In educational services, Indiana is a high-growth activity, having outperformed the national growth rate by one-tenth of a percent.

According to the report in the current issue of INContext, published by the Indiana Business Research Center in partnership with the Indiana Department of Commerce, the state lost more than 600 firms between 1998 and 2001, the last year for which county business pattern data is available.

“Most discussions of the economy are built around employment, but there are other ways of looking at progress and decline,” observed Morton Marcus, IBRC director emeritus, in his article, “The Number of Hoosier Businesses Is Shrinking.”

“The number of firms in business may be another of these measures, because it might indicate something about the business climate and the entrepreneurial spirit of the area,” Marcus added.

Indiana saw a net loss of 617 business establishments during the four-year period Marcus examined, for a decline of 0.4 percent. During the same time period, business growth nationally was 2.2 percent. Just five states had greater percentage losses than Indiana, and only 10 states suffered any loss at all.

While new businesses generally are small in size, their impact should not be underestimated, Marcus pointed out, adding that new business formation is a good indicator of a state’s economic vitality.

In 2001, Indiana had more than 71,700 establishments with fewer than five employees. They accounted for 49.3 percent of the state’s 145,600 establishments, compared with 53.8 percent in that size class nationally. Indiana ranks 49th nationally in the category. Montana, New York, Florida and Wyoming lead the nation in percentage of establishments with fewer than five employees.

“If small firms are the key to business development, then this is a troublesome figure,” Marcus said. “It would seem a flimsy argument to hang the idea of growth on the number or change in small businesses. We may have fewer small businesses reporting their existence to the state. Could it be lax administration of the tax code by Indiana that leads to this statistical artifact?”

Marcus found that Indiana’s losses between 1998 and 2001 were mainly in the number of small businesses. In 2001, Indiana had 1,500 fewer firms with less than 10 employees than it had in 1998. Some of the small firms may have grown, but again, on balance the state had fewer firms in 2001 than three years earlier.

Nationally, firms of all sizes were growing during this same time period. It cannot be said that Indiana’s difficulties were just reflective of the nation’s problems.

For his report, Marcus also looked at government data on 21 industry groups. The nation grew in 17 of these 21 industries, but Indiana grew in just 13 categories.

The state outperformed the nation in four industries, including manufacturing. Three of the four industries were declining nationally. Only educational services was a high-growth activity in Indiana, which outperformed the nation by just 0.1 percent.

Indiana’s biggest deficit in growth—6.8 percent behind the nation—was the information sector. This sector includes telephone, cable and other communication service providers, and newspapers and publishing. Where the nation advanced by 13.9 percent, Indiana managed only a 7.1 percent increase.

“Does the number of businesses count? If innovation and flexibility are related to the number of enterprises, then it is important,” Marcus said. “Presumably, a story can be told to make that link. The more firms in an industry, the more different views exist on how to make a profit.”

http://www.ibrc.indiana.edu/incontext/