Why “Business Climate” Rankings are Usually Bogus
Last week, Wisconsin was named as having the 13th best business climate among the states. Great, right? What’s not to love about an indication that Wisconsin may be becoming a better place for businesses to grow and thrive?
A lot, it turns out. A close look at the most recent business climate ranking sheds light on a variety of problems it shares with other, similar rankings on business climates. All too often, business tax climate rankings are quasi-scientific mish-mashes that tell us very little about environments favorable for businesses to grow and thrive. This most recent ranking is no exception.
Let’s take a closer look at how that #13 ranking for Wisconsin was compiled by Site Selection, “the magazine of corporate real estate strategy and area economic development.” States were assigned points based on a variety of factors, with half the points coming from simply asking corporate site selectors what they thought of the climate in the states. The other points were based mostly on the number of large plants that opened recently in the state (apparently without adjusting for the size or population of the state), and on which states had the lowest business taxes.
At the risk of looking a gift horse in the mouth, Site Selection’s ranking is hardly a sound basis for determine which states have environments most conducive for businesses. But it does raise the question of what actually makes up a solid business climate. In Site Selection’s ranking, the definition of having a healthy business climate seems to be largely that corporate site selectors believe your state has a healthy business climate. Not exactly something you can take to the bank.
And not exactly something that creates jobs, either. Wisconsin did well in Site Selection’s ranking of business climates, but in job creation Wisconsin ranks close to the bottom. Minnesota, for which Site Selection didn’t include a specific ranking because it didn’t rank in the top half of states, created 39,000 more jobs than Wisconsin did over the last year. Now which state has the better business climate?
Unfortunately, the problems with business climate rankings aren’t limited to the one from Site Selection. Very few business climate rankings shed any light on whether businesses in Wisconsin have the right mixture of solid infrastructure, well-educated workers, support for entrepreneurship, and favorable tax climate that helps businesses grow. Until they do, it’s best to take business climate rankings with a very large grain of salt.