Business Friendliness, Firm Performance and Owner’s Optimism

Abstract

In this study, we attempt to find the factors that influence small business owners’ optimism as well as their company’s success. For this purpose, we use a survey done by Kauffman foundation. This survey asks business owners about their state’s performance in areas like “ease of starting a business”, “ease of hiring”, “regulations”, and “training and networking programs”. It also asks business owners questions about their firm’s performance and their optimism for the future. We run several tests to see if business owners are more optimistic and more successful in states with a high score in each “business friendliness” area. We show that, in the states with a higher business friendliness composite score, both growth in revenue and growth in employees are higher and also owners tend to be more encouraging to others. Regression analyses support these findings (except for growth in employees). Our results indicate that growth in revenue is driven mainly by the Ease of Start score. In other words, the revenues of small businesses grow faster in the states with a better initial registration/establishment process. Our results also indicate that growth in the number of employees is driven mainly by the Overall Regulations score. In other words, small businesses grow faster (in terms of the number of employees) in the states with more favorable regulations. With respect to whether or not the owners would encourage others to start a business in their state, our results show that all subcomponents (Ease of Start, Ease of Hire, Overall Regulations, and Training and Networking programs) are important. The owners are more encouraging to others when Ease of Start, Ease of Hire, Overall Regulations, and Training and Networking programs are all favorable. Overall, we conclude that while all components of business friendliness have a positive relation with the small business owners’ optimism, the link between the business friendliness score and firm performance is weaker. Ease of Start is important for growth in revenues and optimism, Ease of Hire is important for optimism only, Overall Regulations are important for growth in the number of employees and optimism, and Training and Networking Programs are crucial for optimism. Keywords: regulations, business friendliness, small business, entrepreneurship, firm performance.