The sad state of entrepreneurship in New York State

Edward G. Rogoff is a professor of Management and Thomas S. Lyons is the Field Family Chair in Entrepreneurship at Baruch College. Data cited were collected by a partnership of Baruch College and Babson College as part of the Global Entrepreneurship Monitor.

Economic development is clearly at the top of Gov. David A. Paterson's agenda. In his State of the State address last month, he outlined more than a dozen ways to create economic growth, from targeted tax reductions to investment in manufacturing companies.

Unfortunately, they are not going to work.

The road to economic growth for New York runs up a steep hill. Successes will be small, hard fought, and start with recognition of the sad reality of entrepreneurial activity in our state.

New York State greatly lags behind the rest of the country in entrepreneurial activity and spirit. The only categories in which the state surpasses national averages are business failure rates and the percentage of people who become entrepreneurs because they feel they have no other prospects for employment.

In the United States, almost 19 percent of the population engages in entrepreneurial activity. In New York, it's just over 15 percent. Not so bad. But the types of entrepreneurial activity reveal the real story.

Entrepreneurs can be characterized as either opportunity entrepreneurs or necessity entrepreneurs. The former act to seize attractive opportunities, while the latter launch ventures because they see no other economic alternatives. On average throughout the country, 88 percent of entrepreneurs are opportunity-motivated. But in New York State, this number is less than 60 percent.

The rest of New York State's entrepreneurs are motivated by necessity - triple the national average.

Minority groups follow a similar pattern. Overall, the rate of entrepreneurial activity among nonwhites in the country is around 21 percent, compared with nearly 19 percent in New York. But here, this activity is concentrated in small, early stage, necessity-motivated ventures that have no employees and very high failure rates. In fact, one measure in which the New York State minority group exceeds that of the United States is in entrepreneurs who have shut down a business within the past 12 months. In other words, these New Yorkers are initiating small, poorly-financed ventures that quickly fail.

Entrepreneurs in our state understand that their ventures have poor prospects. This is especially true for minorities: Fewer than 10 percent expect their businesses to produce 20 or more jobs within the next five years, compared with the nationwide statistic of more than 21 percent.

The implications of all these numbers are, frankly, dire. Today's entrepreneurial ventures grow to be tomorrow's major sources of jobs and tax revenue. As entrepreneurship wanes, these benefits decline as well. In every region of New York State, entrepreneurship is in retreat.

Over the past decades, New York has created an environment that is actually hostile toward entrepreneurs. The state has one of the highest tax rates on a host of business and personal items, leads the nation in real estate costs and has a legendary regulatory burden. The lack of essential infrastructure, such as broadband Internet access, stymies many new ventures.

There are organizations that do offer assistance to entrepreneurs here, including 75 Small Business Development Centers, 42 business incubators, 11 Entrepreneurial Assistance Program Centers and 17 microenterprise development programs, but they provide only fragmented help with little or no statewide coordination. Each program has its own governance, operating protocol, language, lobbying efforts and ways of measuring performance. New York has no clear and clearly helpful statewide entrepreneurship assistance system.

The state can, however, take serious steps to create a far more nurturing environment. For one thing, officials must develop a targeted strategy to support entrepreneurship, especially in key, economically viable sectors, such as financial companies, health care institutions and media outlets. Some of the areas recently highlighted by the governor - manufacturing and back-office operations - are very unlikely to become growth areas. The state should also shift its current overly active promotion of industries that produce few high-paying jobs, namely tourism and retail, to these more promising sectors.

New York also must refocus its economic development stimulus packages, which have primarily awarded tax breaks to slow-growing, large companies. Some of this money should be channeled to smaller entrepreneurial outlets that have greater potential to grow.

New York needs to design systematic, coordinated programs with specific technical and financial advice for small, emerging ventures, helping them to graduate to the level of job-generating businesses. And it should work to extend essential infrastructure to its small businesses, particularly those without access to the Internet.

Finally, the extensive, predominantly university-based network of Small Business Development Centers could provide an effective framework to integrate statewide resources and to expand services targeted to specific, high-growth-potential entrepreneurial industries, along with meaningful networking and mentoring programs for motivated entrepreneurs.

In order to succeed, entrepreneurs - especially opportunity-driven ones - must obtain a lot of capital, have access to important business networks, be eligible for meaningful tax cuts and receive relevant technical support. New York State simply has to create these programs. Its economic future is riding on it.