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Starting a business is complicated, and entrepreneurs must consider many factors when deciding where to set up shop. How long will it take to get approval? How much must employees be paid? Even, is the electricity reliable?
A new report from Arizona State University analyzed more than 12,000 data points to rank cities in North America on how easy it is to start a business.
“Doing Business North America 2020,” released Oct. 5, is the second edition of a report that employs undergraduate researchers to compare a wide range of business regulations among 130 cities in Canada, Mexico and the United States. The project is led by The Center for the Study of Economic Liberty, a joint endeavor of the W. P. Carey School of Business and the School of Civic and Economic Thought and Leadership.
“Doing Business North America” started two years ago based on the World Bank’s “Doing Business” report, and this year involved nine undergraduates in different disciplines, led by Stephen Slivinski, senior research fellow and project director at the Center for the Study of Economic Liberty.
“Policymakers are interested in this in order to make sure they have a healthy economy and a base of people to fill their cities,” Slivinski said.
The students pored over publicly available data sets and websites, collecting information such as the laws covering maternity leave, how many steps it takes to get the power turned on, and how high the tax rate is. Some of the variables score cities on how transparent and accessible the information is.
The more regulations a city has, such as required paid time off or multiple steps for rezoning, the lower the score.
Among the cities evaluated, Raleigh, North Carolina, ranked first in overall ease of doing business, with a score of 82.42 out of 100.
Phoenix, which came in 20th last year, ranks 59th this year, scoring 79.43 out of 100. The other two Arizona cities ranked were Mesa, 58th, with a score of 79.53, and Tucson, 69th, 60.06.
Compared with last year, the new report adds 15 cities, including Mesa and Tucson, for a total of 130.
The team also added new research variables.
“One group of variables has to do with the ability for a business to get reliable electricity, using engineering best practice standards – how often there are brownouts, the duration of the brownouts,” Slivinski said. “This is an important feature for a lot of places – even places you don’t expect, like California. They have serious issues now.”
Another new variable is zoning.
Many studies have examined the impact of regulations on the supply and demand of residential land, Slivinski said.
“But no one has done that for commercial property, and we figured there would be a similar impact,” he said. “Would zoning regulations make it more difficult or easier to build or rent an office building?”
So the team took the methodology of the Wharton Residential Land Use Regulation Index and applied it to commercial property.
“As far as we know, it’s the first time anyone has done that,” Slivinski said.
The “land and space use” category compares things like the number of approvals needed for zoning (one in Houston and Washington, D.C.; two in the Arizona cities; five each in St. Louis and Birmingham, Alabama) and whether there’s an environmental review board for rezoning (no in Arizona and Maine, yes in California and Georgia).
One reason that Phoenix dropped in the rankings was because of low scores on commercial zoning regulations, according to Mason Hunt, project coordinator for the Center for the Study of Economic Liberty.
“Adding the zoning stuff probably hurt them the most, as well as ‘autopilot’ changes from year to year, like the rising minimum wage,” he said.
Besides land and space use, the other categories that cities are compared by are starting a business; employing workers; getting electricity; registering property; paying taxes and resolving insolvency. All of the data is available for download by the public.
Slivinski said that last year’s debut report drew a positive response.
“It’s been policymakers, people at the city council level in particular, but also academics and other researchers, who saw in this data a great opportunity to research migration and why people move from one city to another,” he said.
“But most important, the attention gets at the kinds of things we really should be measuring.”
Steven Moore, a senior majoring in civic and economic thought leadership, is one of the students who has been working on the project since it started.
“From version one to version two, we really got to sharpen our methodology and our approach to collecting raw data, which is a big part of what I did,” Moore said.
The students sorted through an enormous volume of online data to pull out facts like cities’ commercial tax rates. And they couldn’t depend always on municipal web sites.
“You’re looking at a PDF that might be really old. You would imagine that the information would be more up-to-date,” he said.
“Then we had to see if the sourcing was consistent, and whether there were any outliers.”
Slivinski said that the team is interested to see how trends develop, and especially whether there are effects from the pandemic.
“One thing would probably have to do with employees’ ability to work remotely,” he said. “There are tax provisions and licenses that go into that and we may be able to measure those types of things.
“We hope to add a handful of cities every year and have enough of a time frame to see a good, strong pattern emerge over the course of multiple years.”
The analysis showed a wide range of experiences in starting a business:
Raleigh, new to the list this year, took the top spot from the 2019 winner, Oklahoma City, which fell to 16th. The second- through 10th-place cities: Jackson, Mississippi; Tulsa, Oklahoma; Sioux Falls, South Dakota; Charleston, South Carolina; Houston; San Antonio; Colorado Springs, Colorado; Cincinnati; and Cheyenne.
The cities on the bottom of the list were all in Mexico. The lowest ranking U.S. cities are: Philadelphia, 71st; Portland, Oregon, 72nd; Portland, Maine, 73rd; Buffalo, New York, 74th; Providence, Rhode Island, 75th; Newark, New Jersey, 76th; San Diego, 77th; San Jose, California, 79th; New York, 80th, and Los Angeles, 81st.
Edmonton, Alberta, is the highest ranking Canadian city at 78th and Tijuana is the highest ranking Mexican city at 86th.
The Center for the Study of Economic Liberty is holding a free webinar at noon Thursday to discuss Doing Business North America 2020.
Top image: Phoenix, which came in 20th last year, ranks 59th this year in the Doing Business North America rankings. Photo credit: ASU