Getting the Most Bang for the Buck: An Analysis of States’ 

Relative Efficiencies in Promoting the Birth of Small Firms

Whitney Peake and Maria Marshall, Purdue University, 

West Lafayette, IN 47907. 2007 [26 pages].

This Small Business Research Summary summarizes a research report published by the U.S. Small Business Administration’s Office 

of Advocacy. The opinions and recommendations of the authors of this study do not necessarily reflect official policies of the SBA or 

other agencies of the U.S. government. For more information, write to the Office of Advocacy at 409 Third Street S.W., Washington, 

DC 20416, or visit the office’s website at www.sba.gov/advo.

This paper was the recipient of the 2007 Office of 

Advocacy Best Doctoral Paper Award which was 

presented at the United States Association for 

Small Business and Entrepreneurship (USASBE) 

annual meeting. Whitney Peake is a doctoral candidate and Maria Marshall is an assistant professor 

at Purdue University.

Purpose

New business starts have economic and social 

value to communities and are often a goal of state 

economic development efforts. States would like 

to foster an environment that can nurture business births; however, analysis of the impact of 

their expenditures on business births is limited. 

This study evaluates the impact of various state 

expenditures on business births and gives states a 

benchmark for comparison with other states. 

Overall Findings

State expenditures do affect the number of business births, particularly investments in human 

capital and roads. The study also found states with 

larger populations tended to be more efficient 

than states with small populations in supporting 

business births with their expenditures. 

Highlights

• State expenditures on education, highways, 

and natural resources positively affected business 

births. To a lesser extent, so did state expenditures 

on healthcare, parks, and recreation.

• California, New York, and Florida were the 

most efficient states with respect to expenditures 

leading to business births, while North Dakota, 

New Mexico, and West Virginia were the least efficient.

• Individual states’ efficiency levels with respect 

to expenditures and business births tended to be 

stable over the period studied, 1999 to 2002.

• Police expenditures were found to be a 

response to higher crime rates rather than an indicator of providing a safer business environment.

• Future research could incorporate industry 

and tax details at the state level.

Scope and Methodology

The researchers used economic models to test 

the impact of state expenditures for education, 

healthcare, highways, police, natural resources, 

and parks and recreation on establishment births. 

The efficiency measurement method of Data 

Envelopment Analysis was used, so expenditure 

inputs were regressed on business births from 1999 

to 2002. Then the significant inputs were put into 

an efficiency test for the 48 states in the continental United States. States were ranked by their average efficiency index. 

Data on business births were taken from the 

U.S. Census Bureau’s Statistics of U.S. Businesses. 

(This data source is partially funded by the Office 

of Advocacy.) State government expenditures were 

also obtained from the Census Bureau.

This report was peer-reviewed consistent with 

Advocacy’s data quality guidelines. More information on this process can be obtained by contacting 

the director of economic research at advocacy@

sba.gov or (202) 205-6533.

January 2007 No. 290
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U.S. Small Business Administration's Office of 

Advocacy are available on the Internet at www.sba.

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