NORTH CAROLINA IS A GREAT STATE. And, the state of business in North Carolina essentially is very strong. Sustaining our success will depend on the vision and the resolve of government and private leaders — leaders who have already achieved an enviable record of success in North Carolina in the state-to-state and country-to-country competition for jobs and commerce.

North Carolina faces economic change on a global scale and challenges from other states that, frankly, have targeted North Carolina’s enviable record of success and achievement. These competitive pressures will only increase in the future and fundamentally raise the stakes for sustaining our record of success.

The North Carolina and United States economies are confronted with universal changes that challenge many of our basic assumptions and present us with economic tests not yet envisioned.

To confront those challenges and to remain prepared to take and pass those tests, three pillars of a sound economy must be reinforced and improved: an advantageous business climate, a world-class education system that produces a skilled workforce and sensible economic development strategies and tools.

As important as it is to build and maintain each pillar, even more important is the realization that one cannot stand without the others. As we work to strengthen our schools and universities and strive to keep our roads and other infrastructure top-notch, we must also create a conducive business climate, one that remains competitive for jobs and positions the state to break away from the pack.

The Global Context
Thomas Friedman in the 2006 edition of his book The World is Flat provides some insight into the obstacles and opportunities ahead. He opines that around the year 2000 the world entered into a sweeping era of globalization — moving from globalization of corporations to globalizing on a personal level.

What that really means for us at the turn of this century in North Carolina is that PCs and fiber-optics, along with workflow software, now allow us to break down just about any intellectual task and farm it out to the most efficient provider anywhere in the world.

India and China, for instance, have risen to the challenge of these new economics. Significant parts of their economies are thriving because of their enterprise.

TO ADD SCIENTIFIC WEIGHT TO THOSE VOICES and form a benchmark for measuring our state’s progress over time, the Chamber commissioned its first CEO Poll of business owners and operators. The poll by the nationally known firm of Cole Hargrove Snodgrass & Associates measured how businesspeople felt about productivity, taxes, education, healthcare costs, legal and other issues.

In the poll, which asked participants to rank 18 separate issues, owners and operators most frequently cited“ lowering taxes” as the most important issue facing North Carolina businesses today, followed by healthcare costs. The majority of North Carolina business owners polled were satisfied with the quality of the North Carolina workforce, which is a huge plus for our state and an indicator that all the work put into education in recent years has paid off to a good extent.

North Carolina’s business climate reputation ranks very highly in many sectors nationally, but state business owners and operators think there is room for improvement. Owners are split about evenly on whether the state’s business climate is getting better or worse, and it’s notable that even more rate it as staying about the same. It’s also interesting that, while North Carolina is strongly branded as one of the best states in the country to do business, well over half of poll participants (65 percent) disagreed with the statement: “North Carolina has the best business climate in America.”

Nearly half of those polled, 48 percent, answered yes when asked whether North Carolina’s economy is on the right track, but in every region but the Research Triangle at least half of owners and operators answered “no” to that question.

Other highlights from the first North Carolina Chamber CEO poll:

• Tax burden: When North Carolina poll participants were asked about taxes they pay and their businesses pay to fund state and local government, more than 60 percent said they think they pay too much. While there will always be some business operators who feel they pay too much in taxes, our state’s responses at more than 60 percent are at the high end of the scale. Generally, responses in other states polled range from 45 to 60 percent.
• Tax structure: Half of poll participants believe that North Carolina’s current tax structure is a deterrent to business growth and job creation.
• Business costs: Nearly 60 percent of poll participants said that reducing the cost of doing business — such as addressing taxes, healthcare and workers’ comp costs, and legal reform — was the best economic growth strategy.
• Workers’ compensation: Forty-five percent of poll participants believe that North Carolina’s current workers’ compensation system is a deterrent to business, growth and job creation in our state.

• Frivolous lawsuits: Nearly 90 percent of poll participants believe frivolous lawsuits increase the cost of doing business in North Carolina.
• Workforce quality: Overall, North Carolina businesses were more satisfied, 54 percent, than dissatisfied, 38 percent, with the state’s workforce.

Among those positive indicators are many opportunities that, if seized, could push the state economy into the “break away” class of Virginia and a handful of other states — the class where a modern, energetic economy has the tools to survive in today’s ever-more-global economy. And in that kind of nimble economic climate would be a state with the skills and resources to provide residents a good quality of life.

Many of the nation’s break away states – Virginia, Colorado and others – thrive in what’s termed the New Economy, defined as “a global, entrepreneurial and knowledge-based economy in which the keys to success lie in the extent to which knowledge, technology and innovation are embedded in products and services.”

That definition appears in the “2007 State New Economy Index,” a thought-provoking report from the Information Technology & Innovation Foundation in partnership with the Ewing Marion Kauffman Foundation. The report incorporates a number of workforce, technological, educational, trade and corporate statistics to rate how states are faring in this New Economy.

North Carolina earned a ranking of 26th in the foundation’s report, a slight drop from the 24th it received in 2002. Among the strengths cited for the state were its degree of globalization, number of IT professionals, direct foreign investment, venture capital and “gazelle” jobs — those in companies whose annual sales revenue grew 20 percent or more for four straight years. Challenges, the report noted, included level of entrepreneurial activity, workforce preparedness, technology in schools and the percentage of population online.

“In today’s New Economy, knowledge-based jobs are driving prosperity. These jobs tend to be managerial, professional, and technical positions held by individuals with at least two years of college. Such skilled and educated workers are the backbone of the states’ most important industries, from high value-added manufacturing to high-wage traded services,” the report says.

Of our state, it noted: “Given some states’ reputations as technology-based New Economy states, their scores seem surprising at first. For example, North Carolina and New Mexico rank 26th and 33rd, respectively, in spite of the fact that the region around the Research Triangle Park boasts top universities, a highly educated workforce, cutting-edge technology companies, and global connections, while Albuquerque is home to leading national laboratories and an appealing quality of life. In both cases, however, many parts of the state outside these metropolitan regions are more rooted in the old economy — with more jobs in traditional manufacturing, agriculture, and lower-skilled services; a less-educated workforce; and a less-developed innovation infrastructure.”

That said, the foundation’s report points out one of the great advantages — a leveling of the playing

field — for states and localities willing to adapt, innovate, and use break away thinking: “While lower-ranking states face challenges, they can also take advantage of new opportunities. The IT revolution gives companies and individuals more geographical freedom, making it easier for businesses to relocate, or start up and grow in less densely populated states farther away from existing agglomerations of industry and commerce.

The foundation’s report is just one benchmark, as a variety of research sources provide a picture of the strengths North Carolina has in certain sectors and the challenges the state must address to become more business-friendly and fuel economic growth:

Workforce Readiness and Education
Strong points: A recent report by U.S. Chamber of Commerce, “Leaders and Laggards: A State by State Report Card of Educational Readiness,” gave the state high marks in a number of categories, reflecting that the state had a healthy percentage of students going on to college and a good percentage of students passing rigorous advanced placement exams. The U.S. Chamber report also gave North Carolina A’s for return on educational investment and for making sure teachers are well qualified.

Opportunities: The same report says the state could do a better job preparing younger students in math and particularly in reading, that its standards could be more rigorous and, in giving the state a D, that state test scores too readily deem students proficient while other national tests show otherwise.

Taxes
Strong points: The Tax Foundation’s 2007 State Business Tax Climate Index puts North Carolina in the middle among states, ranked 25th, in corporate tax climate and fourth in the nation on unemployment insurance tax (Virginia, by comparison, ranked 22nd on the latter).

Opportunities: A number of studies and reports have criticized the state’s tax climate and administration. The reports, therefore, illustrate a good number of opportunities for improvement that can be seized. The findings include:

• Nearly across the board, the Tax Foundation report ranked the state in the bottom fifth for a tax climate favorable to business, including the categories of individual income tax, sales tax and property tax. The foundation did note, though, that the recent reduction in the state sales tax would likely improve the climate some. Overall our state was ranked 40th, trailing neighbors Virginia (13th), South Carolina (26th), Tennessee (18th) and Georgia (19th).
• North Carolina earned the lowest score in the nation – a D-minus – from the Council on State Taxation in its recent report on “The Best and Worst of State Tax Administration.” That COST report gave the state good marks for its even-handed statutes, but downgraded North Carolina on a number of other fronts, such as its short protest period, due date for state returns, lack of independence in the appeals process and a lengthy and cumbersome refund process, among other issues. A separate report by CFO magazine, based on a survey of corporate tax directors, also rated the North Carolina tax appeals process poorly for its separation of powers from the tax audit department. The same survey also reported that companies felt the state and Legislature were likely to attempt to take back incentives that fostered business and that the state was very aggressive with businesses on a number of taxation fronts.
• Another report by the Council on State Taxation reported that North Carolina, while slightly trailing the national average for the percentage that business paid in overall sales tax collections, had a higher share than Virginia, Tennessee and South Carolina.
• “The Small Business Survival Index 2006,” an annual report of the Small Business and Entrepreneurship Council, ranked North Carolina in or near the bottom 10 percent for its personal income and capital gains tax rates. The council noted that because the great majority of businesses are small ones with sole proprietorships, the state was taking money that otherwise could be plowed back into businesses, creating growth and jobs.

Business Competitiveness
Strong points:
“The Small Business Survival Index 2006” gave North Carolina good marks in state and local government spending, as well as praising the five-year trend in government spending. In addition, the index ranked North Carolina 21st in workers’ comp spending. The similar “State Competitiveness Report 2006,” a study by the Beacon Hill Institute that examines businesses of all sizes, particularly praised North Carolina for its high venture capital investment and bank deposits per capita, ranking the state ninth in the nation for incubating business.

Challenges: The Beacon Hill report noted that other challenging areas dragged down North Carolina’s overall ranking to 26th among the 50 states. It gave the state low marks in the categories of openness (connectedness with the rest of the world, based on exports and other factors), security (crime and trust in public officials) and environmental policy. Still, the report noted, “Though these are the areas of greatest deficiency for North Carolina, they also mark the areas with the greatest potential.” Of surrounding states, Virginia ranked above (10th), while North Carolina and Georgia (30th), South Carolina (37th) and Tennessee (41st) trailed.

The Chamber’s first Annual Competitiveness Index was created to objectively examine where the North Carolina business climate ranks among other states and what this benchmarking signifies for the future. The report empirically measures factors that are likely to influence business’s decisions on whether to – or whether not to – invest in our state in the future.

The data comes from more than 100 sources, primarily governmental but also credible private ones. The cut-off was January 15, 2007, which means that the most recent annual data is either for 2005 or 2004. Consequently, this report contains some very recent 2006 data.

Ranks and Stars
The report uses two methods to show how North Carolina stacks up against other states: ranks and stars. Ranks are widely used and very helpful, but fail to indicate the actual difference in score between states (a state might be rank 9 yet be only 1–2 percentage points behind the leader, while the 10th ranked state might be 10 percentage points behind).

The five-star scoring helps overcome this problem by grouping states into five categories according to their actual scores. The full range of scores from top state to bottom state is divided into five equal parts. Those states in the top 20 percent of score range are the “leaders” with five stars; those in the next 20 percent range are “above mid-range” with four stars; those with three stars fall in the middle 20

percent; two stars are assigned to those “below mid-range” and states with one star are “trailers,” falling in the bottom 20 percent.

To put this another way: Ranking tells you where you place, while stars or grades tell you how well you are performing. A male athlete might do better than the four-minute mile, putting him in “best in class,” but may not place in the top three in a race.

For most economic and social issues, state leaders and decision makers want the state to be among the top performers but worry less about being No. 1. Since a state’s economic position changes slowly relative to other states, tracking star progress is one quick way to observe where improvements or slippage have been occurring.

The competitiveness index covers these benchmarking categories, each of which has various subcategories covered in the “Strengths and Challenges” sections of the following pages:

North Carolina’s performance in Economic Growth has improved from significantly below the majority of states to slightly above the median in the most recent years, giving it a rank of 24th. A 10 percent improvement in score would put the state among the leaders. Of neighboring and other southern states, Florida ranked 2nd, Georgia 7th, Virginia 18th and South Carolina 44th. This year, star ratings of all states were inflated by the negative growth of Louisiana after Hurricane Katrina.

Strengths and challenges

• North Carolina’s Growth in Wages per Job improved to 28th from its 2002 ranking of 34th.
• Gross Operating Surplus Growth per employed (profits, fixed capital, transfer payments) in North Carolina has continuously lost in competitiveness from rank 28th to rank 47th in report year 2006.
• North Carolina’s Other Non-wage Income Growth per capita (dividends, rent, interest) saw substantial improvement over the five reporting years, ranking the state at No. 1 in the most recent year up from rank 39th.
• Growth in the Sustainable Income Population in North Carolina has ranked the stated competitively at 22nd in 2006, up from rank 44th just two years earlier.
• North Carolina’s growth in Jobs per Capita only performed at rank 38th in the most recent year though up from rank 43rd five years earlier.
• Growth in Self-Employment in North Carolina has improved over the last few years, currently ranking North Carolina at 9th, up from rank 27th in 2002.

North Carolina’s performance in Economic Health has stayed below the majority of U.S. states but has been edging up in recent years. A 10 percent improvement in Economic Health would put the state over the median. Economic Health captures the level of economic outcome measured by this report. Drivers such as strong foundations, productivity, investment and entrepreneurship reflect positively in a		Performance 2006 State Score Rank Five-Star Scale Virginia 111.5 11 ««« Florida 104.9 21 ««« Georgia 101.7 23 ««« North Carolina 95.2 37 «« South Carolina 89.4 42 «« Regional Avg. Score Median is 100 100.5 27 «««
state’s overall income condition. This indicator is a composite of various types of income measures.

Strengths and challenges

• Although North Carolina’s Wages per Job have increased over the years, its rank has slightly slipped to 27th from 25th five years earlier as other states have improved faster.
• Net Earnings (by place of work) have equally not been able to catch up with the trends in other states and North Carolina’s rank has fallen from 29th to 31st over the five years.

• North Carolina’s Proprietor Income per proprietor lost slightly in competitiveness, with a current rank of 34th down from 30th five years earlier, again being outgrown by other states.
• Other Non-Wage Income per capita has experienced both an increase in value and in competitiveness over the five years, moving from rank 37th to 28th.
• North Carolina’s Sustainable Income Population ranked 36th in 2006, up from 40th, though that was due more to a lack in performance by other states rather than to its own small improvement.

A fundamental driver of economic strength is a state’s quantity and quality of available labor. North Carolina has struggled for decades on how to upgrade productivity and has used demand-driven workforce strategies to advantage in this regard. This driver measures the inflow and availability of labor and the efficiency with which a state produces goods and services. High productivity and a growing workforce are necessary to maintain a rising standard of living.

North Carolina’s performance in Productivity and Labor Supply measures has kept it significantly above the majority of U.S. states in all years. At the same time, the score of the best performer has moved further away, explaining North Carolina’s relatively low current rating of two stars at rank 16th. In comparison, Virginia ranks 12th, Georgia 18th, Florida 26th and South Carolina 41st.

Strengths and challenges

• North Carolina has throughout all years experienced a substantial and growing gain in Net Migration, ranking it currently 5th, up from 10th five years ago.
• At the same time, relatively low Labor Force Participation Rates have been falling slightly, moving North Carolina from 30th to 33rd.
• Productivity in North Carolina has improved in value and competitiveness in all three measures in this driver and ranks among the top 25 states. The most significant improvement occurred in Value Added per Hour in Manufacturing, where the state moved from 18th to 12th over the five years.

Research and Creativity seeks to measure the strengths of the discovery process that drives new products and new and successful businesses. It looks at investment and returns in innovative activity such as patents and research and development expenditures.

North Carolina’s performance in Research and Creativity has positioned it above the majority of the states with continuous improvement over the five years. The state’s rank of 14th (three stars) compares favorably to Georgia at 22nd and Florida at 27th (two stars each) and South Carolina at 39th and Virginia at 46th (one star each).

Strengths and challenges

• North Carolina has been ranking in the middle of the states in Patents per Worker and Patents per R&D Dollar. The state slipped from 23rd to 28th in Patents per R&D Dollar but improved to 24th from 26th in Patents per Worker compared to five years earlier.
• Industry and Government R&D measures both improved in their values and competitiveness to rank 23rd and 20th, respectively. University R&D ranks higher at 16th

• North Carolina’s performs best in University Royalty and License Income at rank seven, up from14th. It also fared well on the NSF Proposal Funding Rate, ranking 16th vs. 20th five years earlier.

Business Vitality/Opportunity measures the level of start-ups and entrepreneurial firms that are the basis for an innovation economy. It also looks at how states stack up in more international measures of business opportunity such as foreign direct investment and export activity. Successful states create systems that support a culture of innovation as well as entrepreneurship in all aspects of the economy.

North Carolina’s performance in Business Vitality/Opportunity has remained above the majority of U.S. states, increasing after a slight slump in 2003/2004. The state ranked 15th, earning three stars, compared to Virginia’s 7th and South Carolina’s 11th (four stars each), Georgia’s 14th and Florida’s 19th (three stars each).

Strengths and challenges

• The Kauffman Foundation Entrepreneurial Activity Index ranks North Carolina only at 38th in the most recent year in terms of new business owners.
• Startup Rates at the firm level, however, rank North Carolina at 12th, implying that entrepreneurial engagement happens less at the individual level.
• Although North Carolina has a relatively high Establishment Failure Rate at rank 31st, the New Business Churn rate in relation positions the state at rank 10th.
• Foreign Direct Investment (share of employment in foreign-owned companies) has always been a competitive asset for North Carolina at a current rank of 9th, though they have slipped in value and from rank 6th in 2002.
• The average number of High Performance Firms relative to all firms in the state has slipped in value and rank from 15th to 27th

This driver focuses on the degree of capital formation, especially for small businesses and startups but also more established firms. Funding for research and development and access to capital are important elements of entrepreneurship and innovation.

North Carolina’s performance in Capital Formation has continued to improve over the years and remained well above the majority of U.S. states, earning it a rank of 2nd and five stars. By comparison, Virginia was 17th (two stars), Georgia 24th (two stars), South Carolina 38th (one star) and Florida 41st (one star).

Strengths and challenges

• After several years of slippage in value, North Carolina has seen improvement in Venture Capital in the most recent year, leaving it at rank 11th.
• Bank Commercial and Industrial Lending as well as Private Small Business Lending have continuously ranked North Carolina among the top five states, though Small Business Lending has declined in value and rank in the most recent year from 2nd to 4th.

• North Carolina has continued to lose competitiveness in Capital Investment in Manufacturing with a current rank of 44th. Only the most recent year shows an improvement in value, though not enough to improve its position.

A primary reason for the disinflationary environment of today’s national and global economy is overcapacity. Productive investments made during the boom times of the 1990s, along with a global shift to free enterprise economics, have put downward pressure on prices for standardized products and services. The result is that many businesses have lost their pricing power. One of their responses is to control costs. Costs of doing business remain a critical factor in business location and growth.

North Carolina’s performance in Business Costs has slipped in the most recent years but is still above most U.S. states, giving it a rank of 15th and a four-star rating. Virginia ranked 5th (««««), Georgia ranked 12th (««««), South Carolina 24th («««) and Florida 38th (««).

Strengths and challenges

• North Carolina’s Unit Labor Costs have continued to improve over the last few years, moving it from 8th in 2002 to its current 3rd.
• Especially in the most recent year, North Carolina experienced a continuous increase in industrial and commercial Energy Costs, ranking it at 18th, up from 27th.
• North Carolina has been the one of the leading states in the lowest Business Tax Burden over the years as other states have increased their rates faster. Its State Business Tax Structure ranked it consistently in the middle of the states.

Information, knowledge and ideas are critical assets for success in the innovation economy. Having a strong human capital base is a necessary but not sufficient condition for success. States, or even countries, may be endowed with a well-educated population, but lack some other necessary conditions, such as a free enterprise system that cultivates creativity and entrepreneurship. The Education driver is made up of two sub-drivers: K-12 education and postsecondary education.

North Carolina’s performance in Education has continued to stay above majority of U.S. states, earning a rank of 10th and four stars. Virginia was 7th (««««), Florida 34th («««), Georgia 35th («««) and South Carolina 44th (««).

Strengths and challenges

• Although High School Graduation Rates have improved over the last five years, North Carolina currently ranks at only 37th, up from 40th.
• North Carolina has shown significant improvement in SAT and ACT performance though still ranking only at 32nd for SAT and 39th for ACT.
• North Carolina’s competitive position in Technology and Technician Degrees granted showed substantial improvement over the five years from rank 35th to 27th despite a decreasing share. Other states seemed to have decreased their performance even more.
• Other Innovation Degrees granted at the same time slipped in value as well as rank to a current position of 31st.

States can have excellent Education scores, yet still lack in Workforce Preparedness because the education system is not in tune with the demands of the workplace or because the better educated move out of state. Research indicates that Workforce Preparedness is closely correlated with Economic Health and Growth. This driver measures the educational attainment and skill levels of the workforce.

North Carolina’s performance in workforce measures has continued to lie just below the majority of U.S. states. The state ranks and scores similarly to all surrounding states except Virginia. Improving customized training and the state’s career technology and community college systems has long been a priority and deserves continuing attention.

North Carolina’s performance in workforce measures has continued to lie below the majority of U.S. states, earning a rank of 33rd and two stars. Virginia at 4th received five stars, Georgia 26th («««), Florida 34th (««) and South Carolina 41st (««).

Strengths and challenges

• Bachelor’s Degree Attainment in North Carolina has improved in value and from rank 33rd to rank 28th in the most recent year.
• North Carolina has lost competitiveness in Physical Science and Engineering Workers, moving from 24th to 32nd. As its share has remained stagnant, other states have been able to improve their share of these innovation workers in the workforce.
• Although North Carolina has been able to increase its share of High-tech Manufacturing Employment over the years, its already weak competitive position has slipped further from 41st to 44th. It has been able to hold its ground in High-tech Service Employment at 18th despite a falling share.

In the innovation economy, sound basic “infrastructure” remains important, especially in a state like North Carolina with strong international trade ties. Infrastructure can be broadly defined to include both traditional physical infrastructure, such as roads, ports, water and sewer, and “virtual” infrastructure, or digital connectivity. The metrics chosen attempt to measure outcomes, productivity, and level of service, rather than inputs, such as capital expenditures per resident.

North Carolina’s performance in Infrastructure and Connectivity slipped below the majority of the states in recent years, earning a rank of 39th and three stars. That trailed states in the region such as Florida at 2nd («««««), Virginia at 3rd («««««), Georgia at 9th (««««) and South Carolina at 31st («««)..

Strengths and challenges

• North Carolina’s Highway and Bridge Quality has stayed at 30th and 34th, respectively.
• Broadband Lines per 1,000 residents have not increased at the same speed as in other states, dropping North Carolina to 19th from 14th in 2002 but Broadband Coverage (share of ZIP codes with two or more providers) improved to rank 4th from 12th.
• The Technology in Schools index improved from rank 43rd in 2002 to 35th in the most recent year.