New Jersey Ranks 34th in the Nation in State Competitiveness Index
*Index number based on a scale of 1-10.
Source: *based on normalized averages of the sub indexes of government and fiscal policy, security, infrastructure,
human resources, technology, business incubation, openness, and environmental policy.

* See below for a commentary on how these statistics can affect your business

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New Jersey Ranks 34th Most Economically Competitive State According to Beacon Hill Institute’s Metro Area and State Competitiveness Report 2005

New Jersey currently ranks 34th in the index with a score of 4.60, 8 percent below the national average.  Though only slightly below average, New Jersey has shown great improvement by advancing 10 places from their 2004 rank of 44th.

For the second year in a row, Massachusetts remains on top of the competitiveness index compared to that of the other 50 states, although there were three new entries into the top ten this year which include Alaska, Maryland and North Dakota.

Alaska, which was ranked 27th last year, showed great improvement by taking the 7th place slot with an index score of 6.10 this year.  Other states such as Wyoming saw a great drop in their ranking from 12th to 26th with a score of 5.08.

The states with the lowest competitive index were Arkansas (48th), 38.8 percent below the national average in competitiveness; Mississippi (49th), 44.4 percent lower than average; and Louisiana (50th), 48.6 percent lower than average.

The Metro Area and State Competitiveness Index, released annually by the institute, indicates which states have the best policies and conditions that enable and maintain a high level of per capita income and its continued growth.  In order to achieve this, states must be able to attract and incubate new businesses as well as provide a proper environment for existing firms to grow.  According to Michael Porter, author of the Competitive Advantage of Nations, competitiveness can be seen as a catchall term for what he calls the “microeconomic foundations of prosperity.”  The outcome of competitiveness is greater affluence measured by higher levels of Gross State Product or personal income per capita. 

In order to derive the index numbers for the competitiveness report, the institute uses eight different sub-indexes, government and fiscal policy, security, infrastructure, human resources, technology, business incubation, openness, and environmental policy.  In turn, each of these sub-indexes has a number of component variables that determine the overall index number for each category.   

• Government and fiscal policies. Businesses are more likely to be attracted to areas with moderate tax rates and clear evidence of financial discipline.  This sub-index is designed to pick up these effects.

• Security:A state will be more attractive to business if public officials are trusted, and if crime is low.  The security sub-index addresses these dimensions of competitiveness, with particular emphasis on the importance of public safety.

• Infrastructure:   How easy is commuting?  Do most households have access to high-speed broadband?  Is housing affordable?  How affordable is energy?  These are the elements of competitiveness that are included in the infrastructure sub-index for each state.

• Human Resources:  A high level of labor force participation, and skilled labor that is readily available and not too expensive, combined with a widespread commitment to education, training and health care, make a state attractive for business.  These factors are captured in the human resources sub-index.

• Technology:   The development and application of technology is central to economic development, and has been ever since the industrial revolution.  The technology sub-index measures this by taking into account research funding, patents issued, the proportion of scientists and engineers in the labor force, and the importance of high-tech companies.

• Business Incubation:  A good idea is not enough; businesses also need to be able to mobilize financing for investment, both internally and from the financial system.  A higher rate of business births is a particularly clear sign of a competitive environment, and is an important component of the business incubation sub-index.

• Openness:   Open economies tend to be more competitive and hence more productive.  The openness sub-index measures how well firms and people in a state are connected with the rest of the world.  It is based on the level of exports, as well as the percent of the population born abroad.

• Environmental Policy:   States that are faced with environmental problems, or that have a heavy-handed policy of environmental regulation, are likely to be less attractive to businesses as well as to their workers and managers.  We measure this effect with the environmental policy sub-index which, among other things, reflects the levels of air pollution and of toxic releases.

Since the raw value of these variables often differ in scale from one another, several steps were needed before one was able to construct the competitiveness index.  First, each variable was normalized to give it a mean of 5, standard deviation of 1, and a range from 0 (worst) to 10 (best).  Then the simple averages of the normalized component variables were used to form the eight sub-indexes.  Next, the eight sub-indexes were normalized just as in the first step, giving them a mean of 5 and standard deviation of 1 each.  Finally, the competitiveness index is the simple average of the eight sub-indexes which again must be normalized to give it a mean of 5 and standard deviation of 1.

According to the institute, if the index is properly constructed it will allow us to identify what determinants directly influence a state’s competitiveness.  This is of much value to policy makers since they can then analyze the data and determine what areas of the state need to be improved upon to create greater affluence and improvement.  It has also been determined that if a state gains one point in the index, it will also gain $640 in real per capita income.

In the case of New Jersey, which ranks 34th with a competitiveness indicator index score of 4.60, the State excels in the security sub-index with a rank of 7, the human resources sub-index with a rank of 15, the business incubation sub-index with a rank of 13, and in the openness sub-index with a rank of 5.  The overall index score for New Jersey is hurt by low scores in the government and fiscal policy sub-index with a rank of 43, the infrastructure sub-index with a rank of 49, the technology sub-index with a rank of 30, and the environmental policy sub-index with a rank of 50.  Although these four categories mark the area of greatest deficiency in the State, they are also the areas with the best potential for improvement.  If New Jersey can institute policies that bring the government and fiscal policy, infrastructure, technology and environmental policy sub-indexes up to the national average, then the State would theoretically be able to raise its real per capita personal income by $640 per point in the overall index due to these measures.

Source:  Beacon Hill Institute, Metro Area and State Competitiveness Report 2005.