The Best States For Business

Twelve years ago, the world watched as Muhammad Ali lit the Olympic torch during the opening ceremonies of the Summer Olympics in Atlanta. It was a transformative moment for the city and the state. “The Olympics put Georgia on the map internationally,” says Kenneth Stewart, commissioner of the Georgia Department of Economic Development.

Since then, the state’s population has soared by more than two million people, outpaced only by behemoths Texas, California and Florida. Companies in the United States and overseas set up shop, lured by the state’s growing pool of educated labor, low business costs and one of the best transportation networks in the country.

In Forbes’ annual ranking of the Best States for Business, Virginia finished first for the third straight year. But Georgia is the real story, moving from 15th to fifth place. Georgia finished in the top 10 in four of the six categories we examined (economic climate, growth prospects, labor supply and regulatory environment). Just two other states, Virginia and third-ranked Washington, managed this feat.

Virginia has maintained the top spot since our first Best States ranking in 2006. This year, though, its lead over second-ranked Utah was razor thin. In fact, the top five states (North Carolina ranked fourth) were all closely bunched together.

Driven by higher labor costs, business costs in Virginia jumped, and are now approaching the national average. The biggest factor closing the gap between Virginia and everyone else: lower growth projections for the next five years. On last year’s list, Virginia ranked eighth in our growth-prospects category. This year, lowered expectations for growth in jobs, income and gross state product knocked Virginia’s growth-prospects ranking down to 26th.

Virginia remains an excellent location for new or existing businesses. It has the best regulatory environment by our count, thanks to the second-best incentive programs in the country–as well as the fifth best tort atmosphere. Other high points include energy costs 30% below the national average and an educated labor force fueled by its proximity to Washington, D.C., and top colleges like the University of Virginia and William and Mary.

Our rankings measure states on six main areas of importance: business costs, labor supply, regulatory environment, current economic climate, growth prospects and quality of life. Business costs are weighted the most, but low costs were not enough to keep Louisiana and West Virginia from being the bottom two in our ranking. We look at a total of 32 data points to compile rankings of the six main categories.

As for Georgia, several factors propelled its move up the rankings. Ten years ago, just 21% of Georgia’s adult population had a college degree, badly lagging the national average. Today, 28% of the population has a degree–on par with the rest of the U.S. The jump is the second biggest improvement by any state after Maine.

Much of this improvement is fueled by young professionals moving to the Atlanta metro area, which has experienced a net migration of 800,000 people in the past decade, second only to Phoenix. “Our capital city of Atlanta offers a great environment for young professionals,” says Georgia Gov. Sonny Perdue.

Reaping the benefits of this migration are major corporations like Coca-Cola (nyse: KO – news – people ), Delta Air Lines (nyse: DAL – news – people ), Home Depot (nyse: HD – news – people ) and United Parcel Service (nyse: UPS – news – people ), all headquartered in Atlanta.

Another reason behind Georgia’s higher ranking is an improved economic outlook relative to the rest of the country. The U.S. is expected to increase employment by 0.9% annually over the next five years, while Georgia is expected to experience almost double that rate, according to economic research firm Moody’s (nyse: MCO – news – people ) The Peach State’s projected annual gross state product growth of 3.2% is seventh-best in the country.

One company that migrated south in recent years was Newell Rubbermaid (nyse: NWL – news – people ), which left Freeport, Ill., for Atlanta when it moved its corporate headquarters in 2003. Rubbermaid selected Atlanta based on its “proximity to customers and company locations, exceptional transportation access, good quality of life and affordability.”

Georgia recently looked overseas more aggressively when scouting for new companies. “As the U.S. economy has slowed, we have cast our eyes globally and sought international business. We consider this a harvest from the ’96 Olympics,” says Gov. Perdue.

The ground work for this international recruitment was laid out long before the Centennial Olympics. Georgia opened an economic development office 22 years ago in Seoul, South Korea. The big payoff will come next year, when Seoul-based Kia Motors is set to open a new $1.2 billion car manufacturing facility in West Point, Ga.

Kia expects to hire 2,500 employees,and another 5,000 or so workers will be needed for the numerous auto suppliers popping up around the Kia site. “The number of companies needed to support these big business is the silver or even gold lining of a major manufacturer locating to your state,” says Stewart.

The Seoul office is one of 10 economic development offices Georgia opened outside the U.S. Others include Mexico City; Munich, Germany; São Paulo, Brazil; and Tokyo. A Beijing office opened in April. Georgia has seen a host of Chinese companies, including General Protecht, Lehui and Sany, establish operations in the state the past two years.

Georgia leads most rivals with its incentive programs to lure businesses, ranking fourth according to a study on state government incentives, conducted by Pollina Corporate Real Estate, that we incorporated in our ranking. It is not something Gov. Perdue wants to hang his hat on. “We don’t think Georgia needs to be nor do we want to be the low-cost leader in [incentives]. We think it is about value,” he says.

But with North Carolina, Virginia and South Carolina–the top three states when it comes to incentives–as neighbors, Georgia is often forced to utilize tax breaks. “The core strength of Georgia’s incentives and economic development department are its job training and tax-credit programs,” says Brent Pollina, who authored the study.

Perhaps Georgia’s best selling point is its logistics infrastructure. Atlanta’s Hartsfield-Jackson airport is the world’s busiest, serving 89 million passengers a year and supporting the operations of 16 cargo airlines also flying out of the city.

Meanwhile, the Port of Savannah is the fastest-growing in the nation, now the fourth busiest. Its 27% growth in container traffic last year represented 30% of U.S. total growth. “We consider ourselves to be the gateway to the Americas,” says Stewart.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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