2015 Survey of Connecticut Businesses
Now in its 14th year, this annual report by CBIA and BlumShapiro examines the near-term outlook, profitability, export activities, workforce, technology investments, and legislative priorities of Connecticut’s business community.
The 2015 Survey of Connecticut Businesses was distributed to top business executives in June and early July, a period marked by intense debate about a budget and tax package largely seen as a threat to the state’s employers and its economic competitiveness.
After a budget that included nearly $2 billion in tax increases narrowly passed the legislature, a widespread outcry from businesses and residents led to a reopening of the budget, with lawmakers rolling back about $178 million in business tax hikes.
“The budget debate served an important purpose,” said CBIA President and CEO Joe Brennan.
“It put a spotlight on Connecticut’s economy and the ability of companies to compete in regional, national, and global markets.”
Many of the 584 business leaders participating in this year’s survey addressed their greatest concerns and public policy priorities at a time when everything was still on the table; some completed the survey in the days immediately after the budget was revised.
In spite of sustained, steady growth, the business outlook this year—not surprisingly—is clouded by misgivings about state fiscal responsibility and the possible outmigration of leading Connecticut employers to other states with more favorable business climates.
Global economic concerns, including the Greek debt crisis, persist as well.
Business Outlook, Climate
The single greatest challenge for most businesses this year is Connecticut’s economy.
Fewer than two-thirds of all businesses surveyed (63%) recorded a net profit last year. Just under a quarter (22%) broke even, and 15% recorded a loss.
Half report that they are holding steady, about a third (32%) are growing, and 17% are contracting.
This year’s survey asked a number of open-ended questions about Connecticut’s business climate, public policy, and economic competitiveness.
Taxes are the biggest concern stemming from the 2015 legislative session (48% of respondents). Similarly, the number-one recommendation for enhancing business competitiveness in the next two years is to reduce taxes (53% of businesses surveyed).
Respondents are overwhelmingly pessimistic about the legislature making decisions that will benefit businesses: 66% have a very pessimistic view of the state legislature, and 22% are at least somewhat pessimistic.
High costs and taxes were also cited as the primary reason businesses have considered moving (or shifting significant production) to another state.
The vast majority of companies surveyed (70%) are somewhat or highly dependent on larger Connecticut companies for business, which raises concerns when tax hikes threaten to push large companies out of state.
One-third of the companies we surveyed export goods or services. Among them, one in 10 attribute at least 40% of their sales to exports, and close to half (47%) say exports account for 10%–39% of their sales revenue.
Thirty-seven percent of companies surveyed report no real barriers to exporting—perhaps indicative of the business community’s growing level of experience and sophistication in the area of international trade. (CBIA surveys find the percentage of Connecticut companies engaged in international trade has grown steadily over the past several years.)
- Export destinations include:
- North America (87% of respondents)
- Western Europe (51%)
- Northern Asia/Pacific Rim: China/Japan/Taiwan/Korea (43%)
- South America (30%)
- Southern Asia: India/Indonesia/Malaysia (28%)
- Central America (26%)
- Eastern Europe, excluding Russia (23%)
- Australia/New Zealand/Pacific Islands (21%)
- Middle East (21%)
- Russia (13%)
- South Africa (12%)
- Africa (11%)
Among the biggest hurdles to international trade are the costs and risks associated with expanding into new markets, lack of knowledge about foreign markets, and—a new phenomenon this year—the strong U.S. dollar.
With Europe and Japan in stimulus mode, the U.S. dollar has strengthened dramatically against the world’s major currencies—going up in value 14% since the beginning of 2015—the fastest rise in 40 years.
While the robust dollar has its benefits for importers, major multinationals and smaller domestic exporters may either struggle to sell their products overseas (because they are too expensive for foreign buyers) or take a hit when converting payment in foreign currencies back to U.S. dollars.
This is reflected in how businesses surveyed view foreign markets with the greatest potential as export destinations for their products. Only 40% identified western Europe as a prime market in the future; even fewer (35%) identified China and Japan as prime markets.
Investment and Innovation
Innovation is critically important in a high-cost state such as Connecticut, as new products and services often command premium prices.
Half of all businesses surveyed introduced a new product or service over the past year, and only slightly more (52%) expect to in the coming year. While this is an uptick from last year’s 47%, it represents a decline from five years ago, when 59% of companies planned to introduce a new product or service.
Technology remains the greatest area of investment for most companies today and two years out, followed by property/facility upgrades and employee training. Investment in capital assets is a very distant fourth place now but nearly closes that gap in two years.
The continued appreciation of the dollar, however, threatens to dampen businesses’ capital spending and hiring plans. Indeed, though investment and innovation this year are on par with 2013 levels, that could easily change for Connecticut manufacturers and other exporters.
Workforce and Succession
Three out of four executives surveyed have no formal succession plan. Of those without a succession plan, 33% are age 60 or older, and 40% are between the ages of 45 and 59.
About half of all businesses surveyed said that baby boomers account for at least 40% of their current workforce.
By 2020, executives see their employee retirements increasing nearly tenfold over the current year, from 1% of their current workforce to 9%.
The greatest demand for new hires in 2016 will be mid-level workers.
In an open-ended question, businesses were asked how the state could address the shortage of skilled workers.
Common responses included greater investment in technical education, better infrastructure and housing, and tax incentives for employee training.
Many business leaders blamed recent policy decisions, such as tax hikes and other cost increases, for driving young workers out of the state.
Nearly one in four anticipate a sale or transfer of their business over the next five years; another 13% expect a sale or transfer within 10 years. Seventeen percent are unsure or undecided.
Most (70%) expect to sell their company for $1 million or more. Among those who anticipate a sale or transfer, 79% do not plan on staying in Connecticut.
Among manufacturers, 94% handle their production in Connecticut. While this is encouraging, 28% also have production facilities in other parts of the U.S., and 24% in other countries—which means they may be more likely to consider expanding or shifting more of their production elsewhere.
The factors that drive site location include access to key inputs; proximity to suppliers and customers; access to skilled labor; cost of labor; occupancy costs; affordable energy; and where companies are in their life cycle (e.g., mature companies are often likely to disperse geographically to reduce costs).
CBIA’s surveys consistently find that personal reasons also factor significantly in location decisions, especially among smaller companies and those that are family-owned.
Many business leaders point to Connecticut’s quality of life and the desire to work close to where they live as the main reason for locating and/or staying in-state. However, we are slipping here.
In a survey of Hartford-New Haven-Springfield businesses conducted earlier this year, quality of life—traditionally the number-one benefit to operating a business in this region—emerged as less of a competitive advantage today.
Recent years have shown a steady decline in the percentage of company leaders citing quality of life as the greatest benefit of operating a business here: 47% in 2009, 43% in 2011, 40% in 2013, and just over a third (35%) in 2015.
One in three businesses surveyed have been approached about moving or expanding their operations to another state.
Of those, nearly one in four are planning on moving to that state, 29% are considering shifting significant production to another state within five years, and 31% are weighing expansion in another state within five years.
Primary reasons for moving or expanding operations outside of Connecticut are the state’s high costs (including taxes) and its anticompetitive business environment.
More than three-quarters of business leaders (77%) say Connecticut’s business climate falls short of other states in the Northeast, and 91% say we are outmatched by the rest of the country.
According to Connecticut executives, top-ranked states for business friendliness are Texas, North Carolina, Florida, and South Carolina—many of the same economic powerhouses that have been working to poach Connecticut businesses.
In addition to closed questions that lend themselves to year-over-year comparisons about profitability, exporting, workforce needs, and more, the 2015 Survey of Connecticut Businesses included open-ended questions that dug deeper. Among the questions we asked:
What can policymakers do differently to make Connecticut a top-20 state for business?
- If you had one message to send the governor and legislature about how to improve the legal and economic environment in the state, what would it be?
- What was the most important factor driving your profit or loss last year?
- If your company plans to move or shift some of its production to another state within the next five years, explain why.
- From businesses as varied as small, family-owned enterprises and large, multinational corporations, certain themes emerged.
Business leaders are calling on Connecticut legislators to control state spending and balance the budget.
They point out that the interests of large and small businesses are often seen as mutually exclusive in public policy discussions, as are the interests of labor and employers, when, in fact, these groups are interdependent.
Competitive tax policies for both large and small businesses, for example—including state income, corporate, property, sales, and unemployment insurance tax policies—are frequently linked to a healthier economy and lower unemployment.
Some of the hundreds of open-ended responses from this year’s survey that underscore these points:
- “We do some production off-site, as some of the skilled personnel needed have left the state for states that have a growing economy.”
- “Fix the economy. Workers follow jobs.”
- “Overall economic conditions in Connecticut are making it more difficult to generate a reasonable profit.”
- “The last round of budget talks was shockingly out of touch with political and economic reality in the state.”
- “Connecticut is increasingly inhospitable to small businesses in general and healthcare businesses in particular.”
- “As with any growing business, we have options. Other states are providing solid growth opportunities for us.”
The survey was mailed and emailed in June and July to approximately 5,500 top executives at businesses throughout Connecticut; 584 responded, for a return rate of approximately 10.6% and a margin of error of plus or minus 4.1%.
Company types included privately held (43%), familyowned (38%), S corporation (29%), incorporated (24%), LLC (16%), woman-owned (10%), publicly held (5%), minority-owned (3%), and foreign-owned (3%).
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