Politics and Entrepreneurship

I just finished my PowerPoint presentation for my 10 minute intro speech at the 40th annual St. Gallen’s symposium next week. My work session with Mr. Yoshinori Imai (NHK) will be on Thursday, May 13th after Mr. Hiroshi Mikitani’s (Rakuten) session. Basically, my presentation talks about the intersection of politics and entrepreneurship. I hope it will be a catalyst to instill debate with the audience during the session.

I’m posting excerpts of the presentation here both for people who cannot come to Zurich and attend as well as people who have additional comments, suggestions and ideas that I might be able to incorporate/mention during the 1.5 hour session. Again, crowdsourcing has been working very well for me so I’ll use it again here.

As I mentioned in a previous blog, the symposiums theme for this year is titled “Entrepreneurs – Agents of change“. Obviously, this is a timely topic given all the turmoil throughout the world due to the current Great Recession. Personally, I have seen the interest in entrepreneurship grow tremendously in the last 18 months. Not only due to the rapid globalization and technological change but because entrepreneurship helps meet new social, political and environmental challenges. In fact, many countries have made entrepreneurship an explicit policy priority due to this economic crisis and thus, has resulted in me travelling to numerous countries around the world to talk about this topic (and sometimes in conjunction with innovation).

While I am not personally happy about anyone losing their jobs, I believe economic crises are historically times of industrial renewal or creative destruction as described by Schumpeter. Basically, that throughout human history, less efficient firms fail while more efficient ones emerge and expand during these times. Specifically, during times of economic prosperity, legacy industries and technologies can survive due to momentum, established networks and infrastructure. However, when a downturns occur, new business models and new technologies merge – particularly those leading to cost reductions and greater efficiencies.

Some examples of companies that were founded during a recession include household names such as: 3M, Adobe Systems, Amgen, Apple, Broadcom, CNN, Chevron, Disney, Electronic Arts, Exxon Mobil, Facebook, Genentech, General Electric, Google, Home Depot, Honda, Hyatt, IBM, Johnson & Johnson, Kraft, McDonalds, Merck, Microsoft, Nintendo, Pizza Hut, Princeton Review, Skype, Sony, Twitter and Whole Foods. Obviously, there are many more but I had to select ones that people know from around the world and still fit on one PowerPoint slide.

Obviously, my point is that entrepreneurship is key to an economic recovery and many other people feel the same way. In a recent Kauffman survey of Americans and found:
  • 79% said that entrepreneurs are critically important to job creation, ranking higher than big business, scientists, and government
  • By three to one, Americans favor business creation policies as opposed to government creating new public and private sector jobs
  • 72% said the government should do more to encourage individuals to start businesses
  • Almost half think the laws in America make it more difficult to start a business

Similarly, the St. Gallen’s International Students’ Committee (ISC) surveyed Leaders of Tomorrow on current opinions on a wide variety of topics and produced a report called the 2010 Global Perspectives Barometer. From the report, I was able to pull similar comments including:

  • Majority felt there is too much regulation in their country
    • Western Europeans and North Americans disagreed with this
  • 38% felt that government should regulate corporate risk
    • However, only 24% risk regulation to free markets
  • 70% favor a free-market, federal state system as opposed to centralized state intervention
  • Wanted a state with strong armed forces

I included the last bullet since I actually found that quite interesting.

Anyway, back to the main topic and the history of government and entrepreneurship. Personally, I think a lot of the modern entrepreneurial activities started with the formation of the Small Business Investment Companies (SBICs) was formed in 1958. It was created to foster funding for growth-oriented small businesses with the understanding that entrepreneurial companies would spur technological advances. The interesting and actual motivation for the creation of this entity was so the US could compete against the Soviet Union. Eventually, this led to the formation of the infrastructure for much of the modern venture capital industry.
In the 1980’s, government and politicians in Western countries began to realize that they were unable to sustain traditional manufacturing/production and thus started shifting industries to service based sector. Furthermore, the privatization of publicly owned enterprises and reduced regulatory controls on industry happened during this time. With this “perfect storm”, many large manufacturing industries started losing out to smaller, more nimble, knowledge based ventures.

In today’s financial crisis, many governments were forced into massive public interventions and become super venture capitalists. Unfortunately, the monies (e.g., TARP) that were invested focused on most troubled and poorly managed firms. With the electorial base complaining, politicians liked the “fun stuff” of handing out money by creating several program such as loan funds, SWFs, government subsidies, government funded venture capital, business centers and tech parks that have not had much track record of success. To further complicate matters, this situation has created numerous moral hazards where cheap, politically influenced and motivated money is wasted on short term pain and not long term gains where there are no incentives to becoming financially viable.

So what action should governments take? I believe the role of government is not to try to create wealth but to create an environment in which the entrepreneurial spirit can flourish. Namely, that economic freedom is best public policy that fosters entrepreneurship. As there is a strong correlation between economic growth and ease of doing business in a country, governments should make every effort to change their policies to make doing business easier and fair.

Along these lines, governments must do all it can to create a fair playing field for companies while protecting them once they become established and not smothering them in the process.
  • Rule of law – For example, bankruptcy laws should not be so punishing as to scare away potential entrepreneurs to start-up business, or worse, be afraid to fail
  • Property rights – Intellectual properly rights with the right balance of protection but not protectionism
  • Tax burden – Depending on how taxes are structured, this can encourage or discourage entrepreneurship
  • Bureaucracy – Ease of doing business in a country becomes a competitive advantage in this global marketplace
  • Regulations – Should encourage fairness but not be unfair, unreasonable or illogical
  • Lack of coordination – Different ministries should not have conflicting regulations that prevent industries from developing

All governments also need to look out for issues that put them on a more competitive footing in this global environment. With mobility of people and ideas today, countries need to compete for commerce. Why would anyone choose to setup a business in Brazil where it takes 18 bureaucratic steps and 152 days to get the company whereas in Canada, it only takes 1 step and 1 day? Globally minded entrepreneurs now measure the following items when deciding on a place to start their business:

  • Steps and complexity in starting a business
  • The ease at obtaining construction permits
  • Employing workers – both the ability to hire and fire employees
  • Registering property
  • Getting credit
  • Protecting investors from lawsuits and taxes
  • Paying taxes
  • Trading across borders both physically and governmentally
  • Enforcing contracts and the court system
  • Closing a business and associated liabilities

Anyway, I hope to talk about these points and other in the opening 10 minutes. As I always say in the end “Think Globally, Act Locally”. Your comments are always welcome.

Posted by whsaito

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