Jonathan Ortmans

Building One Global Entrepreneurial Ecosystem

Month: February 2009

Entrepreneurs: Engines for Job Creation & Innovation

Times are tough. Layoffs are growing every day and despite massive government intervention, there is little talk of anything more than a slow prolonged recovery. There are a few reasons though to remain optimistic. The main one: as long as we have entrepreneurial people, jobs will be created, and when times get tough we learn to do more with less. There are many entrepreneurs out there who see new and better opportunities for innovation now we are in the midst of crisis.

Just last December, a new study confirmed that the relationship between company success and economic conditions at the time of a company’s founding is ill-understood. One of the statistical results suggests that the likelihood of a company being part of a public IPO is unrelated to whether it came from a recessionary or non-recessionary period.
Not even the worst economic crisis has stopped entrepreneurs: Allstate, Texas Instruments, U.S. News and World Report, Revlon, Knoll and more were founded during the Great Depression. And the trend has continued during other economic downturns. Not only do these companies hire workers and expand economic activity, but many of them introduce life-saving or productivity-enhancing innovations. Existing companies have also commercialized innovations during recessions instead of pulling back. For example, Procter & Gamble pushed to launch its Pampers disposable diapers during the economic dip of 1961. In 2001, Apple introduced the first iPod. There are always needs to fill in the market, and fortunately we have risk-taking entrepreneurs to pursue innovative ideas.

Every week, we will highlight one story of innovation and job creation in our “Profiles in Innovation” section under the Policy Forum tab. A recent survey revealed that Americans see entrepreneurship as having a key role in overcoming the current crisis: 80 percent of voters want to see the government use its resources to actively encourage entrepreneurship. We hope that the profiles will be powerful statements for policymakers, future entrepreneurs and society in general about the ways in which entrepreneurs drive the economy and improve living standards.

The Role of the University in an Entrepreneurial Economy

Have you ever thought about the contribution that universities can make to an economy? Here’s a fact: Around 6,900 MIT-alumni companies with worldwide sales of approximately $164 billion are located in Massachusetts, representing 26 percent of the sales of that state’s companies. MIT’s impact extends to the national level with, for example, 4,100 alumni-founded firms based in California generating an estimated $134 billion in worldwide sales. Edward B. Roberts and Charles Eesley reveal these and other facts in their soon-to-be-launched report “Entrepreneurial Impact: The Role of MIT.”

Universities can be global leaders in nurturing a strong entrepreneurial economy through their several roles. For instance, universities advance our understanding of the determinants and impact of entrepreneurship. As more professors and students are researching the many topics related to entrepreneurship and collecting the necessary data, we are better able to inform policy.

Universities also disseminate this knowledge to students, fostering a culture of entrepreneurship among them. Students learn to think and act entrepreneurially. Many schools also support extra-curricular activities (e.g., business plan competitions, celebrations like Global Entrepreneurship Week, etc.) that engage students in all sorts of entrepreneurial projects.

In the broader innovation ecosystem, universities and their faculty are key agents.  Entrepreneurship and innovation need each other to go far. Scientists and engineers at universities are constantly developing new scientific understandings and technologies which can translate into innovations that meet a need in a market. For example, university research benefited society through the nearly 700 new products reaching the marketplace in 2007 and the 555 new startup companies launched in 2006. In cumulative terms, university licensing offices introduced more than 4,350 new products since 1998, the equivalent of about nine new products every week. It is no wonder that many firms choose to locate near universities.

Yet, universities can and should yield more – especially in this economy. For this to happen, the relationship between universities, the government and industry needs some rethinking. For example, how can these agents organize to support early-stage innovative ideas from students and faculty? Advice from industry experts can be crucial at that stage, so strong networks are necessary to connect these “worlds.” The government, as a major funder of basic research at universities can foster such networks. The Future of the Research University offers some interesting approaches from around the world.

In the midst of a crisis, it is important to support all contributors to an entrepreneurial economy. Universities, as centers for knowledge creation and diffusion, can be leveraged to generate future growth. This is why we are hosting a Hill Briefing on Feb 17th on the economic impact of entrepreneurial universities. It is important that universities operate under policies that encourage entrepreneurship and innovation. The MIT model is one of the many, but it is a clear example that with the right programs and policies in place universities can be catalysts of innovation, job creation and growth.

Tax Employment?

Employment in the U.S. has been in a free fall. Payroll employment has declined by 3.6 million since the start of the recession in December 2007, according to the latest report from Bureau of Labor Statistics. Firms have shed jobs every month since January 2008. Last January alone, the national payroll dropped by 598,000 jobs. The unemployment rate has risen from 4.9 percent in January 2008 to 7.6 percent in January 2009. Is it time to consider a payroll tax cut?
When the goal is to contain unemployment, taxing labor does not make much sense. In 2007, IRS collections from FICA (Federal Insurance Contributions Act) taxes totaled $787.8 billion. Firms and households share the burden of these payroll taxes.

An estimate suggests that if Congress cuts workers’ Social Security contributions by 2%, workers earning $20,000 a year would enjoy a tax break of $400, and workers at the taxable maximum ($106,800) would receive $2,136.The concern is, as with any tax break, that a payroll tax cut can be ineffective if households, distressed about the outlook of the economy, save the additional disposable income or use it pay down debt, instead of spending to stimulate the economy.

But a payroll tax cut will not only influence households’ decisions; it will also affect decisions by firms. In general, the tax code is a package of incentives influencing entrepreneurship, including hiring decisions. A reduction in the payroll tax would give firms an incentive to retain more employees on their payroll by reducing the cost of employing workers.

Another caveat is that payroll taxes are one of main sources of revenue for Social Security and Medicare benefits, which already face severe funding problems. However, because these programs are financed out of total government revenues they could continue to receive the same level of funding. The primary goal of tax policy is to raise public revenues to deliver benefits like these, but the structure of taxation also matters. Tax incentives should be crafted to boost economic growth.

In times of sharp economic slowdown, federal tax policy should support entrepreneurship in order to accelerate growth and job creation and retention. The labor market incentives that a payroll tax cut can provide make it an option worth considering to break free from the vicious circle of slumping demand, falling production, reduced investment and rising unemployment.

Greening Our Economy

Making what is urgently needed consistent with what is needed for the long-term is not a bad idea. The current House bill on the economic stimulus nicely blends the short- and long-term perspectives, particularly in the way it addresses renewable energy. The challenge now is to figure out how to achieve progress in developing and commercializing green technologies without turning the government into an obstacle to the entrepreneurial innovation needed to end the climate change and economic crises.

The unfortunate reality is that the clean energy industry requires a government push to leverage the risk-taking behavior of entrepreneurs and their financiers. Months of plunging oil and coal prices and a deepening financial crisis have dried up financing for many renewable energy projects. Because climate change and energy security are national priorities, we can’t risk having the clean energy sector in a freeze any longer. Experts in the renewable energy business say that most projects take three to five years to develop even when fully funded.

The proposed stimulus package includes a $20 billion investment in tax incentives for green energy investors, temporary loan guarantees for up to $80 billion for renewable energy power generation and electric transmission projects that begin in the next two years, and $11 billion to create smarter electrical grids. The tax breaks include an extension of the production tax credit for three years, and the option for businesses that place new renewable energy facilities in service during 2009 and 2010 to claim either a 30 percent investment tax credit instead of the production tax credit, or apply for a grant of up to 30 percent of the cost of building a new renewable energy facility from DOE. Yet another tax incentive relates to R&D, which is at the base of all high-tech innovation: an enhanced R&D tax credit for research in fields such as fuel cells, renewable energy, efficient electricity transmission, and carbon capture and sequestration. Of course all the activities being incentivized can not only bring us green technologies and energy, but also generate jobs (for an estimate of this impact, see ITIF’s new report).

The provisions in the stimulus package for clean energy could unleash a good dose of entrepreneurship and innovation by speeding up investment in clean energy projects and engaging our best scientists, engineers and entrepreneurs in the economic recovery. In addition, President Obama announced in his first weekly radio address that he would like to start a clean energy finance initiative, which will use loan guarantees and other financial support to leverage $100 billion in private sector investments in clean energy projects over the next three years.

While we can see with optimism that entrepreneurship in the green energy sector might feel revitalized with these incentives, we must be wary that government intervention could lead to undesirable outcomes. The devil is in the details that will come. The risk is that what might be needed to revive the clean energy market today could prove harmful to the clean energy sector’s competitiveness tomorrow, by allowing the government to pick and protect winners and thereby deprive society from the very forces that drive innovation. We should applaud efforts to jumpstart investment in clean energy, but once this is achieved, we must always look to entrepreneurs to lead the way to a greener, healthier, and more productive future.

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