Jonathan Ortmans

Building One Global Entrepreneurial Ecosystem

Month: May 2009 (page 1 of 2)

NAS Study on SBIR Adds Hope for the VC Industry

As the deadline for the reauthorization of the Small Business Innovation Research (SBIR) program approaches, evidence is mounting on both sides of the debate that has been pushing the decision about the future of SBIR back since March. This time, a new study supports the positions of the Venture Capital industry which hopes to gain access to SBIR funds. Continue reading

More VC Leadership at the SBA

Last Thursday, President Obama announced his nomination for the position of Chief Counsel for Advocacy at the Small Business Administration. The nominee,Winslow Sargeant, is a managing director in the technology practice at Wisconsin-based venture firm Venture Investors LLC. Continue reading

The Entrepreneurial University: An Institutional Innovation

Entrepreneurship is increasingly recognized as central to economic growth. We observe entrepreneurial innovation driving growth in a number of economies such as Israel, Ireland, Turkey, India and China. Universities, particularly research universities, are an important component of any innovation economy. Universities have long been instrumental in developing much of the innovation that benefits our lives. A key question, therefore, is how well universities are prepared to support the transition to a more entrepreneurial economy. The various successful experiences from around the world show that shaping entrepreneurial universities requires commitment to institutional innovation.

Last June, the Kauffman Foundation and the Max Planck Institute gathered university leaders to discuss The Future of the Research University. At this conference, a consensus seemed to emerge: universities can only effectively become incubators of entrepreneurship and innovation if they themselves practice entrepreneurship. For example, Arizona State University’s (ASU) Michael Crow turned this institution into a force for innovation by reconceptualizing a large public university as an academic enterprise. Today, ASU competes for research funds, bright students and faculty and it strives to be responsive to the changing needs of its local and global constituencies. It collaborates with other academic institutions, business and industry, much like a private enterprise.

This “reconceptualization” involved several non-traditional university arrangements. Transforming ASU involved abolishing academic departments, creating new ones, and even helping to found entirely new academic disciplines. This is not surprising. The idea of universities explicitly fostering entrepreneurship in business is quite radical. Traditionally, universities have preferred to partner with government and to shield themselves from private industry. However, as Carl Schramm, Robert Litan and Lesa Mitchell point out, universities have always played, even if implicitly, a vital role in promoting entrepreneurship and growth: they produce and disseminate new knowledge, and they train the scientists who make the groundbreaking discoveries, the engineers who turn those discoveries into new products or processes and the businesspeople who bring those innovations to the marketplace. We observe this highly-dependent relationship in many of our country’s vibrant regions such as Silicon Valley, whose engine is Stanford University. It is estimated that about half of the start-ups in the Valley have their roots in the university.

A few other universities have transformed their role in an innovation economy with success, but they implemented different strategies to redesign the university-industry relationship. George Mason University (GMU) has become a “global university.” To embrace this new paradigm, GMU uses a wide range of technologies and communication strategies to link individuals, localities, national units, multi-national businesses, and trans-national regions. Alan Merten, President of GWU, explains that “a global university does not exist in the ivory tower of yesterday. It is an entity with ever-growing and reciprocal linkages to other entities of equal influence and growth potential, including corporations, domestic and foreign municipalities, and governments.”

And there are good examples from outside the United States. Erasmus University in Rotterdam aims to foster a culture of entrepreneurship in Dutch society in part through a new education curriculum that trains students in entrepreneurship, an initiative similar to the Kauffman Campuses in the U.S.  Government policy which is so important in many economies, has helped universities around the world embrace their role in economic development. For example, national R&D policy has helped to make Israel’s universities entrepreneurial since it has encouraged collaboration between academic and applied research by, for example, supporting consortia from industry and academia, which have bred collaboration, knowledge exchange, and entrepreneurship. In Europe, the Lisbon agenda has been supporting open coordination among economies trying to nurture innovative and entrepreneurial behavior. Many European universities have decided to expand their missions to economic growth.

University leaders’ efforts to support the world’s burgeoning culture of entrepreneurship highlight the challenges, as well as the opportunities, that universities face in the transition toward a more entrepreneurial economy. What works best may depend on a number of factors, including the university’s research strengths, the nature of the related industries, especially in my opinion the nature of the region, etc. At the end of the day, while there is no magic bullet, a great part of the success in becoming an entrepreneurial university is clearly the extent to which the university can connect with the broader market of ideas in society and the business community. Growth and innovation demand universities that compete to impact the economy through an entrepreneurial culture.  How a university does this is less important; what matters is that it continues to make the global melting pot interesting and innovation rich.  If you have good examples, let us know.

What Accounts for the Overproportion of Immigrant Entrepreneurs?

Another news article has highlighted the overproportion of entrepreneurs in places like Silicon Valley: over half (52.4 percent) of the startups contributing to innovation and wealth creation in that region have at least one immigrant founder. This New York Times article asks “Why this overproportion?” and presents some of the arguments that surrounding the debate on high-skilled immigration.

The first explanation relates to education. A large proportion of engineering students in the U.S. come from overseas. This observation raises questions about the quality of education in the U.S. Quality of higher education is clearly not the issue given that foreign students choose U.S. universities precisely for their quality. We still lead in university education. But the U.S. does lag behind in K-12 STEM education, which could explain students’ career choices.

An analysis of the education system in the U.S. is certainly welcome, but when it comes to the over-proportion issue, we must not just look at the skills, but rather at the fact that these high-skilled immigrants blend their skills with entrepreneurship. As Vivek Wadwha, the author of the studies that have unveiled the impact of high-skilled immigrants to our economy, has told us the reason why high-skilled immigration laws need reform is not that there is a shortage of engineers, but that those foreign immigrants in places like Silicon Valley are highly educated AND entrepreneurial, creating companies and more innovation.

The article touches on this “entrepreneurial spirit,” quoting opinion leaders like Mr. Wadwha arguing that the character of the immigrants themselves explains their disproportionate presence among the entrepreneurs and innovators of America. Immigrants are prone to take risks to climb the social ladder; they’ve got nothing to lose.

Other explanations of the astounding entrepreneurial contributions of high-skilled immigrants presented in the NYTimes article tend to distract attention from these contributions, among them that immigrant engineers are hired because they are cheaper. There is little evidence to support a decline in engineer salaries. Moreover, the high-skilled immigrants behind the overproportion statistics (e.g., the founders of Yahoo and Google born in Taiwan and Russia respectively) are precisely entrepreneurs; they create jobs rather take jobs.

Unlock Entrepreneurship Through Health Care Reform

All Presidents who take on tackling reforming American health care deserve a medal for trying. I have been actively engaged in health care economics for more than 15 years and after facilitating hundreds of town halls aimed at finding common ground, I can attest that whoever leads the charge makes as many enemies as friends.  In 1994, I convened a summit presided over by among others then Senate Majority Leader Bob Dole and First Lady Hillary Clinton in Kansas City. “Summit of Harmony” was the front page headline of the Kansas City Star.  I flew back to Washington with a group of Senators hopeful that we had actually changed the tone of Washington politics on health care at last.  Bob Dole and Hillary Clinton were going to work it out.

Jump forward to the present. The legislative branch is well underway in getting a bill together and President Obama has already gathered together publicly and privately key leaders with diverse views on how to achieve the three-fold goal of lowering health care costs, expanding coverage and improving quality. The President is also offering a 2010 Budget that sets aside a deficit-neutral reserve fund of $635 billion over 10 years to help finance reform of our health care system. With a likely veto proof Democratic Congress, the powerful potential opposition is more likely to come from those such as the six leaders of the health care industry who attended last Monday’s gathering at the White House. The morning headline though might well have been the same – with their pledging to decrease the annual health care spending growth rate by 1.5 percentage points.

So what is the wild card this time if the health care industry sees fit to support this President and Congress and keep “Harry and Louise” ads off the air?  It is of course the recession. Economists anxious in 1992 about exploding entitlement spending in an aging America can only be in a state of pure panic today with headlines of negative growth rates and high unemployment.  Health care economists will remind us that health care is a tax and budget issue and a better health care “system” is less about the debate between using tax credits or taxes to finance care but more whether America can afford what it citizens clearly demand.

Enter the entrepreneurs. If you subscribe to one of the themes of this column that entrepreneurship equals recovery and have absorbed the significance of the now often repeated facts around new firm formation, you will concur that our first rule should be do not harm to the revenue and job generators.  Policymakers should carefully evaluate the effects of health care reform, particular the health insurance system, on entrepreneurship and the economic growth and revenues it brings to pay for health care.

Entrepreneurs are currently constrained by the pressure of having to provide health insurance for themselves and to offer it to the employees they seek to attract. Given their smaller workforces, entrepreneurial firms have smaller ‘risk pools,’ which means that insurers charge them higher premiums. The NFIB (National Federation of Independent Business) estimates that the self-employed for example, pay an additional 15.3 percent tax on their premiums. The self-employed may deduct their premiums from income tax but not payroll taxes. The SBA in turn found that health insurance deductibility enhances entrepreneurial survival. It estimated that if the self-employed could deduct health insurance like other businesses, the average likelihood that single-filers will exit the entrepreneurial sector falls by 10.82 percent.

It is important to remember that the current system of employer-sponsored health insurance is an accident of history. Employers began offering health insurance during World War II as a way of circumventing wage controls in place at the time. Employees were not required to recognize the health care benefit as part of their taxable income. More and more firms began offering health care coverage, creating the current employer-based system of health insurance.

Today’s uncertainties surrounding health insurance availability in the individual market may even lock many entrepreneurs in jobs that offer health insurance at a low premium. This job lock effect undermines entrepreneurial innovation. In addition, tying insurance to employment contributes to higher health care costs by reducing the incentives for individuals to really shop for medical care.

In seeking reform, policymakers should find the right institutional answer to these effects on the labor market. At the broad level, the solution is straightforward: decouple health insurance from employment. This could be achieved by, for example, phasing out the tax policy that undergirds the current employer-based health insurance system, which should lead to a rise in real wages that would be used to purchase insurance individually or through non-employer groups. If you are not keen on placing so much responsibility on the individual, there are also public sector options with the government playing a role similar to that it does with “Medicare”.  Either way, America must find a way to remove health care as a competitive disadvantage for American employers in the global economy.  As a nation, we must dissipate the fear of leaving a company to start a new enterprise or work for a start-up.

The current incentives leading to job lock affect not just entrepreneurs, but a large sector of society. First, entrepreneurs are the drivers of medical innovations which can improve quality and even cut costs. Second, because small firms provide the majority of jobs in the U.S., their disadvantage in health premiums affects many Americans. The SBA estimates that while nearly all of the employers with 200 or more employees offered health benefits to their workers, only 62 percent of businesses with fewer than 200 employees offered such benefits in 2008. People who cannot get health insurance at work must pay their premiums out of after-tax income. In other words, it is also a matter of coverage.

Consensus is rarely easy to achieve on an issue that touches our personal lives and our economy so deeply, but I think that we can all agree that addressing health care barriers to entrepreneurship should be part of a pro-growth reform.

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