Based on recent interviews with 161 successful business leaders in Taiwan and the USA, three principles determine the rate and speed at which new companies can create economic value:
1. Transparent and equal opportunity marketplaces for small and large companies
2. Adherence by all citizens to the rule of law
3. Degree of uncertainty regarding government intervention and taxation
Increases in the rates and scale of job creation, are based on the perceived rewards of commercializing one’s venture. The more options to monetize the entrepreneur’s new product or service, the better chance of the number of start-ups will increase. Two examples of monetizing events are outside investment to catalyze organic growth or a sale to a private or public investment group. These monetizing events create positive perceptions for future or would be entrepreneurs.
The ability to find, leverage, and monetize investment capital varies greatly by community and nation. The greater likelihood of incremental investment and willingness to risk the greater perceived “upside” for entrepreneurs. The idea that free market principles apply only to equity markets or investment risk calculation ignores historical precedence.
Increased investment and risk taking occurs when the perceived paths to monetization are clear and uncluttered by government “red tape” or corruption. In Taiwan, central planning and monetary policy were perceived as the best levers to long-term growth. Unfortunately, the US has tried this approach and according to many experts, the policy has failed to stimulate job growth. The premise is that the greater level of government involvement, the “safer” it is to conduct business. The reality is government meddling in business and increased taxation kills job growth and the spirit of entrepreneurism. The greater uncertainty for start-up businesses, the fewer resulting companies. Entrepreneurs cannot attract as much investment or take on more risk associated with hiring and training new employees in environments of great uncertainty. Uncertainty creates this “poor” environment for entrepreneurs.
Stanford University Economist, Thomas Sowell recently said:
“The idea that the federal government has to step in whenever there is a downturn in the economy is an economic dogma that ignores much of [US] history. The myth that has come down to us says that the government had to intervene when there was mass unemployment in the 1930s. Yet, once having intervened, it was politically impossible to stop and let the economy recover. Experimentation by the government today makes it more risky for [real estate or stock market] investors to invest or employers to employ, because neither of them knows when the government’s rules of the game are going to change. Whatever the merits or demerits of particular government policies, the uncertainty that such ever-changing policies generate, paralyzes an economy, just as it did back in the days of FDR. http://www.lewrockwell.com/2011/05/thomas-sowell/fed-up-with-the-fed/
The “rules” of engagement mandated monetary intervention in the recent mortgage meltdown. US citizens were warned there would be “no General Motors (GM), no AIG, no Merrill Lynch” if there was not a federal bailout. President Obama made the case that US could not survive without companies such as GM, Goldman Sachs, Bank of America or Merrill Lynch.
Sowell makes a strong aurgument that no incremental job creation resulted from the bailout. He claims the bailouts of banks too large to fail and monetary easing contributed to the severity of the 2007 global recession. “ It did not work in the 1930’s and its is not working today”. The rules by which monetary policy is made contributes our uncertainty and investor uneasiness. The uncertainty of the level and degree of government intervention is a job-killer.It causes investors to wait “on the sidelines” to better understand how the new rules will determine the outcomes.
Today’s economic argument centers on what really drives job creation in a national or world economy. In Taiwan, jobs in technology and services are growing, while traditional manufacturing jobs are dwindling. In the US, when a plant closes in Michigan, Illinois or Wisconsin the average citizen blames global trade or free markets. The results of the numerous US political poll and presidential election confirm this hypothesis.
Where I lived in Illinois, my neighbors had an immediate and visceral reaction to our largest company, Caterpillar’s drive to cut costs by locating jobs in India or Brazil. What does the average Taiwanese citizen think when Toyota moves its factories to China or Vietnam? All Americans enjoy the benefits of free trade in the form of lower prices and yes, job growth. But job growth is not coming from the US’s largest companies such as Caterpillar or GM. Job growth is driven by mid to small companies with less than 500 employees.
What can Taiwan do to create a more positive ecosystem for entrepreneurs and small companies? Greater transparency is critical. Make the rules clear and increase the perception that risk leads to big rewards. The US and Taiwan possess valuable economic resources such as: an industrious people, a focus on technological solutions and innovations, a strong entrepreneurial spirit, and the world’s leading institutions of higher learning that are open to best and brightest individuals and ideas from all over the world. Certainly a similar chart could be created for the Taiwan.
How is Taiwan doing? What assets can Taiwanese claim as unique and world class?
The US and Taiwanese governments protect intellectual and real property like no other nations on earth. Most Americans and Taiwanese obey the law, not because they are forced to, but because they see the benefits for the greater good of society. Hernando DeSoto identified the willingness to obey the rule of law as a defining American characteristic. US citizens take for granted their ability to leverage property they purchased at 80-100% of its value. This economic privilege spurs economic value by freeing up investment capital for equity investment or savings that are in turn, loaned to small businesses.
So, what makes entrepreneurs so integral to job creation?
Entrepreneurs take risks, spend investment capital using specialized knowledge, and most importantly, hire employees at a faster rate than big business.
What proof can I offer that entrepreneurs drive wealth and job creation? Israel Kirzner (1973, 1999 http://www.nyu.edu/econ/dept/vitae/kirzner.htm) along with Grebel, Pyka, and Hanusch (1987) focused a lifetime of research on entrepreneurs as catalysts for market growth and change. The top economies became the world’s richest countries by supporting entrepreneurism, anti-corruption policies, and the rule of law. Entrepreneurs prosper by encouraging risk and protecting intellectual property. Research provides the evidence for what is now considered the ideal ecosystem for today’s entrepreneur. Most people point to Silicon Valley or Bangalore India as prime examples of the ideal ecosystem. However, most policy makers are focused on big businesses for job creation because it is easier to understand and manipulate. They are confused about how small business can impact the overall economy. They do not understand why a friendly environment for entrepreneurism is so critical for job growth and the nation’s prosperity.
Entrepreneurs I meet with every day in the USA are faced with more regulation, taxes and mandated employee benefits than ever before. The current controversy about universal health care benefits (called Obama care) is a great example of how uncertainty hurts job growth. Because small and mid-sized businesses do not know how much more they will be forced to pay for employee health benefits they reduce their hiring and growth plans and wait on the sidelines.
The current political environment in Taiwan is much friendlier to big business. In the US unions and unskilled workers played a big role in the re-election of President Obama. Entrepreneurs are not usually as strong of a political force, so their views are suppressed or marginalized. This is ironic because today’s national leaders need the job creation power that comes from a positive ecosystem for entrepreneurs. Entrepreneurs risk their livelihoods, reputations, wealth and family life to create value and jobs. Union leaders and supporters of our US President complain that successful businesses and their owners are not doing enough or paying their fair share. This is not an approach nations should follow when trying to grow their economies. It is not supported by macro-economic trends either.
A friendly economic environment for entrepreneurs is the ideal catalyst for job growth–it is an essential ingredient lacking in the US economic recovery. I suggest the following policy changes to counter-act the adversarial relationship between government and small business owners by:
What can Taiwan expect from entrepreneur-friendly policies? The benefits of these changes have been demonstrated in the US—proving that a country or community will experience greater degrees of job growth and greater prosperity when barriers are reduced and there is less uncertainty related to government intervention and taxation.
The model I created is focused on how to catalyze start-up success and gain market traction. We are testing this model in Florida and with a few schools of business accredited by AACSB. Even in tough economic environments such as the recent recession, US entrepreneurs were the first to adapt to changing circumstances and keep economic activity at its highest possible level.
Why? Entrepreneurs are flexible and adaptable. When a viable market surfaces, entrepreneurs are the first to adapt their business model to the opportunity (pivoting), often in the face of stiff competition from larger companies who follow the best innovations with Me-too copycat products or services, often months after the original product gains some popularity.
Entrepreneurs have shown that they although they suffer more from market gyrations and downturns than large companies (because they are less diversified) they can “pivot” faster. Entrepreneurs maintain a stable labor force despite their circumstances through “self-sacrifice. Many entrepreneurs I know go without pay or benefits to keep their best employees when times get tough. Larger companies, subject to the quarterly earnings call, shed even their best workers when management changes direction.
Modern researchers such as Clayton Christenson built upon the theories of “creative destruction” and the “entrepreneur as hero” made famous by Joseph Schumpeter to develop the theory of disruptive innovation. Schumpeter and Christenson provide the most substantive evidence that demonstrates how entrepreneurs add value to products and services and most importantly buoy the employment and financial markets of a national economy.
Entrepreneurs are important because they are willing to risk their capital on less experienced and educated workers who are not immediately productive. If you want to put your finger on a leading indicator for job growth, take a look at the “hire rate” for small companies.
Leading US companies are looking for ways to become more competitive with market leaders abroad. Conventional wisdom would be for trade commissions and policy makers to support and invest in the expansion of big businesses. My money is on small business. Entrepreneurs have proven they can more easily adapt to local demand and succeed in international venues.
International entrepreneurism involves the added complexity of adapting a product or service to a new market or culture. International entrepreneurs face numerous challenges and barriers that add complexity to any venture such as trade barriers, legal constraints, distribution limitations, and human resource issues not found in their home country. But “enlightened” governments should help. Breaking down barriers to entry, anti-corruption programs, encouraging direct investment by foreigners, and protecting intellectual property all contribute to a healthy market.
Based on my interviews with international entrepreneurs, they are willing to take on even greater risks to achieve superior results. I am working with several right now that recognize incredible international opportunities. By staying abreast as to the best methods and products in their respective industries, these entrepreneurs are part of the engine that could help our nation compete more effectively. Entrepreneurs are the most efficient players in gathering or assembling resources from all over the globe and are both close and accountable to the customer, whether they compete in Canada, India or Brazil.
With my experience starting three ventures, Netcentives (1997-2000), Capener Advertising-San Diego (1987-1993), and Above the Rim (1989-1993), I learned first-hand how businesses successfully must “pivot” to the changing environment. I could not ignore the growing opportunities internationally. I spent a significant amount of time finding, interviewing, and training new employees with entrepreneurial drive and smarts.
The new employees that could deal with ambiguity and change thrived. Start-ups attract employees with these qualities and it enhances the environment for innovation. Risk adverse employees are attracted to larger companies. They are willing to “put-up with bureaucracy” in exchange for their perception that size will lead to more stable employment.
Those who feared change hesitated to leave less challenging jobs at large companies because they sought “shelter” from disruptive markets or upheaval. These workers were scared watching the changing landscape and market gyrations despite great career opportunities.
The speed required to seize entrepreneurial opportunities are similar to the metaphor of the train pulling into a station and the passenger must choose to get aboard or watch that train ( or opportunity) leave the station as fast as it pulled in. Successful entrepreneurs know when to jump on to (the train) an opportunity and the best ones can sense when to get off the train in a hurry.
Block and MacMillan wrote, “The entrepreneurial drive to pursue [opportunities] is a combination of many factors, chief among them motivation and attitude. These attributes in turn, affected by childhood influences, role models, and later workplace environments [create the entrepreneurial drive]. Providing they work hard, those with more talent will clearly do better than those with less; but entrepreneurial ability can be directly influenced by education, training, and experience. In other words, entrepreneurs are made, not born” (Block). High aspirations drive entrepreneurs to take risks and demonstrate passion that attract investment and co-workers. Below is a chart I created for Taiwanese policy makers in an effort to help them better understand how entrepreneurs are made. Taiwan must create a better ecosystem through improvements in showcasing role models, reforming higher education, and becoming friendlier towards small businesses and start-ups.
It is my goal to encourage the creation of a positive ecosystem for entrepreneurs. The more options and the easier it is to monetize a small business for a sale to private or public investors will stimulate new business growth and entrepreneurism. Uncertainty concerning the levels of government intervention results in less jobs.
If you set policy in the future or go to work in government, think hard before you put up barriers “unfriendly to” entrepreneurs. Entrepreneurs are heroes in the free economy and should be treated as such; they are the nation’s most powerful engine for economic prosperity. Freeing entrepreneurs up to do what they do best: driving productivity, wealth creation, increasing or creating product value, thereby creating jobs. It is the world’s most powerful engine of prosperity.