Category: Public Policy, Economics and Entrepreneurship

Small Businesses not yet Buying into the Recovery

The economic recovery that some had been predicting over the past months may not be right around the corner, after all. While there are some indications of a strengthening economy, many experts are becoming more cautious about both the timing and the rate of the recovery.

And there is a growing chorus of those who believe that we may actually see a second downturn as part of this recession.

Recent surveys find that small- business owners also are not confident that good times will be returning anytime soon.

SurePayroll’s Small Business Scorecard for April found that optimism among small-business owners has shown some improvement during 2010. However, the authors caution that, “while some good things are happening, until more small businesses start hiring full-time workers — and those workers spend with confidence due to perceived job security — it is not time to declare a full recovery.”

Two specific results from the latest survey of small-business owners taken by the National Federation of Independent Business, a small-business lobby, found that the mood among entrepreneurs remains cautious.

First, job measures in the NFIB survey were very weak, which indicates that there is little hope of an employment recovery coming from America’s small business owners anytime soon. This is not good news as small businesses typically lead national recoveries by creating new jobs one by one.

Second, the survey found that small-business owners have very little intention of making capital investments in their businesses anytime soon. Plans to make capital expenditures over the next few months were unchanged and remained near the 35-year record low.

Only 4 percent of business owners characterized the current period as a good time to expand facilities.

I actually see this result as good news. Entrepreneurs are recognizing the need to be cautious right now. This economic crisis is far from over, so prudence is a virtue.

My advice to business owners is to remain conservative in spending, especially with fixed overhead. They should continue to build cash reserves and avoid taking on new debt whenever possible.

A strong financial position will help ensure a strong market position when the economy moves into a sustained recovery.
Top troubles: cash flow, sales

Author Barry Moltz recently conducted a survey of entrepreneurs to find out what struggles they face.

As expected during a recession, the biggest struggles Moltz identified from his survey were with cash flow (36.3 percent) and weak or declining sales (32.5 percent).

One of his more interesting findings was that even with so many small-business owners struggling to stay in business, only 8.5 percent said that they have lost their passion for being an entrepreneur. While the economy continues to show no clear signs of a recovery, entrepreneurs remain resilient.

This offers the hope that when better times do return, entrepreneurs will be ready to lead the way into a period of economic growth.

(This post was my column in today’s Tennessean).

Listen Up!

My friend Rhonda Abrams has a message for Washington in her latest column at USA Today:  “Listen up, government: Small business is most trusted group.”

From her column:

“Be proud, small-business owners! You’re now the most trusted group in America. Listen up, federal government! You’re neglecting small business — and most people think so.

“According to the just-released study by the highly respected Pew Research Center, small business is the most trusted institution in America. More than churches. More than colleges. More than technology companies. And certainly more than labor unions or large corporations.”

Let’s Choose None of the Above

I was sent an e-mail this week that for some reason caught my attention.

It read as follows:

Hello,

I thought you might like to know that America.gov has published a feature on public efforts to promote high-tech entrepreneurship. The feature includes a blog discussion of relevant issues.

Regards,

Andrzej S Zwaniecki
Editor, International Information Programs
U.S. Department of State

How interesting.  The U.S. Department of State has its tentacles in entrepreneurship.

So I went to the link at America.gov.  I must admit, it was my first time at this site. 

The page linked to at America.gov had a quiz.

“Can Your Government Promote Entrepreneurship?” was the headline in bright red at the top of the page. 

Of course, I immediately looked for the “NO” button to click.  After all, if venture capitalists who study high growth ventures for a living have such a lousy record of picking winners — the good ones get about one out of ten right — how in the world can government officials expect to be able know where the market will lead us next?

But there was no button that would let me answer “NO”.  The site just wouldn’t let me answer that first question.  Instead had a second question that I could answer that was part of a quiz:  “You can invest $1 million of public funds to spur high-tech business. What steps will you take? (Click START.)”

So I went ahead and threw caution to the wind and clicked “START”.

Up popped the following:

Imagine you are a provincial government official ready to invest $1 million of public funds to kick-start high-tech business. After considering the following hypothetical scenario, test your decisions.

BACKGROUND:
Your province was strong in traditional manufacturing, but recently lost ground to cheap overseas competition, and your government is promising an economic recovery.

Three local universities are doing fruitful research on clean-energy technologies.

As often happens, you hire a consulting firm. Assume that the firm studies the business climate in your province and reports that the $1 million you have to invest to kick-start entrepreneurship should be split among efforts to encourage three types of ventures: 1) clean-energy technology, 2) biotechnology and 3) high technology.

You must encourage local economic growth. You could place strings on the money, matching it only to loans by local investors supporting companies that hire locally, or you could work with more-experienced firms based overseas that want to operate in your province.

The consulting firm recommends converting a former manufacturing facility into a research park/business incubator. Some of the potential tenants, however, prefer to maintain headquarters in their own garages or basements. They want networking opportunities but can’t afford office space, even if rent is subsidized.

The consultancy would be happy to manage the entire program, as it provides business-development services. But you can also rely on the local research universities and venture capital firms for advice, and they have a strong interest in the success of local businesses.

As you go on to set up an appropriate entrepreneurship program, you need to answer four questions:

1. Do you split the money into three funds?
2. Do you aim at the developing local businesses or global players?
3. Do you establish a physical or virtual research park?
4. Do you hire the consulting firm to manage the program?

(Click on Questions 1, 2, 3 and 4 and on the options to answer them.)

Source: This scenario is based on opinions of experts who have tackled the topic of what government efforts are likely to succeed in spurring high-tech entrepreneurship. They are authors Josh Lerner (Boulevard of Broken Dreams) and Anthony Townsend (Future Knowledge Ecosystems).

“Wait just a minute,” I exclaimed out loud while sitting on my back porch.  “Who the heck are these experts and what do they know about entrepreneurship.” 

It seems that Josh Lerner is a Harvard professor of Investment Banking.  Wait just a minute!  Investment banking?  Aren’t those the guys who helped get us into the current mess with all of their knowledge of managing markets?

Anthony Townsend is Director of Technology Development at the Institute for the Future out in Palo Alto, California.  His blog is full of ideas on how government can reinvent cities, shape markets, and the like.

Hmm… Sure wish the quiz had given me more options, like maybe “None of the Above.”

All of this reminded me of the following quote from Friedrich August von Hayek about the proper role of government in the economy:

“He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.” 

I have to agree with Hayek on this one.  The last thing we need right now is the State Department, an investment banking professor and a futurist trying to craft our economy.

Let’s cultivate the economic soil and see what the market spouts!

Start-up Visa: Right Agenda, Wrong Policy

We need to rethink immigration policy.  As I have written in the past, we need to find creative new ways to open our doors to immigrant entrepreneurs.

A new bill introduced by Congressman Jared Polis (D-CO), would create a Start-Up Visa for entrepreneurs with financial backing from angel investors.  It is H.R. 4259 – The Employment Benefit Act (you can see a summary of the bill here).

Here is how the bill is described in the press release:

Every day the American economy is losing ground–not to mention high-tech jobs and technologies–to India and China because foreign-born entrepreneurs cannot secure a visa to stay in the U.S. That’s why I’ve introduced H.R. 4259, the Employment Benefit Act, to create AMERICAN jobs by bringing our immigration system into the 21st century and encouraging foreigners with good ideas and much-needed capital to invest in our economy, rather than in our competitors. By streamlining and expanding our nation’s EB-5 visa program, this much-needed change would unleash innovation into our economy, create thousands of quality jobs right here in America, and bring capital to America to grow American businesses.

But, when looking at the details of this bill it becomes clear that this is another example of Washington policy makers thinking they can predict and control the market.

Rather than open the doors and let the market pick winners, the act targets what markets are eligible and constrains its benefits to specific levels of investment.

What about those immigrant entrepreneurs who do not want or need venture capital or angel backing?  Out of luck with this bill.  While venture capital backed deals are important, they create only a small percentage of new jobs in our entrepreneurial economy.

What about entrepreneurs who want to start a business in a particular market where they see an opportunity?  Only if it is in a targeted geographic area.  Entrepreneurship is a powerful economic tool — we need to stop trying to hamper this by making it a social policy tool.

We desperately need immigrant entrepreneurs to join in the rebuilding of our economy.  But we don’t need bureaucrats serving as the bouncer at the door deciding who can come in.   

Upturn is Elusive

A growing number of economists are pulling back from their earlier statements that the economy has bottomed out and is poised to begin its upturn.  It seems that small business owners concur.

The National Federation of Independent Business Index of Small Business Optimism lost 1.2 points in March, falling to 86.8.  The persistence of index readings below 90 is unprecedented in survey history.

“The March reading is very low and headed in the wrong direction,” said Bill Dunkelberg, NFIB chief economist. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.”

The index has posted 18 consecutive monthly readings below 90.  In March, nine of the 10 Index components fell or were unchanged from February’s not-so-great readings.

Some highlights from the March NFIB survey:

  • While actual job reductions may have halted, plans to create new jobs remain weak.
  • The frequency of reported capital outlays over the past six months fell to near record low levels.  A paltry two percent characterized the current period as a good time to expand
    facilities.
  • Widespread price cutting continued to contribute to reports of lower nominal sales.
  • Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock.
  • Earnings trends declined again in March, with 58 percent reporting that profits are falling. 
  • Regular borrowers continued to report difficulties in arranging credit. 

“What small businesses need most are increased sales, giving them a reason to hire and make capital expenditures and borrow to support those activities,” said Dunkelberg in summarizing this month’s survey results.

Economic recovery on Main Street is looking to be a long, long way off.

Immigration is Key to Entrepreneurial Economy

Tom Friedman offered his thoughts on what we need to do to get the economy going in an op-ed piece at the New York Times.  His take on how to revive the economy:

“Good-paying jobs don’t come from bailouts. They come from start-ups. And where
do start-ups come from? They come from smart, creative, inspired risk-takers.
How do we get more of those? There are only two ways: grow more by improving our
schools or import more by recruiting talented immigrants. Surely, we need to do
both, and we need to start by breaking the deadlock in Congress over
immigration, so we can develop a much more strategic approach to attracting more
of the world’s creative risk-takers.”

Immigrants have always played a vital role in fueling our
entrepreneurial economic engine.  Given our need for help in revving up
that engine right now, I wish we would take another look at our
immigration policy.

The primary reason that we see so many
immigrants pursue entrepreneurship is that they are opportunity focused –
surveys reveal that this is what drives many of them to leave for a
new country.  I have to wonder how attractive the US will look in a few
years after our mad dash to socialism is fully in force. 

When
we look within specific ethnic communities in the US, recent immigrants
out perform non-immigrants in economic achievements and have higher
rates of self-employment than native-born in these ethnic communities.

In
Internet-based ventures, immigrant entrepreneurs pursue more aggressive
strategy.  One study found that 25.4% of engineering and technology
companies include at least one founder who was born outside of the US.

Here
are a few more quick facts:

  • Immigrants represent 12.5 of
    all business owners.
  • Immigrants are 30 percent more likely to
    start a business than non-immigrants are.
  • Immigrant business
    owners are concentrated in certain states, including California, New
    York, New Jersey, Florida, and Hawaii.
  • Mexicans represent the
    largest number of immigrant business owners, while Greeks, Koreans, and
    Iranians have the highest ownership rates

In the 1900s we viewed immigrants as a
source of cheap labor.  Our immigration policy — or lack thereof — has reflected
this. 

To help create jobs and growth we should open our doors to
entrepreneurs from around the globe.  Current policy makes it difficult
for entrepreneurs to enter the US legally.  We
should be actively recruiting immigrants who want to come to our system
of free enterprise to start their businesses, just as we did to bring
in the scientists we needed in the 1950s and 1960s to help fight the
cold war. 

The last great entrepreneurial economic boom was
created in large part by first generation Americans and sustained by a
large, but controlled, wave of immigration that helped to build an
economy that last through most of the 1900s.

 

In addition to a “green card” for
immigrants coming here to work, the US also needs another card (let’s
color it a “red card” for urgent) to support the flow of legitimate
entrepreneurs looking for the freedom this country offers to business
owners.

Will the Flame Still Burn Brightly?

A post by Jonathan Ortmans, president of the Public Forum Institute, at Entrepreneurship.org led me to reflect on the changes we are seeing being ushered in America.  Ortmans made the following observation:

“We have long been aware that American education is struggling to stay competitive. We also know that the development of entrepreneurial skills, such as opportunity recognition and prudent risk taking, are not prioritized in most U.S. educational institutions. Developing tomorrow’s talented, capable innovators is a challenge that will require entrepreneurially-driven improvements in education at all levels.

“Programs that introduce students to the possibilities of business creation are few, but they have proven that they can open up new horizons for talented kids and unleash an entrepreneurial drive would otherwise lay dormant.”

But just where does the American entrepreneurial drive that we take for granted come from?  What is the source of the entrepreneurial flame that burns so brightly in the students who come to programs like ours at Belmont?  The answer is our culture.

Since our founding, our culture was fostered by our freedoms.  We created an economy based on economic freedom that rewarded self-reliance and ingenuity, rather than family power and birthrights as had been so common in the histories of our founding fathers and mothers. 

Ours was this economic system that shaped our values over the generations.  We celebrated those who succeeded, holding them up as icons of what was possible for all of our citizens.

We have added the likes of Hewlett and Packard starting an industrial empire out of their garage into the stories that informed our culture.  Even more recently, the stories of technology companies like Dell that started in college dormitories have become part of our folklore.

But now our public policy is moving toward the next stage of a fundamental shift that threatens this part of our culture.  We are seeing self-reliance being replaced by entitlement.  We are seeing the creation of wealth and economic success being vilified.  Property and wealth are no longer things created out of nothing by entrepreneurial individuals seeking opportunity in the market, but public goods to be doled out by government and its armies of bureaucrats.

I fear that the current generation coming into the workforce — the so-called Entrepreneurial Generation — may be the beginning of the end. 

The children being born today will know an America where society and government are expected to provide for them and to solve their every problem.

I truly fear that the entrepreneurial flame that has burned so brightly in this country will begin to dim.

Those of us who teach entrepreneurship cannot ever teach the entrepreneurial drive and the spirit of free enterprise.  I am only successful because those who come to our program have that drive deep in their core values.

I can teach how to evaluate opportunities in the market, but I cannot instill the drive to do so.  I can teach how to assess and manage risk, but I cannot build a class to train students to have the entrepreneurial spirit that seeks the rewards that come from risk-taking.

Entrepreneurship will not go away, but it will not be the fundamental part of our culture and our economy that it has been in the past. 

There is still time to protect the entrepreneurial flame, but it is already beginning to flicker.

candle_flame_2.jpg

You Have Better Answers

Here is my final thought from the Economics Blogger Forum….

One of the economists in attendance here today said that while he respected the enthusiasm of people sounding their voices through the Tea Parties, “populists rarely have ideas for effective economic policy.”

After hearing the bickering about economic policy nuance throughout the day today, it is clear that economists have little understanding about the day-to-day hardships being faced by small business owners on Main Street. 

It it is time to listen to the economic wisdom of the populist entrepreneurs across America when they tell the government, “Let us keep our money and get out of our way!”

Its Technology, Stupid

We had a rather spirited discussion in a small group breakout late this morning session here at the Economics Bloggers Forum here in KC.  It centered on what really caused the recession.  The argument was made by Michael Mandel (formerly of Business Week) that we had very few real technological innovations introduced into our economy since 1998.  What is interesting to me is that this may partially explain why we are seeing no entrepreneurial job growth pulling us out of the recession.  In all past recessions it has been entrepreneurs who have kindled new growth.  The argument may be that there is no real base of new technology to build from to jump start a recovery.

The good news is that Bob Cringely asserts that there is a technology seedbed out there that may yet spur long-term growth.