The State of Small Business in America

February 27, 2012

By Michael Hendrix, Research Manager

What is the state of small business in America?  This is an important question to ask for the overall health of the economy and job market, especially since we know that as recently as 2007 young firms were creating two-thirds of all jobs in America.  Unfortunately, recent testimony by Martin Neil Bailey of The Brookings Institution paints a relatively bleak picture for small businesses in America.  According to Dr. Bailey, there’s been a 20% decline in new businesses since the start of the 2008 recession.  What’s more, small business optimism hasn’t really recovered from the depths of the recession, which in turn was the culmination of a seven year overall decline.  For those firms that have gotten off the ground and are hiring, they still struggle to find the right skilled workers for their business.

This information is drawn from testimony by Dr. Baily to the U.S. House of Representative’s Committee on Small Business and the entire presentation is worth reading.  His conclusion that the “Great Recession has hit almost everyone hard” rings a little hollow in the face of overwhelming regulatory obstacles for small businesses.  One thing is true: small businesses are an important part of America’s economy, now and in the future.  Their resilience has been proven time and again, even in the face of economic stagnation.


Blogs Driving the Debate

February 24, 2012

NCF curates a weekly list of blog posts that touch on emerging issues affecting the American business community.

Max Fisher outlined the “next 5 emerging economies that will change the world“:  Turkey, Indonesia, Kazakhstan, Congo, and Mexico.  Just for good measure, he added Nigeria as a “maybe.”

Justin Fox outlined the fourteen articles contributed to the Harvard Business Review by some twenty-one authors on the future of American competitiveness.  Under the “government” header, he looks at taxes, fiscal policy, immigration, trade, and entrepreneurship and innovation.  The “business” section examines how to break Washington gridlock, better educate Americans, address the financial system, build clusters of innovation, and engage with the true costs of outsourcing.

James Hamilton at EconBrowser took a close look at oil prices to try to figure out why the price at the pump is rising.  In short, the reason for rising prices comes down to one word: Iran.

Outsourcing work from the West to the East has been one of the big stories in business for the past few decades.  Today, it seems that nearly every consumer product was made in China, a place where the cost of production is appealingly low.  Alex Tabarrok of Marginal Revolution came across a news item that seems to auger a reversal in this trend.  It appears that some Chinese firms are now starting to outsource to (of all places) Europe.  Tabarrok expects that we’ll see a lot more of this East to West outsourcing in the years to come as China grows in wealth and adapts to having a more consumer-driven economy.

Felix Salmon summarized the Greece bailout package, starting with these words: “Greece is now officially a ward of the international community.”

Whether you agree with him or not, Ryan Avent at The Economist made a series of insightful comments about the contributions that manufacturing does (or does not) make to the American economy.  He’s skeptical that the manufacturing industry is worthy of any special support other than that which would be offered to any other industry, i.e., support for R&D, a simplified tax code, and the like.  Laura D’Andrea Tyson made the equally informed counter-argument in the Economix blog for the unique qualities of manufacturing to, say, the support of general innovation in the economy.


Leaving the App Economy Alone

February 24, 2012

By Sean Hackbarth, Blogger, U.S. Chamber of Commerce

If you have a smartphone, how many apps do you have on it? Being a tech junky I have over 70 on my iPhone–including 7 different Twitter apps! Each of those apps required people to design, code, and market them. (What, you thought Angry Birds magically appeared?) Those jobs didn’t exist a few years ago, and their numbers are substantial. Michael Mandel, chief economic strategist of the Progressive Policy Institute, concluded in a study that the App Economy has created almost 500,000 jobs since 2007.

One lesson he took from his research was not to burden this growing niche economy with regulations:

The key elements in the App Economy “team”–Apple’s development of the iPhone, Google’s development of Android, the buildout of wireless networks by AT&T, Verizon and other providers–were not the object of heavy government regulation. Government did have a role in unlocking and distributing spectrum and otherwise clearing the underbrush. But no government agency was in charge of supervising the burgeoning App Economy.

Is more regulation needed? Given that App Economy companies are creating jobs and investing in the United States economy during a period of economic weakness, there’s an argument for not messing with success. Government agencies should restrict themselves to ‘light-touch’ regulation of the App Economy unless there’s real problems in the market.

If only regulators treated the rest of the economy like this.

Originally posted on FreeEnterprise.com


A Look at How Israel Invests in Innovation

February 23, 2012

By Josh Kram, U.S.-Israel Business Initiative

A modified version of this post first appeared on FreeEnterprise.com

It’s not a stretch to say that Israel is one of the most innovative places on earth.  On this tiny strip of land on the Mediterranean sits a who’s who of technology firms from around the globe, such as Microsoft, Intel, Google, IBM, AT&T, and others.  Each of these companies have opened state-of-the-art research and development (R&D) facilities.  The soil is rich for homegrown companies too.  Israel now boasts more start-up firms per capita than anywhere else in the world.

One of the most promising areas of growth comes in the life sciences arena, consisting of advanced biotechnology firms and pharmaceutical companies.  Just six years ago, Israel had all of two publicly-listed life sciences companies.  Today, there’s an entire index devoted to this category of stocks.  Indeed, of the currently 702 companies in the life sciences arena in Israel, 56% were founded during the last decade, according to the Israeli Life Sciences Industry Association (ILSI).

This phenomenal growth in the life sciences is taking place in a collaborative ecosystem between academia, the government, and the marketplace.  Just last month, Israel’s Office of the Chief Scientist — an agency responsible for developing government policy in support of industrial R&D – announced the creation of a new program targeted at fostering international partnerships around the life sciences.  The hope is that, just as the existence of foreign companies in Israel’s Silicon Wadi helped spur even greater innovations in the country, creating some of the first life sciences R&D facilities in the Middle East will be a boon to the industry around the world.

The Israeli Government is currently seeking input from foreign multinational life science companies on the basic approach of this new program, which includes two unique tracks for private sector engagement.  Working closely with the Government of Israel, the U.S.-Israel Business Initiative (USIBI) is laying the groundwork to ensure that U.S. companies heed this call for increased investment and development.

On March 25-27, the Chamber will lead an elite delegation comprised of top-tier U.S. companies on a Life Sciences Mission to Israel to explore these opportunities. Participants will meet with key government agencies, including the Ministry of Health, Ministry of Industry, Trade, and Labor, Ministry of Finance, Office of the Chief Scientist, and Offices of the Prime Minister and President. Additionally, those attending the mission will participate in tours of medical, biotech, and pharmaceutical facilities across the country and participate in roundtable discussions on key policy and programmatic issues with Israeli stakeholders.

Expanding our private-sector collaboration with Israel will help to ensure that the strong alliance our nations share can continue for years to come. The Initiative, which propels our alliance into one of the world’s strongest innovation-based commercial relationships, is an important voice, advocate, and platform for this bilateral business relationship.

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For more information regarding the life sciences mission or USIBI, please contact Josh Kram at jkram@uschamber.com or visit usisraelbusiness.com.


For Your Consideration… the NCF App Video

February 22, 2012

By Rich Cooper, Vice President, Research & Emerging Issues

If it weren’t for the fact that there are so many award shows on television, it would be hard to tell it was winter given the incredibly mild weather we’ve had of late.  From Grammys to Golden Globes, sparkling awards are being handed out left and right this season to deserving and memorable performances.  For me though, I’ve always been a fan of the late entrant to these contests.  There always seems to be one performance that sneaks in under the radar and just “wows” the audience.

Once again, I’ve found that performance.  This year’s unheralded, late entrant comes courtesy of the U.S. Chamber’s think tank, the National Chamber Foundation (NCF), with its short form film, “App Auditions.”

Directed by the Chamber’s own underground video artiste, Erik Sulcs, it features a compelling story and screenplay written by NCF’s own Jackie Carl and the acting abilities of NCF’s Michael Hendrix.   This moving piece of cinema brings to light the challenges and benefits of using an iPad app, and through its driving narrative inform users everywhere of what’s happening on the emerging issues front of free enterprise.

I can honestly say that I’ve never seen anything like it (and I’m in it).

Recent reviews are coming in from all corners:

  • Former Bush Administration Domestic Policy Advisor and Education Secretary, Margaret Spellings called the film, “Funny…”
  • A DC public relations firm even called it “Hilarious.”
  • Even my wife and kids thought it was compelling and that for me is the toughest audience of all!

Never has iPad instruction been more meaningful than in this 2 minute, 40 second video.

I hope the Academy leaves just a little room on their ballots (and in their hearts) for this late entrant.

My tux is already laid out and I promise upon winning that coveted Oscar that my acceptance speech will be very short.  After all, the NCF team and I have to be back to work early Monday morning.  You just never know what we might do next.


Lean Engineering and the Rise of In-Sourcing

February 22, 2012

By Michael Hendrix, Research Manager

The famed management guru Tom Peters once said, “Do what you do best and outsource the rest.”  Thanks to low costs abroad, many firms have chosen to outsource much of their manufacturing capacity over the past few decades.  It appears that trend may be reversing among many small companies thanks to the advent of “lean engineering” and an assortment of other changes in the global economic landscape.

Wired Magazine recently visited the American manufacturing plant of a company called NBS, which makes fast, efficient servers for SeaMicro, a small startup, to see just how this in-sourcing trend is happening.  The work at NBS is highly specialized and complex, and in SeaMicro’s case running on a low volume of highly valuable products.  SeaMicro could very well have outsourced this work to a large factory abroad, but that simply wouldn’t do.  You see, that company desires control and that’s where lean engineering comes in.

Lean engineering means that SeaMicro has control over each server that makes its way through NBS, including when it’s built (only when the customer places an order) and how it’s tweaked (immediately so, by a SeaMicro engineer from down the street).  This is essentially “just-in-time” manufacturing, but with a focus of cutting out all work that doesn’t produce value for the end customer.  Implementing this sort of an approach to making products is a lot easier in a factory down the street versus one situated halfway around the world.

SeaMicro isn’t alone in this search for control.   In fact, “Over the past two years, 31 percent of the ‘medium-sized’ manufacturing projects that once moved to Asia have now moved them back to North America.”

Making things in America remains costly, but two recent trends are working in this country’s favor.  For one thing, countries like China have seen their wages rise substantially over the last few years.  What’s more, companies are starting to see that outsourcing brings additional costs, like that of shipping, that have become more costly as well.

In-sourcing also enables startups to capture the gains found with proximity, whether it be for rapidly sharing knowledge or enabling partnerships and specialization.   Increased density alone boosts productivity by up to 28%, and when that density results from a greater number of skilled workers the boost to productivity is twice the national average.

Thanks to the development of lean engineering, the rise in prices abroad, and the increasing value of proximity, America is doing what it does best: innovating.  The story of 21st century American manufacturing may be just beginning.


The Economist: Over-Regulated America

February 21, 2012

By Michael Hendrix, Research Manager

According to The Economist, “The home of laissez-faire is being suffocated by excessive and badly written regulation.”  The point is not that America has an overwhelming amount of bad regulation, though the examples of such ill-guided red tape are numerous.  Rather, it is the cumulative effect of regulation that is chocking American free enterprise.

Dodd-Frank is a prime example.  It’s a complex bill layered on top of an already complicated industry.  ”At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929.  Worse, every other page demands that regulators fill in further detail.  Some of these clarifications are hundreds of pages long.”

Downloading the text of the Dodd-Frank bill yields a PDF file some 2,319 pages in length.  By way of comparison, our NCF Fellow Mark Perry produced a handy list of the top financial reform bills and their length:

  1. Federal Reserve Act (1913) – 31 pages.
  2. Glass-Steagall Act (1933) – 37 pages.
  3. Interstate Banking Efficiency Act (1994) – 61 pages.
  4. Gramm-Leach-Bliley Act (1999) – 145 pages.
  5. Sarbanes-Oxley Act (2002) – 66 pages.

The quantity and complexity of America’s regulatory regime not only adds a burden of cost onto the private sector but a broader sense of uncertainty (which itself is costly).  Back to the Dodd-Frank example, The Economist notes how only 93 of the 400 mandated rules have actually been issued, leaving the financial sector to comply with a law that will remain partially unknown for an equally unclear amount of time.

Dislodging America from its thicket of regulation is first a matter of reducing the number of rules.  Arcane procedures and entrenched interests means that this process won’t be easy, as The Economist shows in a follow-on article.  There’s also the danger that cuts will be imprecise and uninformed, like calling for field surgery with a machete.  This is why transparency will be vital.  Cutting regulation needn’t be as opaque as the process that made them.

Reducing red tape is a good first step.  But we must also take another look at the mindset behind the regulatory process.  Recent studies argue against the increasing specificity of rule-making in America.  Instead, if an area due for regulation is highly complex, the matching regulation ought to be decisively simple.  Dynamic, wealthy economies are necessarily complex — so the overall regulatory regime in such countries should be straightforward and highly adaptive to changing circumstances.

Put another way, a lean and simple regulatory regime is the perfect complement to a healthy economy.


Blogs Driving the Debate

February 17, 2012

NCF curates a weekly list of blog posts that touch on emerging issues affecting the American business community.

Megan McCardle envisioned in The Atlantic a “post-campus America” after MIT announced an inexpensive online certification program called MITx.

Jordan Weissmann (also at The Atlantic) highlighted the best and worst states for high-tech businesses.  Rather than take the cit-based approach of the National Science Foundation at face value, whose research Weissmann is highlighting, I would encourage any reader to look at the overall regions that are most favorable to technology-based companies.  In that light, we see that the mid-Atlantic region is surprisingly strong.

Matt Yglesias considered “the new economics of oil” with today’s expansion of shale oil production.

The Harvard Business Review asked a panel of leading CEOs to describe the greatest threats to U.S. competitiveness.

Jonah Lehrer at Wired asks what Jeremy Lin’s recent success in the NBA teaches about the nature of talent and of identifying gifted individuals to hire.  Unfortunately, even the greatest of meritocracies can’t identify the key predictors of future success.  Even when the evidence of this failure is clear in the NBA, teams often ignore these facts rather than instill “hiring” practices that embrace uncertainty.  In the end, scouting for good players in basketball yields results that are little better than tossing a coin.

Michael Sivy of Time asked, “Are we already planting the seeds of the next financial crisis?”  In the end, his advice is one that rings true no matter the state of the market: exercise “prudence and caution.”


Businesses are Proven Partners in Advancing Infrastructure Protection & Resilience

February 16, 2012

By Bill Raisch, Director, International Center for Enterprise Preparedness (InterCEP) at New York University

As public-private partnerships (PPPS) are being increasingly proposed as a vehicle for infrastructure services, some have raised the question:  How can public sector concerns be addressed where the private sector partners may not be inherently focused on the public good?   Essentially, can we trust business to keep our infrastructure protected and resilient?

There is much history and many approaches that suggest the public good can not only continue to be advanced through PPPs but perhaps promoted with greater ingenuity and cost effectiveness.

The private sector has a long history of accommodating the public good in its operations. Incorporating government regulations are just one example. Life safety and other building codes are readily incorporated into the physical design and operation of structures, which in turn address public concerns about emergency management and the protection of human health.  Occupational safety and health requirements are also generally observed in the workplace and forward the public and organizational good.

Contractual stipulations in government agreements with business have often included security and continuity requirements.  We see these especially in contracts with the Departments of Defense and Homeland Security, alongside other related agencies.  In some PPPs, service level agreements or scope of work provisions — the essential architecture for uniting the public and private sectors — can be used to promote specific objectives of resilience and infrastructure protection.

What is more, governmental permitting processes often require incorporating public concerns.  In physical construction, environmental impact studies are a frequent element of real estate development and regularly take into account public concerns about the environmental ramifications of proposed construction activity.

Market forces already play an important role in promoting resilience in some infrastructure-oriented industries whose customers place a high value on reliability and little downtime.  We see this in various elements of the communications and IT industries where resilience has been programmatically adopted on a wide basis.

As an example, arguably one of the longer-term public-private partnerships in critical infrastructure is the “investor owned utility.”  These businesses generally operate infrastructure under the review of a public utility commission.  Electric utilities in this regard are clear examples of a societal good being evolved by private sector organizations.  These privately run utilities typically have a strong emphasis on resilience and reliability in the delivery of power – a focus reinforced both by governmental oversight as well as the media attention that comes after any disruption.

In all of the above cases, when the public objectives are stated as end goals without specific process requirements as to how to achieve those goals, the private sector is empowered to develop innovative approaches which often lead to greater impacts at lower costs.  Indeed, setting clear performance standards allows business’s the flexibility to adjust to new situations or develop a diversity of approaches to achieving the same end.  This can work to both widen the options available to all businesses and ultimately further the achievement of societal goals at the same time.


A Look at the World’s Cyber Powers

February 15, 2012

By Michael Hendrix, Research Manager

The Economist and Booz Allen Hamilton recently released the Cyber Power Index, an insightful look at the intersection of the digital economy, our physical infrastructure, and a skilled workforce.

The Index measures countries against four factors, all of which are essential to having a digital infrastructure that is both thriving and resilient:

  • Legal and Regulatory Framework
  • Economic and Social Context
  • Technology Infrastructure
  • Industry Application

When held up to these standards, the United States ranks second in the world, just behind the United Kingdom.  Here then are the top 10 Cyber Powers:

  1. United Kingdom
  2. United States
  3. Australia
  4. Germany
  5. Canada
  6. France
  7. South Korea
  8. Japan
  9. Italy
  10. Brazil

Not only is the Cyber Power Index endlessly fascinating to play with, but it’s really a new measure of what’s essential for success in the 21st century global economy.