Reviving Entrepreneurship in America

hand drawn light landscape

There has been considerable concern regarding the current status of entrepreneurship in America. Overall, American entrepreneurs are producing less wealth than they have in the past. According to a recent study by Barclays, entrepreneurs in developing countries currently produce more wealth than their American counterparts. Demonstrating American entrepreneurs’ relative lack of entrepreneurial success, the same Barclays study determined that 21% of American millionaires cited business profits and sales as their primary source of wealth, as opposed to 58% of South American millionaires, 41% of European millionaires, 68% of South Africans millionaires, 48% of Middle Eastern millionaires, and 57% of East Asian millionaires.

The United States seems to engender a business environment that is favorable to entrepreneurial endeavors. For example, the world’s first venture capital industry was founded in America. In addition, American universities have ties to industries, creating additional opportunities for entrepreneurship. Open immigration policies have also historically contributed to entrepreneurial success in America. Even the American consumer culture is advantageous to developing entrepreneurial enterprises, as American consumers are generally willing and eager to test new products. However, today, entrepreneurs in America face certain challenges that largely result from burdensome taxing regulations and narrow immigration policies. Sam Graves, Chairman of the House Committee on Small Business, agrees. At a Committee hearing in May 2012 examining the state of entrepreneurship in America, Graves stated, “Entrepreneurship is a cornerstone of the American dream— having the freedom to take risks in order to chase your dreams and hopefully become successful and prosperous. The federal government should be encouraging this ingenuity which leads to job creation and economic growth, instead of impeding with more bureaucratic red tape.”

Regulatory red tape is especially detrimental to entrepreneurial opportunities, as federal taxes and regulations are disproportionally burdensome to small businesses. In the past four years, regulatory costs for small businesses have increased by almost $70 billion. The recession has also made it increasingly challenging for entrepreneurs and startups to find financial backing. In response, following the recession, crowdfunding has emerged as a prominent source of investment. As stated in the Crowdfunding Industry Report, “Crowdfunding shows to be a viable alternative for raising capital to fund small businesses and startups.” However, it is evident that regulations must be updated as crowdfunding and other novel forms of business financing continue to be embraced.

Realizing the significant role of immigrant entrepreneurs in America is imperative to revitalizing the U.S. economy. Over 40% of current Fortune 500 firms were founded by immigrants or their children. Furthermore, the National Venture Capital Association recently released a study demonstrating that companies backed by venture capitalists with at least one immigrant founder produce more IPOs and employment opportunities than they did before the recession. Congress is beginning to take notice of the value of immigrant entrepreneurs, proposing the possibility for “start-up visas.” This new class of visas would be available to foreign entrepreneurs who create at least five jobs through their business’s formation and also raise a minimum of $500,000 in investments from venture capitalists, angels, or other types of investors.

Clearly entrepreneurs are vital to the health of the American economy; entrepreneurs have consistently been integral to U.S. economic growth. In response to the struggling American economy, President Obama has placed significant emphasis on the concept of “middle-out” economics, which focuses on strengthening the middle class. As an added advantage, “middle-out” economics would simultaneously benefit American entrepreneurs. According to a study by the Kauffman Foundation, about 90% of American entrepreneurs are of middle or lower class origin. Therefore, if implemented effectively, Obama’s “middle-out” economic strategy would improve the state of American entrepreneurs, thereby strengthening the overall U.S. economy.

Posted by: Marjorie Baker

Sources: The Economist, House Committee on Small Business, Washington Post, Forbes, CNBC, the Kauffman Foundation, National Venture Capital Association

A Generation at Risk: The Global Youth Unemployment Crisis

student protest

The world, according to the business leaders at Davos 2012, is “sitting on a social and economic time bomb:” global youth unemployment. Many leaders at the World Economic Forum’s meeting last year iterated that failing to employ the youth today amounts to a “cancer in society,” which not only affects economic growth now but will significantly stifle future growth. The figures have not improved since Davos 2012: as of last year  12.4 percent of people aged 15 to 24 worldwide were unemployed, which has increased to 12.6 percent in 2013. Now, young people are three times more likely to be unemployed than adults.

According to the International Labor Organization (ILO), in a global labor force of 3.3 billion, some 200 million people are unemployed, 75 million of which are between the ages of 15 and 24.  ILO’s Global Employment Trends for Youth 2013 report points out that the weakening of the global recovery in 2012 and 2013 has further aggravated the youth jobs crisis—youth unemployment increased by as much as 24.9 percent in the Developed Economies and European Union between 2008 and 2012. Both developed nations and emerging economies alike are struggling to create pathways to employment for their young citizens. Youth unemployment rates, which have continued to soar since 2008, are particularly high in three regions: Developed Economies and European Union, the Middle East, and North Africa. The lowest regional youth unemployment rates in 2012 were South Asia, with 9.3 percent, and East Asia at 9.5 percent. The highest were 28.3 percent in the Middle East and 23.7 percent in North Africa. In the advanced economies, the statistics are equally worrying.  In the European Union, the rate was at a 10-year high of 22.6 percent in 2012—with Greece at a staggering 54.2 percent and Spain at 52.4 percent—while  16.3 percent of the youth in the United States was unemployed.

Unemployment rates alone do not demonstrate the scale of the issue, given the 290 million young people more broadly classed as NEETs (not in education, employment or training). According to the Organization for Economic Co-operation and Development (OECD), 14.8 percent  of young Americans were qualified as NEETs in the first quarter of 2011, while the figure was 13.2 percent in the European Union. In the OECD area as a whole, one in six young people were without a job and not in education or training. The proportion of young people neither working nor studying illustrates how well economies manage the transition between school and work, which has become particularly problematic in developed economies.

The skills mismatch in youth labor markets is an underlying cause of this persistent and growing trend. McKinsey, a global management consulting firm, reported that in the nine countries that it studied (America, Brazil, Britain, Germany, India, Mexico, Morocco, Saudi Arabia and Turkey) 40 percent of employers were struggling to find candidates with adequate skills for entry-level jobs. In contrast, almost 45 percent of young people said that their current jobs were not related to their studies, and of these more than half viewed their jobs as temporary and said they were planning to leave. Another survey by Accenture found that in the United States, 41 percent of college graduates from the last two years had to take jobs that do not require a degree. The skills mismatch shows that over-education and over-skilling coexist with under-education and under-skilling.  This is particularly the case in most developed economies, where the job market is split between high-paying jobs that most workers are not qualified for and low-paying, low-skill jobs that do not provide a sufficient income.

Many economists think that such a systemic mismatch requires policymakers to reform rigid labor markets and implement education policies that would close the gap between the world of education and world of work. Creating vocational and technical programs and forging stronger relations between future employers and future employees are seen as remedies to ease the school-to-work transition. Germany, where apprenticeships and vocational training have long been the norm, has the second lowest rate (8.2 percent) of youth unemployment in the European Union. Such training programs, backed by a certification system, would allow employees to have skills transferable across companies and industries. However, only less than a quarter of education-providers offer similar practical courses involving hands-on learning in the classroom or training on the job.

It is also unclear if similar training programs would produce similar results in other countries, given that Germany’s export-driven economy is characterized by high-tech manufacturing, which employs many highly-trained manual workers. Thus, determining country-specific needs will be crucial for employing wide-ranging and well-targeted reforms. The ILO suggests that some labor market policies, such as targeting the employment of disadvantaged youth, promoting self-employment to assist potential young entrepreneurs, and implementing international labor standards ensuring that young people receive equal treatment at work, are necessary to revamp youth labor markets across countries.  Without significant reforms, it is estimated that there will be a global shortfall of 85 million high- and middle-skill workers for the labor market by 2020.Unless bold reforms are undertaken, many fear that the economic and social costs of long-term unemployment, discouragement and pervasive low-quality jobs will not only continue to undermine the growth of many economies but will also put a whole generation at risk.

By: Sera Tolgay

Sources: BBC News, Huffington Post, International Labor Organization, The Economist, Time Magazine, CNN, Business Week

Photo Credit: Paris January 15th, 2009 Student Protest courtesy of Flicker user frog and onion

The Challenge of a Changing China

chinaLower than expected growth numbers from China on Monday have raised worries that China’s economy may be losing momentum.  Forecasted to have a growth rate around 8%, China’s actual growth came in at a lesser 7.7% for the January to March quarter, compared with 7.9% in the previous three months. This slower growth is in part due to lagging recoveries in the US and Europe causing China’s exports to decline. However, it is important to note that major, if understated, structural changes within China’s own economy have also contributed to these unexpectedly low growth numbers.

Rapidly rising wages have led to a systemic shift in the way China’s economy currently operates and have caused the country to move away from its traditional reliance on low cost manufacturing. China is looking towards a transition to a more sustainable economic growth model and these numbers might be indicative of the growing pains that China is currently facing. In fact, according to Ms Yao of Societe Generale,”Given Beijing’s goal of restructuring the economy, a relatively moderate economic growth is not a bad thing in the longer term.” While China will likely remain a manufacturing hub thanks to its relatively mature investment environment, superior infrastructure, and skilled workforce, it is the higher-knowledge industry sector and domestic consumption that will be the future drivers of Chinese growth.

Improving wages and job opportunities have created an optimistic and vibrant consumer class that has demanded both a higher standard of living and higher quality goods and services. Metaphorically speaking, Chinese citizens are emerging from the factories and entering the malls. Rather than being a mere base of production, China has become a prime market to sell into as consumption continues to increase. This massive and complex market holds huge commercial potential for those businesses that can successfully adapt and gain a foothold. Meanwhile, China itself can benefit greatly from increased foreign direct investment as its economy continues to mature.

Despite China’s economic dynamism, it is still a place that is plagued with many dilemmas that limit its potential. Some of the most infamous issues revolve around corruption, which is especially rampant at the local level leading to staggering pollution, serious quality control issues, and enormous levels of inequality. In addition, China’s educational system is stunted by its singular focus on testing and needs to be reworked to foster creativity and innovation, skills that are vital in an increasingly connected global marketplace. These concerns may limit China’s global economic potential, especially when major policy efforts are still needed to address these critical domestic problems.

Overall, China is still dealing with the disorder commonly found during major economic transition. Its switch from a primarily manufacturing economy to a consumer economy may take time as growth rates begin to rebalance. In fact, it is likely that  these declining numbers indicate not economic problems in China, but an economic changing-of-the-guard that will result in less dramatic, healthier, and more reliable economic growth.

Posted by: Matthew Goldberg

Sources: The Economist, BBC News, Bloomberg, CME Group

Photo Credit: China Pavilion courtesy of flickr user Wojtek Gurak

Reinvigorating Trade Negotiations: Optimists in the Midst of Battle

tradeFree trade advocates are known for being optimistic; espousing the removal of trade barriers that are often jealously guarded by domestic constituencies as part of the national interest. The global movement towards free trade as envisioned by the World Trade Organization has always been an uphill battle, but this month it has had its fair share of reasons for hope. Negotiations for trade agreements have been struck between the EU and Japan as well as the EU and the US in the Transatlantic Trade and Investment Partnership TTIP), and Japan announced its bid to join the 11 countries negotiating the Trans-Pacific Partnership (TPP). These will be the most comprehensive trade agreements in history if they are fully realized, and the collective member countries constitute nearly 70% of world GDP. The conclusion of these trade deals, although bilateral, would be a great step forward in defining comprehensive free trade standards for the global market.

The reasoning behind this reinvigoration of free trade deals is expressed clearly in a study commissioned by the German Federal Ministry of Economics and Technology, as explained below:

The transatlantic free trade initiative needs to be considered against the backdrop of (i) eroding competitiveness of industrialized countries relative to emerging nations such as China and India, (ii) the long-lasting standstill in multilateral negotiations at the World Trade Organization (WTO), and (iii) the need for growth-stimulating structural reforms, as vividly highlighted by the current crisis in the EU.

The impetus and goals of these agreements are not only economic in nature, but also geopolitical. The Information Technology and Innovation Foundation (ITIF) describes “a battle being fought now for the soul of the global trading system”, in which these free trade deals can promote high standards for reducing barriers to trade and set the agenda for future multilateral trade talks.

However, as  ITIF notes, there are many obstacles to overcome in this process. Agriculture, automobiles, cultural industries, and textiles are all industries that are historically reluctant to liberalize. Non-tariff barriers such as incompatible regulatory systems are even more problematic, but liberalizing these areas will bring the most benefits. The services market is another complex area, but because 30% of manufacturing costs are business services, there are strong economic incentives to liberalize trade in services. Since a large part of trade volume between these countries is intra-industry and intra-firm trade, companies’ costs for intermediate goods will be substantially reduced. Although most studies focus on the static and immediate gains from these trade deals, the dynamic and ongoing benefits will create positive feedback that renews the economic foundations of industrialized nations.

This is an opportune moment for trade deals, and the window may be closing fast. The political will is currently there to complete these deals, but may not last after the woes of the latest recession have tempered. Europeans and Americans are trying to stimulate their languishing economies, and Japan is pursuing radical new policies to end stagflation. Geopolitical considerations and a renewed emphasis on international competitiveness are the final pieces of the puzzle that make the deals more plausible at this point in time.

There are reasons for optimism in trade policy circles, but the battle is only just beginning.

Posted By: Ben Copper

Sources: IFO Institut, Information Technology and Innovation Foundation, Foreign Affairs

Picture Credit: Cargo Ship Terminal Burchardkai (Hamburg, Germany), courtesy of flickr user      Reinhard_Schuldt

Do traditional measurements misinterpret global trade?

global communicationsAs the world economy becomes more interconnected, it has become clear that import/export trade figures by themselves do not fully capture how much the US contributes to global commerce. Imports and exports merely measure the trade in completed products between nations and present a flawed picture. On the other hand, metrics such as US foreign affiliate sales provide information on longer-term investment and entrenchment in foreign markets, thereby giving a substantially different, and perhaps more accurate, look at what the US provides in goods and services.

Taking a look at exports trade data, a country like Ireland looks inconsequential to US trade with only $7,276 million (USD) in exported goods. However, Ireland is actually an important hub for transnational companies, and rakes in huge amounts of investment as shown by the foreign affiliate sales which puts Ireland at around $171,895 million, a number that eclipses Mexico at $143,478 million. Using only exports, Mexico is our number two trading partner for exports, but when we use the Sales/Export ratio, Mexico stands at 0.9, whereas Ireland is at 23.6.Without accounting for foreign affiliate sales, policy makers would have no idea of the importance of Ireland to US commerce. In addition, using foreign affiliate sales sheds light on other trade relationships, including Germany a country that many policymakers are worried about due to our supposed trade imbalance. In actuality, while US exports with Germany are only at $48,161 million, the US foreign affiliate sales are at $244,785 million and a ratio of 5.1. This means that the US is very much invested into Germany and the trade imbalance is not as nearly as significant when looking at both sets of metrics. This also presents an interesting note on the relative significance of trading partners. Policy-makers often stress the importance of China to US trade, but when looking at foreign affiliate sales, China is only at $138,991 million compared to Germany’s $244,785 million. This has the implication that the US actually has more trade interests in Germany, which is something that is completely unacknowledged when measuring using only export trade.

Using only export numbers presents an incomplete depiction of US trade. It is very difficult to make smart policy that improves US trade potential if the true trade relationships between the US and foreign countries are not understood. In terms of trade importance to the United States, opportunities lie with the newly proposed Trans-Atlantic Trade Agreement at almost $1,473,483 million in foreign affiliate sales. The United States must begin to rely more on foreign affiliate trade data or at least use it to supplement traditional import/export measurements to get a more accurate representation of US trade interactions.

Posted by: Matthew Goldberg

Sources: U.S. International Trade Commission, Vox, OECD, U.S. Census Bureau

Graduation Rates: the Good, the Bad, and the Ugly

graduationOne of the main goals President Barack Obama laid out during his first term was to return America to its previously held position as the country with the highest number of college graduates per capita by 2020. This American Graduation Initiative (AGI) requires increasing the percentage of college graduates in the US workforce by 50% by the end of the decade. In order for the AGI to be accomplished, the number of college graduates would have to increase by an annual 16% every year from 2010-2020. However, the problem in reaching this goal may be rooted in low graduation rates, rather than low enrollment numbers.

America2020 is a private sector approach to the same problem, focusing specifically on STEM (Science, Technology, Engineering, and Math) graduates. Their plan is to encourage STEM degree completion by committing industry professionals to volunteer their time mentoring and teaching students in these fields. There will be an estimated 10 million STEM job openings by the year 2020, and OECD data reports that US students tend to have a low interest in science. This approach has already seen significant improvements in graduation rates with the schools involved and those students who have participated in the program are far better prepared for college.  Citizen Schools, one of the major forces behind the America2020 initiative, along with representatives from the White House and several big-name companies recently convened here at the Wilson Center to discuss details of its implementation and how they could be involved.

The American Dream 2.0 is an initiative by the Bill & Melinda Gates Foundation that, “offers a comprehensive framework for how the hundreds of billions invested in the financial aid system can increase college access, affordability, and completion”. According to the Foundation’s findings, 46% of students enrolled in higher education institutions fail to graduate within six years. This rate increases to 63% for African Americans and 57% for Hispanics. In addition, total annual borrowing for college has more than doubled in the past ten years, as tuition rises faster than family income or inflation. These statistics are worrying, because those who borrow money for school but end up dropping-out without earning a degree have higher unemployment rates than those who graduate.

Good news comes from high school completion rates, which reached a record high in 2010 at 78.6%. While this is certainly heartening, fewer than half of those in the class of 2012 were ‘college ready’ as determined by the College Board last fall. In order to meet the challenges of President Obama’s AGI, education policymakers need to focus not only on college enrollment rates, but also on access, affordability, completion rates, and high school rigor. Although in the current fiscal climate, large scale investments in education may be harder and harder to implement, the effects of education investment on the productivity and success of our nation’s young people are immeasurably important.

By: Ben Copper

Sources: Huffington Post, PR Newswire, White House records, EducationSector.org, Citizenschools.org

Photo Credit: flickr user: Smithsonian Institution

American Manufacturing Starting to Make Sense Again

reshoringIn the past decade, offshoring was considered an obvious business decision for companies that wanted to reduce costs and increase profits. However, this trend may soon begin to wane as many American companies, both large and small, return to the U.S.

This so called “Reshoring Movement” has been generating a large amount of buzz, especially as high profile companies such as General Electric and Apple plan to start manufacturing more products back home. This reverse course is based both in public relations and sound economic reasoning. While larger companies often leave the majority of their manufacturing abroad, they are still able to benefit from the positive publicity of selling some American-made goods. For smaller businesses, it makes clear economic sense primarily due to soaring wages in low-cost countries. For instance, the pay and benefits for the average Chinese factory worker increased by 10% a year between 2000 and 2005 and rose to 19% a year between 2005 and 2010. This increase has made offshoring only marginally cheaper, and firms still have to deal with other problems such as intellectual property theft and unwieldy supply chains.

This trend ties in nicely with the issue over consistently high US import levels and enormous trade deficits. Harry Moser, head of the Chicago-based Reshoring Initiative, states that “since the 1950s, about three million manufacturing jobs have been lost to imported goods. So to balance the deficit we’ll need to bring back three million jobs.” While “reshoring” has only brought back around 50,000 jobs in terms of offsetting trade imbalances, it is an interesting development that is worth further exploration.

Posted by: Matthew Goldberg

Sources: The Economist, MIT Technology Review, Forbes

Photo Credit: World Class Manufacturing Academy courtesy of flickr user Chrysler-Group