Today the President’s Council on Jobs and Competitiveness is releasing its interim report. [Note on Sunday, the Council’s head, Jeff Immelt of GE, talked about the jobs issue on 60 Minutes — for the clip, see the story on GE Reports or directly at 60 Minutes]. The Jobs and Competitiveness Council’s report Taking Action, Building Confidence outline five sets of recommendations:
Invest Aggressively and Efficiently in Competitive Infrastructure and Energy
The Jobs Council recommends a set of proposals to accelerate public and private investment in U.S. energy and infrastructure. Upgrading the nation’s transportation and energy infrastructure is a win-win for the United States. It creates jobs in the near term, at a time when more than one million construction workers are out of work, and improves America’s long-term competitiveness by enabling a more productive economy.
Nurture the High-Growth Enterprises that Create New Jobs
Startups and small firms are the key to U.S. job growth. Over the last three decades, high-growth enterprises less than five years old have created 40 million net new jobs, accounting for all the net new job creation in America. The Jobs Council recommends that the Administration, Congress and the private sector implement a comprehensive package to unleash startups and empower small businesses.
Launch a National Investment Initiative
The U.S. became the largest economy in the world by being the best place for companies to invest and grow. In the late 1990s, the U.S. attracted nearly 26% of global foreign direct investment (FDI), but that figure has dropped roughly a third, to about 18%, today. The Jobs Council recommends that the U.S. create a National Investment Initiative (NII) comprised of a number of proposals aimed at regaining America’s place as the premier destination for foreign and domestic investment. The primary goal we propose for the NII is to attract one trillion dollars of foreign direct investment over the next four to five years, which would be a 20-25% increase over recent trends.
Improve and Balance Regulatory Review and Streamline Project Approvals
To make the U.S. competitive and to speed the creation of jobs already in the pipeline, we need to adopt global best practices to streamline approval processes and use common sense metrics to measure progress. The Jobs Council has focused on several areas of substantial impact – broad areas of regulatory reform that could accelerate job creation – and has worked closely with the administration on a number of specifically targeted initiatives to create an immediate impact.
Develop Talent to Fill Today’s Jobs and Fuel Tomorrow’s
There are roughly 3 million jobs openings today, many of which have gone unfilled for a significant period of time because workers do not have the required skills. The Jobs Council believes there is an urgent near-term agenda on talent that can help ease today’s jobs woes, and a broader long-term talent agenda to renew America’s competitiveness. In this report we focus on progress already being made in the near-term through private-sector led initiatives.
Many of the suggestions are things that have been talked about elsewhere. But one of the new big ideas in to increase direct foreign investment in the US. In part, according to the Council, this will require a look at broader tax and regulatory reform — which the Council has put off until its report at the end of the year on American competitiveness.
I am very pleased to see emphasis in the report on high growth companies. For the most part, this section seems to echo the June report of the Commerce Department’s National Advisory Council on Innovation and Entrepreneurship (see earlier posting).
One pet peeve however: the chart on the Innovation Ecosystem presented in the report perpetuates the old linear model of innovation — where R&D is starting point of all innovation.
And there is something a little more confusing about financing of high growth companies. There is a very important discussion in the report on high growth companies’ taking the IPO route versus being acquired by a larger company. There is a chart showing the ratio of IPOs versus mergers & acquisitions (M&A) as the exit strategy. The percentage of M&As deal grew in the late 1980’s and early 1990’s to about half. It jumped to 90% in 2001 and has remained above 80% since. The report blames this shift on Sarbanes-Oxley (SOX) and the “Spitzer Degree” (New York State Attorney General’s Global Research Settlement). The problem with this analysis is that SOX did not become law until mid-2002 and the “Spitzer Decree” was not until 2003. Therefore, they cannot explain the dramatic switch to the M&A route in 2001.
The report does mention the dot.com bubble as a contributing factor in decline of the IPO market. I would suggest that the bubble bursting was more than just a contributing factor — but the major reason why the IPO market has been changed. Modifications to regulations to help the financing of high growth companies may be useful. But to place the onus on the regulations is a mis-diagnosis of the problem — and can lead to a less that successful solution.
Also on the issue of IPOs versus M&A, the report states that IPOs create jobs while the acquisition of smaller companies hurts jobs grow. The report indicates there is data on this, but does not cite the data or any other report on this issue. The question of the interaction between start ups and larger companies was one raised at our conference on New Building Blocks for Jobs and Economic Growth. The effect of this interaction, including IPOs and M&A, on jobs, innovation and productivity should be explored further.
Finally, a word on something left out of the Council’s report: the use of intellectual property as collateral for loans. Let me repeat what I said in my earlier posting on the Innovation and Entrepreneurship Council. As readers of this blog know, I have long advocated for the use of intellectual property (and some other intangible assets) as collateral in debt financing. The irony of this missed opportunity is clear when looking at the SBA announcement (as part of Start Up America) of their Early Stage Innovation Fund. They note that “Early-stage companies face difficult challenges accessing capital, particularly those without the necessary assets or cash flow for traditional bank funding.” This statement is correct in one sense and completely off track in another. It is correct when it states that these companies don’t have assets that traditional bank funding would accept as collateral. It is completely wrong in its implication that the companies don’t have assets. These companies are often sitting on intangible assets that could be used in debt financing. The key is not necessarily to expand the equity route — but to change how the “traditional bank funding” treats these assets.
As I’ve argued for before, there are two action that SBA could take:
• Develop SBA underwriting standards for IP. SBA should work with commercial lenders to develop standards for the use of intangible assets as collateral, similar to existing SBA underwriting standards. Allowing IP to be used as collateral will increase the amount of funds a company, such as one in the high-tech sector, would qualify for.
• Create an IP-backed loan fund. Other nations have developed special programs to encourage IP-based finance. The U.S. should set up similar programs on a pilot basis, ideally run by the SBA to take advantage of its lending expertise. Technical support could be provided by the SBA’s Office of Technology, which already coordinates the Small Business Innovation Research (SBIR) program. The SBA technology office also works with the U.S. Commerce Department’s National Institute of Standards and Technology (NIST) on its Technology Innovation Program and has a hand in other federal science- and technology-related initiatives. Such a direct lending program would be a step beyond SBA’s current loan guarantee programs–direct lending is needed to jumpstart the process. Once the process of utilizing IP as collateral is fully established, the program could be converted to a loan guarantee structure.
These two action would begin to unlock the debt financing option for high-growth companies. It is an option the President’s Council on Jobs and Competitiveness should not ignore.