America's Start-Up Slump: What the $X&?! Is Going On

Guest posting by Erik R. Pages, President, EntreWorks Consulting,

America’s start-up engine is ailing.   As the chart below (from a recent Brookings Institution analysis shows, start-up rates in America are declining and have been for some time.  Even worse, new firms are closing more quickly and generating fewer jobs and economic benefits than in the past.  And, around 2008, the US economy hit a fateful crossroads where the number of firm exits (i.e. closings) exceeded the number of firm births (i.e. start-ups.)

These trends make for sobering reading—especially for folks, like us at EntreWorks Consulting, who have long advocated for greater local investment in supporting entrepreneurs.  Thus, it is especially important to understand what is happening and why.  That’s what we’re seeking to do in this edition of EntreWorks Insight.

There’s not much doubt about the veracity of the data on the entrepreneurial slowdown—it’s pretty clear that a big shift occurred in the mid-2000s. But, there is much debate about the causes of this shift.  Here are a few potential explanations.

The Great Recession

Clearly, the Great Recession played a role in driving down business start-up rates.  When the economy is in the tank and opportunities are lacking, it’s no surprise that fewer people start businesses.  This pattern occurs in all downturns, but, as numerous studies suggest, the Great Recession was different.   The downturn in new business starts was faster and deeper, and the recovery has been much slower.   So, the Great Recession is clearly an important factor, but not the sole cause of these trends.


A number of demographic factors appear to be at work   First, overall US population growth rates are declining, and the declines are biggest in many once fast growing regions of the South and the West.  Research from Brookings’ Robert Litan and Ian Hathaway finds that fast population growth was a primary driver of faster start-up activity in the 1970s in these regions.   As population growth has slowed, these areas have seen start-up rates decline and regress to look more like the rest of the US. 

Age demographics matter too.   Today, American society is dominated by two age cohorts:  Boomers and Millennials.    Boomers are actually booming when it comes to start ups, starting firms at twice the rate of Millennials.   People aged 55-64 started 1/3 of all new US businesses in 2013, up from only 14% in 1996.    However, boomers tend to start firms for lifestyle reasons, and, while these can be exciting business opportunities, they are less likely to blossom into fast-growing job creators.   At the same time, we should not expect or plan on boomers continuing the same levels of start-up activity as they move into their 70s and 80s.

Meanwhile, Millennials have not been particularly entrepreneurial when compared to other age cohorts.   This is understandable given that they grew up in the midst of the Great Recession, while also facing many other impediments such as large student loan debt burdens.   Nonetheless, many observers hold out hope for Millennial entrepreneurship.  This age cohort is the best educated in US history, and has also been widely exposed to entrepreneurship, via specialized education programs and popular culture (in TV shows like Shark Tank).  Given the size of the Millennial cohort, an uptick in their business startup rates would have large ripple effects.

Housing Prices

Recent research using Census Bureau data suggests that the collapse of housing prices might play a role in slowing start-up rates.    Studies have found that states with the most severe housing price drops, such as California and Florida, also faced the biggest slowdowns in new business activity.  States with stable housing prices, like North Dakota, saw more limited impacts.   The specific causal pattern of this impact remains unclear, but a couple of factors may be at work  Lower housing prices will put pressure on consumer spending and on the availability of finance for new business starts.  They likely also put a big hit on the construction sector, traditionally an important source of new business starts.

The Rise of Big Firms

Some analysts point to the emergence of Walmart, Home Depot, Best Buy, and other large corporations as another factor at work in the start-up slump.   These large players have decimated the ranks of traditional “Mom and Pops,” such as hardware stores, local restaurants and other retailers.  Here again, we probably have a partial answer.   The startup slump is strongest in the retail and service sectors, but it has also occurred in manufacturing and technology industries.  Walmart may hurt Mom and Pops, but other things are affecting startups too.


Some casual observers have claimed that burdensome regulations might be at work in the startup slump.  In particular, many are pointing to the rise of occupational licensing as an undue burden on start-ups.  (We previously discussed that topic here.)  While regulations can be a hassle, the evidence for a more significant economy-wide impact is pretty weak.  As a new study from George Mason University researchers finds, “Federal regulation has had little to no effect on declining (business) dynamism.”

New Ways of Working

The factors listed above are the most likely issues driving the decline in US business dynamism, but I also believe that one other factor might be at work:  new ways of working.  As more people move into independent work (the 1099 economy) and the distinction between an employee and an entrepreneur becomes fuzzier, our old categories of tracking business dynamism may need updating.   Many things that we once labeled a business startup may now be labeled as a freelancer or an independent worker.  Similarly, the business activities that once occurred almost exclusively inside the firm may now be occurring in less well defined and poorly measured networks or partnerships.  So, some share of the “missing startups” might be found in the 1099 economy.

It’s likely that this final factor is a minor cause at best.   And, if these new work entities aren’t growing or generating new opportunities, we still have a business dynamism problem on our hands. 

So Now What?

As in some many complex public policy issues, the startup slump lacks a single cause.  In fact, it seems like there are almost too many causes at work here.   However, this analysis does suggest that doing just one thing, such as enacting startup visas or changing regulations, is really going make a huge difference.   Instead, solutions will require sustained focus and continued support for the building of regional and local entrepreneurial ecosystems. And, it may require a re-examination of some issues, such as growing student debt burdens, through the lens of how they affect entrepreneurship rates.   The good news is that the most recent data suggest that startup rates are now heading up.   While these “green shoots” are encouraging, a continued focus on stoking America’s economic engines will be needed.

(Originally posted on EntreWorks Insights)

4Q GDP – 3rd estimate

Not much new in the big picture to report from this mornings latest GDP revision. No revision to the annual growth rate for the 4th quarter of 2014 — still at 2.2%. And the growth in investment in intellectual property products (IPP) was revised downward only slightly from the earlier estimate of 10.9% to 10.3%. However, there were some bigger changes in the IPP components. Software investment growth was revised downward from the earlier estimate of 10.4% to 5.1%. R&D investment was revised upward from 14% to 17.2%. Growth in investment in entertainment, literary, and artistic originals was also revised up from 2.6% to 5%.
IPP parts 4Q14 - 3rd.png

The lingering digital divide

The digital divide is not a topic that gets a lot of attention now days. Interest seemed to peak just after the millennium. But the issue lingers on, surfacing in occasional reports and studies (see these three earlier postings). As these studies illustration, the issue has not gone away just faded into the background.
Now comes a new report from the Hispanic Institute, Telecommunications and Hispanics, seeking to address the issue. As Gus West, President of The Hispanic Institute, notes, “The best job and educational opportunities have moved online. If Hispanics are to take advantage of them, they’ll need to follow them into cyberspace.”
The report does a good job of outlining the growing digitization of education, healthcare, financial services, retail commerce and employment. For example, the report notes that “Whether a job applicant is seeking bluecollar employment or vying for a managerial position, doing it successfully without going online is rare.” The same is becoming increasingly true in other areas especially education and health care. Those without access to telecommunications risk being left out of these activities. The report argues that this is especially a risk for lesser educated and lower income Hispanics. For example:

The Affordable Care Act’s subsidized insurance is only available through Meanwhile, many Hispanics believe that they could be deported if they sign up for coverage through the ACA’s exchanges. Combine those two factors, and it’s no wonder that nearly 30 percent of Hispanics are uninsured.

All is not bad news however. As the report points out,

as a group they [Hispanics] are already deeply invested in the use of mobile technology, especially young Latinos. Although Hispanics remain seriously underbanked, for example, mobile technology has enabled them to derive more benefits from the banking system and to position them for greater future engagement. Two-thirds of young Latinos, age 18-29, own a smartphone . . . Similarly, smartphones and other mobile devices have afforded Hispanics greater access to jobs and health care information. They have also enabled parents to be more fully engaged with their children’s education, for example, by giving them access to email and text messaging with teachers.

The report offers no specific recommendations. However, West notes that “If Hispanics are to catch up to the economic, educational, and healthcare achievements of their peers, policymakers and the telecommunications industry must take steps to expand Internet access in Hispanic communities.”
With that in mind, let me then offer some suggestions of my own. Almost a decade and half ago, Athena Alliance held a conference on Inclusion in the Information Age: Reframing the Debate. That was followed by our report Extending the Information Revolution: A White Paper on Policies for Prosperity and Security. As we argued back then, the major issues of the digital age are not just access to technology (aka computers and broadband). The issues of the “digital divide” go deeper to access to and use of information. As we pointed out in the key points that came out of our 2000 conference:

Point one: Focus on the transformation, not the technology.
The issue of concern is the transformation to the Information Age. It is not simply a question of technological deployment. The end purpose is not to narrow some gap, but to ensure that everyone has access to the expanded opportunities. Our framework should be one of inclusion for all in the broader activities that make up society and the economy.
Point two: Review and coordinate efforts.
The problem has aspects of telecommunications policy, such as infrastructure and standards and elements of technology policy, such as research and development and technology deployment. But it also has aspects of policies on training and workforce development, education, economic development, housing and community development, human services and trade. Reaching our goal requires a coordinated approach — in the private, public and non-governmental sectors – that combines the various elements of providing opportunity and inclusion in the information age. To coordinate policy, the focus of governmental digital opportunity efforts should be the White House, not in any one department or agency.
It is also time to take a new look at some policy areas. For example, a comprehensive approach is needed toward all parts of managing the information commons: privacy, intellectual property rights, “right-to-know” policies and other related areas.
Point three: Work to ensure that everyone has access to the technological infrastructure.
Barriers to access to the infrastructure are many. Ways of overcoming those barriers are also varied, including public access facilities that can combine access with training and other activities, as well as home access. With respect to access in the home, we must return to the question of universal access. We also need to address the development of broadband capabilities – both at home and at work. Both home use and public access points are important. Multiple access public points are needed, such as existing public facilities, training centers, libraries, and after-school centers. For these facilities, sustainability is the key. But, it is not enough to simply provide access. We must work to weave information technology into the operations of community groups in a way that will both help individuals use the technology and will make those groups more efficient and effective in their core mission.
Some of the barriers to digital inclusion are physical: the usability of the technology. This is not, as commonly thought of, an issue only for those with disabilities. The problems of usability and human-machine interfaces affect all of us and research on ways to increase access for those with disabilities will pay off in increased usability for all.
Point four: Encourage and facilitate participation and involvement by all in the digital economy and information society.
To foster participation and involvement, the technology must meet people’s needs – not define those needs. Information technology can help people in their day-to-day lives if it is designed and structured in such a way that it helps answer their questions and solve their problems. Otherwise it becomes a barrier and a source of frustration. This is the danger of what some refer to as the “over-wired” world.
It is important to understand that individuals have different needs. A one-size-fits-all may help some – and increase their participation and involvement – but will block others. By focusing on “demand-pull,” rather than “technology-push,” we can better tailor the technology to meet individual needs.
Development of meaningful content, including more locally-based content, is one of the ways to increase the level of participation. E-government is one important form of meaningful content. But, we must also insure that those who are not on-line are not left behind. No services or information should be removed or dramatically cut back from traditional means of dissemination in favor of electronic dissemination until and unless all members of the community have access to that electronic means as easily as they have to the traditional means.
Point five: Focus economic development on the Information Economy, not the Internet Economy.
The information age will require a new approach to economic development. Key to the process is using and developing assets: financial, social, skill-based, and information assets. We must focus on building the local economy’s vitality and ability to compete in the age of globalization and help people make the switch to the new economy.
Our priorities should include:
 • development of processes for identifying and assessing local assets,
 • revitalizing programs for training the existing workforce,
 • helping small and medium size enterprises make use of IT, and
 • fostering entrepreneurship at all levels and in all sectors.
We must also develop and utilize new mechanisms for financing the transformation, including Individual Development Accounts and new ways of financing intangible assets.
Collaborative learning and sharing of information is also important in the larger process of economic development. There are a number of examples of information assets being applied within businesses and with local economies. We need to utilize new knowledge management techniques and old-fashioned communications techniques to collect, disseminate and better utilize that information.
Point six: We need a better understanding of what is going on.
We need to re-look at the data needed for economic development in the information economy. The problem of data extends beyond the scope of local economic data. We need both better data and expanded analysis of the socioeconomic aspects of the information technology. That research must be translated into policy relevant terms. For this reason, Congress should seriously consider re-establishing the Office of Technology Assessment (OTA).
Point seven: The decision making process must be open.
True inclusion and opportunity can only occur if the process of decision making is open and transparent. Information technology has a tremendous potential for opening and maintaining channels for general input and advocacy. However, decisions made about the technology can have the effect of closing off the process rather than opening it up. We must insure that all parties are at the table when decisions, including issues such as standard setting, are made.
Point eight: Innovate and experiment.
We are in a time of transformation and change. The speed of that change and the pace of economic activity will vary. Yet the change is real and will continue. In such a time, we must often invent new ways of coping with our problems and new policies for guiding our economy and society. Such experimentation will require great policy discipline, however. It requires a strong, unbiased means of evaluating programs and policies – and the political discipline to follow the guidance of that evaluation. We must also find means to ensure that the evaluations are timely for the fast moving policy arena. The goal in evaluation is not simply proving the effectiveness of an action – it is to facilitate learning. Learning is the hallmark of the Information Age. Our public policy process must embrace that concept as tightly as the rest of our economy and society already have.

While the eight points are not specific to the Hispanic community, they do address the challenges the community faces. The fact that we continue to see reports such at that by the Hispanic Institute come out on a regular basis is proof of the lingering problem. To address the issue we should take a comprehensive approach. Our eight points are offered as a starting point for thinking through a solution.

Engineers who get it: understanding the new production system beyond manufacturing v. services

One of the major factors in the new I-Cubed (Information, Innovation, Intangible) Economy is the fusion of manufacturing and services. It is also one of the most difficult for many to understand. The notion is ingrained in our thinking that there are “goods” and there are “services” and that the two are different and separate. This is embedded in our economic statistics, our economic policy and our view of the economy.

Now there is a group of engineers that is taking on the task of understanding what the new production system looks like. And not just any group, but the National Academy of Engineering (NAE) – the sister organization to the National Academy of Science. Their new report, Making Value for America: Embracing the Future of Manufacturing, Technology, and Work, clearly focuses on how manufacturing is changing.

The Changing Nature of Production

The reports lays out its framework right at the beginning:

Business and policy leaders need a holistic understanding of the value chain in order to take effective action in response to the changing manufacturing and high-tech sectors. To systematically identify and successfully address customers’ needs and capture higher returns, businesses must draw on in-house capabilities and external partners to carry out a set of interlinking activities spanning economic sectors. For example, in order to sell cars, automotive companies engage in research, product development, supply chain logistics, production, and sales, as well as pre- and postsale customer services such as maintenance, financing, and information and entertainment capabilities.

While companies have always been involved in a range of activities that cross economic sectors, it is increasingly difficult to recognize clear dividing lines between manufacturing, the production of software, and the provision of services in a company’s product offerings. The service content provided by manufacturers has grown in importance, accounting for a larger proportion of total revenues in many industries. At the same time, companies primarily known for software and services have branched into providing manufactured products. (emphasis added)

The report goes on to emphasize the point:

While companies have always been involved in activities that cross economic sectors, it is increasingly difficult to meaningfully categorize companies along manufacturing value chains as providing mainly goods or services. Many companies that traditionally focused on producing and selling goods have developed service-type business models. For example, Rolls-Royce offers a “power by the hour” service that lets customers rent the use of a jet engine rather than purchasing one. Rolls-Royce retains ownership of the engines, monitors their real-time performance, and manages their maintenance and replacement. Such service content has grown in importance among manufacturers. Deloitte Research (2006) found that the fraction of manufacturers’ revenues generated by services has grown to approximately 20 percent in the medical device, industrial product, and telecommunication equipment industries and as high as 37 percent in automotive and 47 percent in aerospace. Service content is even more pronounced among many of the world’s largest manufacturers, whose main offering is defined by after-sale services.

At the same time, companies primarily known for software and online services have branched into designing and producing manufactured goods. Amazon, for example, established a hardware team that developed the Kindle e-reader and Fire TV digital media player, and is developing a smartphone to more effectively deliver its offerings to customers. Google is partnering with contract manufacturers to produce wearable technology products such as Google Glass.

Apple is a case in point. The report lays out the Apple value added chain which runs from raw materials to content. Many companies, from Corning to the New York Times play a role in that value chain. But Apple itself has a major role in assembly & sale of products, software and on-line services. Is Apple a hardware, software or IT services company?

The report demonstrates how different locations and divisions of other major companies can be classified across the manufacturing/services divide. For example, Ford Motor Company is a manufacturer headquartered in Dearborn, MI. It has a wholesale trade business in Livonia, MI. There are numerous retail trade dealerships (with a tight connection to that division of Ford). There are various professional and technical services parts to Ford ranging from R&D to engineering to software development to marketing. Finally, there is an automotive repair division in Wayne, MI. The report highlights similar structures for GE and Procter & Gamble.

Hence the report’s emphasis on a value chain approach. I would argue that it is more a “changing factors of production” and a “serve the customer needs” approach. Intangible factors of production and thus of competitive advantage are noticeable in all areas of the values chain and might be considered “services” if they were done by a separate organization: R&D, product design, supplier relations & supply chain management, marketing & brand management, customer relations, etc. It is next to impossible to separate out the “service” from the “manufacturing” in the inputs, in the throughputs (aka, processes) or in the outputs.

Likewise the end goal has shifted from simply efficient production to meeting customer needs. This is reflected in the report’s core concept of “making value.”

Although it is not yet in widespread use, the concept of making value is a particularly effective way of examining the success and failure of individuals, businesses, communities, and nations. Making value is the process of using ingenuity to convert resources into a good, service, or process that contributes additional value for a person or society. While value creation is often used to refer to the ability to provide things of worth for the customer or user, making value is used here to emphasize the entire system of activities that is necessary to conceive, produce, and deliver these things–especially the design and production processes that often receive less attention in discussions of value creation. (emphasis in original)

It is important to stress that “making value” is about serving customer needs, not about optimizing the value chain for a particular good or service.

This “making value” framework builds upon, but is a break from, earlier STEM/R&D focused reports. Interesting that the focus of the project evolved from Making Things: 21st Century Manufacturing and Design (title of an NAE forum in 2010 – see earlier posting) to Making Value: Integrating Manufacturing, Design, and Innovation to Thrive in the Changing Global Economy (title of a 2012 NAE forum – see earlier posting).

But even the report shows how difficult it is to shed the old vocabulary. To be clear, the report should use the term “production system” or “production value chain” rather than “manufacturing.”

Driving Factors

The report sees three factors driving this change: globalization, advances in computing and automation (digitization) and improved production processes such as lean manufacturing. The result of these forces, they argue, is major change in the nature of work. This shows up as a reduction in the number of front-line manufacturing production workers and a shift in required worker skills.

Much has been said by many reports and studies about globalization and digitization. This report’s inclusion of organizational and process changes is an important and refreshing addition to the mix.

The report contains a entire chapter on the opportunities presented by digital technologies. As they state,

The challenges presented by increasing competition and the changing nature of work, and the opportunities presented by digital technologies, will require US companies and communities to strengthen their ability to innovate and create value.

This is a useful expansion of the earlier chapter on the forces of change. I wish however the report had gone into as much depth on the issues of globalization and the changing nature of work. Each of these topics could have used a chapter as well.

I would have also added another factor to the mix: the increasing importance of intangibles as a factor of production. Business models have shifted from economies of scale to customization. Part of that is due to digitization. But digitization alone was not responsible for the shift in business models. Companies are seeking to differentiate themselves more and compete less on price based. This differentiation has natural focused on customization and better meeting customer needs. The new focus necessarily relies more on knowledge and intangible assets, such as relationships and customer data.

This shift to more knowledge and intangible asset input is directly reflected in the change in worker skills needed. The issue is more just tech skills, however. The report touches lightly on this topic:

It is not enough, for instance, for an IT worker to be proficient in technical issues; because of the ever more integrated and collaborative nature of jobs and companies, employers would like their IT workers to understand the analytical and business development side of their jobs as well, and such employees are much harder to find than workers who can do just one or the other …

They do make one important statement with respect to skills:

The shift in the skills needed for production jobs is indicative of a larger transformation across all aspects of the value chain and all sectors of the US economy.


The report offers a dense array of recommendations that reflect this different view. For example, there is more attention to the issues of business models. The recommendations are grouped around five points to create a “value creation ecosystem”:
    (1) widespread adoption of best business practices,
    (2) an innovative workforce,
    (3) local innovation networks,
    (4) flow of capital investments, and
    (5) infrastructure that enables value creation.

Of special interest to me is their concluding discussion of “federal programs that monitor the condition of various activities in US-based manufacturing and high-tech service value chains.”

As the report implicitly states, the policy questions are not about picking a certain part of the value chain to specialize in, i.e. the old manufacturing versus services debate. Rather, policy issues revolve around finding ways to strengthen all elements in the “making value” process. One of the recommendations specifically states:

The United States needs to encourage new business creation across the value chain to stimulate innovation and job creation. (emphasis added)

I wish the report had highlighted this important point a little more.

Some of the policy ideas are not new. But many of the recommendations are new or new twists on old recommendations. The focus on best business practice brings the policy discussion back to issues of lean manufacturing and associated principles – something that the Baldrige Award is supposed to promote. It also refocuses on the idea of spreading best practices. Specific recommendations include urging companies to examine their business models “to search for missed opportunities to leverage distributed tools and coordinate manufacturing and product lifecycle services.” They also urge companies to implement best practices (including such as Lean Production and researchers to study and find effective ways to teach best practices.

Importantly, the report promotes the concept of design thinking:

An iterative process of understanding customer experiences, building and trying out a prototype, improving the solution, and applying lessons learned to the next innovation are all critical to maintaining a competitive advantage.

While there is no specific recommendation on design thinking, it should fall under the general heading of promoting best practices. I have long argued that to foster design thinking, we should fund five colleges or universities to create design schools (d.schools) similar to the Stanford (Hasso Plattner Institute of Design). The proposal builds upon the “manufacturing universities” proposal to grant 25 universities $5 million each per year for four years to revamp their engineering teaching and research activities toward manufacturing and engage in greater joint industry-university research projects. At $5 million per year for five schools, the total budget for creating new design schools would be $25 million. (See also earlier postings.)

The workforce recommendations look at much more than technical STEM education.

Critical thinking and creativity are as important as technical skills. It is not enough to learn facts and procedures by rote; students need to learn to evaluate a situation by asking questions, observing, collecting further information, and subjecting the collected data to a thoughtful analysis to identify mistakes and weaknesses and come up with alternative possibilities. Creative critical thinkers constantly probe and evolve their own interpretations and ideas.

Many of the recommendations focus on improving the education system, including closer ties between businesses, local school districts, labor, community colleges, and universities and for more focus on “team-based engineering design experiences and learn to use emerging digital and distributed tools.” They also support national skills certifications and efforts to improve education cost-effectiveness.

The report goes well beyond education to address issues of teams and diversity. They specifically call on business to recruit a more diverse workforce, universities and community colleges to improve inclusion of traditionally underrepresented groups and Congress to reform immigration policy. Other than the mention of team-based experiences in college, there appear to be few any specific recommendation on teams per se. I would add however that helping companies understand the importance of and build teams is part of promoting best practices.

I especially like their call for more employer based training:

Despite the sizable returns employers can receive from training programs, both employers and employees report that the current level of employee training, especially in small businesses, is not adequate …

Thus one of their recommendations is that “Businesses should establish training programs to prepare workers for modernized operations and invest in advancing the education of their low- and middle-skilled workforce.” Interestingly, this is part of the best practices set of recommendations. That the report believes worker training is a best practice speaks volumes.

Another workforce recommendation is that “Congress and state legislatures should create incentives for businesses to invest and be involved in education programs.” This includes tax credits or other incentives. While the report mentions continuing workplace education, they only specifically mention incentives for programs for students and displaced workers. I would go beyond this to explicitly include tax credits for on-the-job training for the existing workforce aka a knowledge tax credit. The best program for a displaced worker it to upgrade their skills so they are either less likely to lose their job and/or more likely to quickly get a new one.

Concerning developing local innovation networks, their recommendations are a mixed bag. They call for more research on understanding the declining rate of new business creation. They urge local stakeholders to work together to create networks and for metro area and state governments to do a better job coordinating efforts both internally and geographically. They reiterate their recommendation for on spreading best practices, specifically as part of the Advanced Manufacturing National Program Office. They call on the SBA to “continue to help more young businesses become globally competitive” including connecting with local innovation network.

The discussion of capital investment addresses the long-standing concern about short-term investment and the issue of capital for start-ups. They specifically recommend that Congress should modify the capital gains tax rates to incentivize holding stocks for five years, ten years, and longer and make the R&D tax credit permanent. They also recommend the “Federal agencies should facilitate industry and government cooperation to identify shared opportunities to invest in precompetitive research in long-term, capital-intensive fields.” These recommendations are fine as far as they go but I would have liked to see more discussion of innovative financing tools for start-ups. I would have also added proposals to better utilize intellectual property (IP) in the lending process. Specifically, the Small Business Administration (SBA) and U.S. Patent and Trademark Office (USPTO) should convene a working group of lenders, regulators and other interested parties to develop a common template to be used when describing and valuing IP and intangible assets used implicitly or explicitly as collateral. The Intellectual Property Office in the United Kingdom (UK IPO) is already undertaking such an activity. Any U.S. effort should communicate, and to the extent possible coordinate, with that activity. (See also earlier postings).

The infrastructure recommendations covers information, communications and computing as well as the traditional categories of transportation, water, waste and energy. Their recommendations focus on investing in a world-leading wireless infrastructure and access to a world-leading infrastructure for high-performance computing. Nothing, unfortunately on traditional infrastructure. I would have liked to have seen a discussion of ideas such as the National Infrastructure Bank.

Finally the report looks at the problem that has been at the heart of my work: both statistics and Federal programs are not in-line with this new economic structure. On statistics, they recommend that

Federal agencies should develop methods of accounting for the complex relationships between manufacturing, services, and information and consider multiple ways of collecting and organizing national statistics.

Such an analysis would, I believe, go a long way to helping us break free from the existing out-dated view of the economy. Statistics are a window through which we see the world. But yet our current statistical system is more like looking through the rear view mirror. We need better metrics upon which to base our policies.

On policy, the report recommends that

Federal programs that contribute to innovation should be directed and optimized as appropriate to assist software and service providers as well as manufacturers. Federal programs to revitalize manufacturing in the United States, such as the Advanced Manufacturing National Program Office (AMNPO), the Manufacturing Extension Partnership, and the Advanced Manufacturing Partnership, should not lose sight of the importance of software and service providers.

Of the many recommendations in the report, if these two recommendations alone are embraced by the policy community then the NAE will have secured a breakthrough in the policy debate. As I argued in my report Rethinking Innovation Policy – Reposing to an RFI:

First, we should recognize that the barriers between “manufacturing” and “services” are eroding. Service activities are increasingly linked manufacturing activities. In fact, companies such as the German Mittelständler companies are successfully competing in “old” industries based on that linkage. They offer knowledge — not low cost. Knowledge is what gives them a superior product and knowledge is what makes their services so valuable. But is it not just generic knowledge. They are selling their knowledge as a means to create solutions for their customers. Their customers want the knowledge to be specifically applied to them – not some abstract concepts. That is the “service” part of the equation. So, all of the activities described above for helping manufacturing should recognize that these manufacturing companies are already in the “service” business.
Next, it should be recognized that all of the activities described above for helping manufacturing also apply to services. Service industries are becoming more knowledge-intensive and need to understand and better their intangible assets. MEP could be further expanded to a offer assistance to service providers — just as the Baldrige Award was opened up to service businesses. Promoting innovative service delivery activities the government procurement process and through the establishment of demonstration and technology diffusion programs is also just as important as in manufacturing. Likewise, research on the organizational and business model aspects of service delivery should be undertaken.
The bottom line answer to both questions [raised by the RFI] is as follows: our goal should be to help American companies make the transformation to a more knowledge-intensive, information-fueled innovative production process — in all sectors and in all industries. Some of those industries will be labeled “manufacturing.” Some will be labeled “services.” Some will be a combination of both. What we label it is less important than the action we take to help make the undertaking of these activities here in America as productive, competitive and wage/job creating as possible.


In summary, the NAE has produced a groundbreaking report. It confronts head-on the problems of our incomplete and out-of-date view of the economy. By scraping the “manufacturing” versus “services” dichotomy, the report is able to better confront the challenges facing us. Their recommendation include both ideas that have been around for awhile that are in need of enactment/implementation as well as new ideas that grow out of their new analysis framework. There are places where I think the analysis could have been augmented. Perhaps these will be topics of further exploration.

Clearly the work of the NAE committee responsible for the report is not done. It will take effort to educate policymakers, business leaders and others as to the importance of the framework and recommendations. It will take even greater effort to implement the key recommendations. I wish the committee all the best in these efforts.

Of brackets and productivity – and treating workers as humans

Here we go again. The annual March ritual. But I’m not talking about basketball. I’m talking about the regular chest beating of how the NCAA basketball tournament hurts productivity. Every year we hear a slew of stories about the impact. Challenger, Gray & Christmas annual estimate for this year is a cost of $1.9 billion. And that is the number that gets all the news play.
However, that estimate assumes that workers are simply time punching machines. Yes, there are hours lost. But there are also benefits gained. An article in the Washington Post states “Don’t worry about the March Madness productivity loss too much:”

A survey released March 5 of 300 senior leaders by OfficeTeam, a staffing service for administrative professionals, found that just 11 percent of managers think the NCAA tournament has a negative impact on productivity, with 27 percent saying it has a positive one and 62 percent saying it has no impact. Its survey also found that 33 percent of managers said March Madness has a positive impact on morale. That’s why some companies go so far as to embrace the tournament openly, with friendly competitions designed to boost sales, benefits that give days off during the tournament, or flexibility to watch while working.

The Guardian offers “Eight ways employers can make the most of March Madness“:

March Madness can boost morale and create a better work environment, and ignoring it isn’t a good option. The good news is that finding creative solutions for a legally safe March and April is ultimately easier than finding a wining bracket.

In fact, John A. Challenger, chief executive officer of Challenger, Gray & Christmas actually recommends that companies take advantage of the activity. As the press release states:

“This tournament and the betting and bracket-building that come with it are ingrained in the national fabric. Trying to stop it would be like trying to stop a freight train. When even the president finds time to fill out a bracket, an employer would be hard pressed to come up with a legitimate reason to clamp down on March Madness activities,” said Challenger.
“Any attempt to do so would most likely result in long-term damage to employee morale, loyalty and engagement that would far outweigh any short-term benefit to productivity.
“If anything, employers should embrace March Madness and seek ways to it as a tool to boost employee morale and engagement. For example, creating a company-wide office pool that is free to enter and offers a free lunch or gift card for the winner could help build camaraderie and encourage interaction among co-workers who may not typically cross paths,” he concluded.

Maybe next year Challenger can try to estimate the benefits to the economy of companies using March Madness to boost productivity during the rest of the year.

Agriculture is a high-tech industry

I recently came across this article from a couple of months ago that illustrates how the U.S. economy is evolving. The story (“Working the Land and the Data“) is from the NY Times and highlights the example of Kip Tom’s farm operation in Leesburg Indiana:

From a self-driving John Deere combine, Ernie Burbrink, a Tom Farms employee, sorts real-time data about moisture, yields and net bushels per acre on his iPad, sending important information by wireless modem to distant cages of computer servers that begin analyzing the data for next season’s planting.
“It used to be, if you could turn a wrench you’d be good at farming,” Mr. Burbrink said. “Now you need to know screen navigation, and pinpointing what data should go where so people can plan and predict. You need to be in tune with other people: seed consultants, agronomists, the equipment folks.”

As I’ve noted before, agriculture and all other industries are becoming more knowledge intensive. It is not the case that these industries are begin replaced by knowledge-based industries. They are being transformed. This follows transformation of agriculture in the early 20th century. Farming did not simply move to other nations with lower-cost producers using the traditional techniques. Agriculture was mechanized–or industrialized, if you prefer. Now it (and the rest of the economy) are becoming “knowledge-ized.”
The key is how an industry creates and utilizes knowledge – not what the underlying activity is. Yes, some industries and some companies can and will resist the trend to a more knowledge-intensive activity. But there is nothing inherent in any economic activity that precludes it from generating and using knowledge that will make it more effective, efficient and productive. It just takes people who understand that knowledge is an important input to the production process. It is not something that exists “out there” but something that is everywhere. As more industry leaders understand that simple truth, the vision of knowledge economy will finally unfold.

New IP finance toolkit from UK IP Office

In previous postings, I reported on the efforts of the UK Intellectual Property Office to foster the utilization of IP as a financial asset. In 2013 I posted an item on their report on Banking on IP? The role of intellectual property and intangible assets in facilitating business finance. Last year, there was this posting on their Banking on IP: An Active Response. Last month there was this announcement of a webinar by the UK IPO’s Chief Economist Tony Clayton. (Tony’s slides and talking points are available online.)
I am now very excited to let you know that they have taken the next step with the publication of an IP Finance Toolkit. As the press release notes, the toolkit includes:
  • templates and guidance to help businesses accurately identify and describe their IP assets in a way that prepares them for finance applications and supports the decision making of a potential lender
  • guidance on developing an effective IP strategy, commercialisation of IP and effective due diligence processes
  • improved guidance on finance options for IP rich businesses
  • a glossary of accepted definitions to be used when describing and valuing IP
This framework was developed involving business and financial professionals to help close the gap between lenders and borrowers. The toolkit is an easy to understand guide to using IP in debt financing. It includes a basic primer on IP, on valuation methods and financing concepts and options.
Especially useful is the Valuation Checklist that helps guide the conversation between companies and potential lenders. It does not present a formulaic approach to arriving at a quantitative valuation. Rather it poses a series of in-depth questions to help both sides better understand the role of and the importance of the IP to the business. In that sense it is also useful as a stand-alone guide for a business to better manage its IP.
Tony Clayton and the UK IPO team are to be congratulated on producing such a useful tool. It will certainly help British companies. I hope the toolkit gets wide attention on this side of the Pond as well.

How technology evolves: the violin

We often think of technology as engineered or designed as a fully conceived package. But in reality, technology often evolves in incremental steps. Think of the steam engine which was the product of successive tinkering. Or the iPad that grew out of the iPhone that came from the iPod. The Economist recently published another example: violins. Specifically the size and shape of the resonance hole in the violin. As the story points out, the current configuration is not the result of deliberate scientific based engineering but trial and error:

Design implies intent. But [Professor Nicholas Makris] his analysis of 470 Cremonese instruments made between 1560 and 1750 suggests, as the chart shows, that change was gradual–and consistent, in Dr Makris’s view, with random variations in craftsmen’s techniques producing instruments of different power. The market, presumably, favoured those journeymen within a workshop who made more powerful instruments. When they became masters in their turn, they then passed their ways of doing things on to their own apprentices. Only at the very end of the period might a deliberate change have been made, as the holes get suddenly longer.
Intriguingly, intentional attempts in the 19th century to fiddle further with the f-holes’ designs actually served to make things worse, and did not endure. As is also the case with living organisms, mutation and selection seem to have arrived at an optimal result.

FYI – the technical paper (“The evolution of air resonance power efficiency in the violin and its ancestors“) was published in the Proceedings of the Royal Society of London.
Also interesting is the fact that the famed Stradivarius is well below others (such as the Guarneri) in sonic power. Clearly some other factors are involved that this particular evolution did not cover.

January 2015 trade in intangibles – and annual revisions

Some more partially good news in this morning’s trade data from BEA: January’s trade deficit dropped by $3.8 billion to $41.8 billion. The not so good news port is that export were down $5.6 billion while imports were down $9.4 billion. The drop in both imports and exports is a troubling indicator of the state of the US and global economy. In addition, the good news is that the deficit in petroleum goods declined while the bad news is that the deficit in non-petroleum goods continues to increase.
In another piece of minor bad news, our surplus in pure intangibles declined slightly in January as exports dropped while imports grew. The surpluses in maintenance & repair services and in financial services declined as exports went down in both industries. The deficit in insurance services was slightly lower as imports declined. Net revenues from the use of intellectual property dropped slightly as revenues from foreign sources (exports) were basically unchanged while charges for the use of intellectual property paid out to foreign sources (imports) increased. The good news is that the surplus in business services finally increased after a long string of declines (revised data shows that the string of declines actually stopped in December with a slight increase).
Revised data shows that on an annual basis our intangibles surplus was up by 5.5% in 2014. All areas showed improvement except telecommunication which managed, however, to remain in surplus.
Our Advanced Technology deficit once again improved dramatically in January, dropping to $5 billion from $8 billion in December and $11.4 billion in November. And once again the improvement was due an $3 billion improvement in the Information and Communications Technology (ICT) deficit as imports dropped by $4 billion while exports were down $1 billion.
Advanced Technology goods also represent trade in intangibles. These goods are competitive because their value is based on knowledge and other intangibles. While not a perfect measure, Advanced Technology goods serve as an approximation of our trade in embedded intangibles. Adding the pure and embedded intangibles shows an overall surplus of $9.9 billion in January compared with $7.0 billion in December. Again, much of this was due to the lower ICT imports.
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Note: I am now reporting the trade data using the new BEA classifications for services trade, which breaks services into more categories. In the past, the intangible trade data was the sum of Royalties and License Fees and Other Private Services. Under the new classification system, intangibles trade data is the sum of the following items: maintenance and repair services n.i.e. (not included elsewhere); insurance services; financial services; charges for the use of intellectual property n.i.e.; telecommunications, computer, and information services; other business services.

Charges for the use of intellectual property n.i.e. is simply a renaming of Royalties and License Fees. This includes transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights.

Maintenance and repair services n.i.e., financial services, and insurance services, were previously included in Other Private Services. Telecommunications, computer, and information services is a combination of those two items (telecommunications and computer & information services) that were also previously included in Other Private Services. Three categories previously in Other Private Services — education-related and health-related travel and the expenditures on goods and services by border, seasonal, and other short-term workers — were removed and reclassified to travel. The new category of other business services is a continuation of the older category Other Private Services with those components removed.

Thus, other business services includes categories such as advertising services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; and industrial engineering services. It also includes personal, cultural, and recreational services which includes fees related to the production of motion pictures, radio and television programs, and musical recordings; payments or receipts for renting audiovisual and related products, downloaded recordings and manuscripts; telemedicine; online education; and receipts or payments for cultural, sporting, and performing arts activities.

For more information on the changes, see the March 2014 Survey of Current Business article, “The Comprehensive Restructuring of the International Economic Accounts: Changes in Definitions, Classifications, and Presentations.”

February employment in intangibles industries

Good news from today’s job numbers from BLS: employment is up by 295,000 in February and the unemployment rate down to 5.5%. Economists had expected an increase of 235,000 jobs. Employment in tangible producing industries grew by 162,600 in January. The biggest gain in percentage was in Repair & Maintenance, followed by Accommodation & Food Services. Manufacturing, Construction & Mining and Tangible Business Services also grew. Intangible producing industries added 132,400 jobs with the biggest percentage gains in Information and Educational & Health Services. (See tables below)
As the charts below shows, U.S. employment in tangible producing industries and intangible producing industries is just about equal. However, since the end of the Great Recession, employment in tangible producing industries has been growing slighly faster than in intangible producing industries. Employment in tangible producing industries increase by 23% in February while employment in intangible producing industries grew by 19%.
For more background on this data, see my earlier posting.
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