Entrepreneurial Businesses Drive Job Growth, says Harvard

Politicians are too likely to guess wrong about which industries are worth attracting. With job growth worrying politicians, Toronto City Hall may be tempted to chase big companies to take a tax break and set up shop.
"That's a misguided approach," says Ed Glaeser and Bill Kerr, Harvard.
Job growth and the big economic development coming from these new work roles is now proven to come from the successful incubation of "small, entrepreneurial employees--not a few big companies." Even adjusting for variables such as tax or industry, Glaeser and Kerr say, "the relationship between small firms and job growth rate stands."
Industries with smaller firms and more start-ups had faster job growth than an industry an industry in the city without a cluster of start-ups. So a gnat like cloud of small companies buzzing around larger companies will be far better suited to job growth.
According to Glaeser and Kerr, apparently large companies generate less job growth than these "gnat" sized businesses. Also, once a city establishes itself as entrepreneurial, it tends to be self perpetuating.
So Toronto needs to market itself as a City for Entrepreneurs.
A big thank you to The Globe & Mail for organizing a 6 Mayor Candidate Town hall on what to do for business.
Give your views on Facebook to:
Sarah Thomson
Rocco Rossi

4 Reasons Governments want to help Business

Business owners will be able to attend a town hall on how Toronto can help business. Thanks to the Globe & Mail for sponsoring the Sept 9th discussion with the 6 mayor candidates.

The economy has changed business as usual approach by government from city to country levels and encouraging a return to government involvement from puppet master to financial supporters of business. 

Four main forces are driving this revival of industrial policy. 

First is the weak state of the world economy. Governments are under pressure to reduce unemployment and stimulate growth: support for chosen industries is a way of saving jobs and helping local firms fight foreign competitors. 

Second, some countries, such as America and Britain, want to rebalance their economies away from finance and property. Along with older manufacturing, clean technology is emerging as a favourite direction. Nearly every large economy has plans to win global market share and create green jobs.

Third, emergency use of industrial-policy tools leads to demands for more. Mr Obama has responded to complaints that only big companies such as General Motors and AIG, an insurer, have enjoyed the state’s largesse by setting up a $30 billion small-business lending fund. 

Fourth, rich countries are responding to the apparently successful policies of fast-growing economies, notably China and South Korea.

Industrial policy remains controversial. Defined as the attempt by government to promote the growth of particular industrial sectors and companies, there have been successes, but also many expensive failures. Policy may be designed to support or restructure old, struggling sectors, such as steel or textiles, or to try to construct new industries, such as robotics or nanotechnology. 

Does Government Involvement in Business Help or Hinder?

Toronto's Mayor candidates will talk to entrepreneurs about how the City can help. I have been asking business owners about their thoughts. These owners tend to run companies that are making a decent cash and the majority say,  "Simplify paperwork, taxes, hiring and firing rules and stay out of the way." They do not reach out for government programs like SREDS and find these annoying. Lawyers, who make a good living from explaining the difficult rules, may not like these ideas. I have also noticed that the companies that look for help from the government are often the ones who should not be getting a subsidy, while the stronger ones do not reach out for programs.

So, does Government involvement help or hinder business development? Many governments are now looking at industrial policy. Justin Lin’s book is well worth reading on the topic. He tries to sort out good industrial policy from bad. 

When does state intervention lead to structural upgrading, a la East Asia, and when does it merely generate a bunch of uncompetitive companies being kept on artificial life support by state subsidies, as sometimes happened elsewhere? His conclusion is that the state should not depart too far from a country’s comparative advantage, but consciously push it towards upgrading by imitating neighbours that are similar, but have travelled further along the upgrading path – basically the East Asian ‘flying geese’ model. 
Think of it as the state pulling a country along by a piece of elastic – pull too little and nothing happens, pull too hard and the elastic snaps. 
For a review of his paper, and Justin’s response in a guest blogpost, visit Oxfam’s From Poverty to Power blog onhttp://www.oxfamblogs.org/fp2p/?p=2982.

A useful industry that will probably become more useful as it becomes less grandiose

Less Pomp and Circumstance and more humbleness is wanted from private equity, according to The Economist.  The recent article goes on to go over the same, tired hypothesis that private equity developed a weak model of using bank debt madly (which the banks were throwing at Private Equity) and buying up companies like drunken sailors.
Yes, and the government policies and mortgage craziness had nothing to do with the last three years?
The Economist does grudgingly admit that zero of the top 20 companies owned by private equity have gone under or needed a bail out, while banks have been wiped from the top 100 Bank list. Canadian banks find themselves in the top 20 banks in the WORLD!
Here is a look at the article:

IF PRIVATE-EQUITY outfits were once the kings of capitalism then during the credit crunch they behaved a bit like George III. Gripped by a bout of madness, they overpaid for firms at the top of the economic cycle and loaded them with too much debt. Today private-equity types are quick to admit things got out of control, just as in the buy-out booms of the late 1980s and 1990s. Most big shops, including Blackstone (see article), are keen to clean up the mess and move on. Yet it will take the industry a long time to rebuild its credibility.

Capitalism still needs private equity in its pure form. The stockmarket is not good at dealing with some firms—those that need surgery, are in the grip of bad bosses, or in industries that fund managers sniff at. Then it can make sense to have a lone, obsessive owner—particularly if it uses a dollop of debt to concentrate managers’ minds and locks in its own investors so long-term decisions can be made. The mere threat of a buy-out also helps keep managers at all listed firms on their toes.

The 2005-07 boom was damaging because it was so wild. Some $1.6 trillion of buy-outs took place—not far off the total for the preceding three decades, after adjusting for inflation. There was also a shameless degree of mission creep, with buy-out firms investing in volatile industries that are allergic to debt, such as semiconductors, and taking stakes in listed firms much as any investor might. A few private-equity outfits even listed their own shares and managed to keep a straight face.

READ MORE

Pay to Get Investor Ready

"Founders, do not fall in love with your product or your people.  Before you talk to anyone about funding get experienced people to rip your strategy and pitch apart.   You only get a few chances to get it done so make sure they count. Network like there’s no tomorrow.  Gather people around you who have proven “big league” execution skills.  Talk to everybody who can spread the message and bring value.  Get yourself down to the Valley. Cold-call and get connected to anyone who can make your business move faster and smarter.  If you don’t your competitor will."
Howard Gwin tells Canadian owners, "Bring it or stay home.  If you are in the Canadian technology ecosystem, run faster, harder and set higher goals or we are going to fall behind – and we will not catch up."
READ MORE of Howard Gwin
I read  Howard's article just after I saw yet another owner-operator who had a healthy company at $20M, but waited until it dropped to $9M to speak with Loewen & Partners. The damage was too bad by then. The worst part was that he had bought out his partner and debt and it was ALL his own capital in the business. Rule # 1: Use other people's money. Rule #2: As Howard Gwin says - Bring it or stay home. Realize that this is the time of private equity and the money is here now. If you don't, your competitors will be accessing private equity and think how much market share they could gain.