Illusions of Entrepreneurship? Interesting Guidance for NEO

An interesting report by Scott Shane at Case Western Reserve University for the Fund for Our Economic Future and its regional strategy: Advance Northeast Ohio.

I posted a note in BFD here.

You can read through the paper below:

Richard Herman, who passed the paper along, commented at length in his e-mail, which I reproduce here:

This Summer, the Plain Dealer editorial board wrote a piece asking why the Fund for Our Economic Future was not involved in efforts to welcome immigrant talent, immigrant entrepreneurs and international capital into the region.
 
The Fund may now have its answer.  

A new report commissioned by the Fund has recently been released.
 
The author of the report, Dr. Scott Shane, is a professor at Case, and author of books, Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By (Yale University Press, 2008) and Fool's Gold: The Truth Behind Angel investing in America. (Oxford University Press, 2009).
 
Dr. Shane issued the recent report for the Fund for Our Economic Future:  "White Paper on Economic Growth Through Business Formation"  A link to the report can be found below.

In contrast to the "Global Detroit" project at the New Economy Initiative mega-fund  ( http://freep.com/article/20081007/COL06/810070362/0/COL08 ), to the Wooster EB-5 Foreign Investor Regional Center initiative ( http://www.the-daily-record.com/news/article/4453346  ) and to numerous similar projects around the country,
 
and in contrast to numerous national studies on  venture-backed immigrant founded companies, immigrant entrepreneurship and scientific innovation, and on the importance of tech development and research,
( a sampling:   http://www.kauffman.org/Details.aspx?id=1508  ; http://www.nvca.org/pdf/mericanMade_study.pdf ;

http://www.entrepreneurship.org/FeatureArticle/StrongActivity.html

 http://www.hbs.edu/research/pdf/09-003.pdf
http://www.nycfuture.org/images_pdfs/pdfs/IE-final.pdf )


and in contrast to the immigration policy initiative of the Great Lakes Chambers of Commerce Coalition,

and in contrast to other research commissioned by the Federal Reserve Bank of Cleveland for the Fund for Our Economic Future

http://www.clevelandfed.org/Research/Workpaper/2006/wp06-05.pdf
 
the "White Paper on Economic Growth Through Business Formation" concludes that the Fund for Our Economic Future should NOT allocate resources to the attraction of immigrant talent, to enhancing tech creation, or expanding the university research base in the region as a way to promote "attractive" entrepreneurial activity.
 
Excerpts follow:

I.)  Interventions to Attract Immigrants to the Region
Some observers have argued that interventions that increase the proportion of the
population that is foreign born will increase the amount of attractive entrepreneurial
activity in an area. Immigrants are believed to be carriers of an entrepreneurial spirit that
leads them to start new businesses, spurring our country's economic growth. The popular
wisdom is that immigrants have the work ethic, gumption, willingness to take risks, and a
host of other things that enable them to start businesses at a rate higher than the native
born population. Moreover, immigrants have social networks that allow them to source
raw materials and produce products in other countries where labor costs are lower.
58   As a result – the story goes – we can boost the amount of "attractive" start-up activity in an
area by bringing in more immigrants from other countries.

The data, however, do not suggest a strong relationship between the four measures of
attractive entrepreneurial activity in an MSA and the percentage of the population in the
MSA that was foreign born. No statistical relationship exists between the number of
angel group-backed companies or the number of "high impact" firms per capita and the
proportion of the population that immigrated to the United States. The correlation
between the per capita number of companies that receive external equity per capita and
the percentage of the population that immigrated to the United States is only weakly
correlated (0.13). However, the per capita number of venture capital backed companies
and the immigrant proportion of the population is correlated at 0.30.

The effect of immigrants on the number of companies that have received external equity
is negligible. A one percentage point increase in the immigrant population – 30,000
immigrants in NEO – would increase the number of companies less than six years old
with external equity by 12. Because these companies have sales of $435,000 and
employment of seven, the addition of 30,000 immigrants would add 84 jobs and $5.2
million in sales through this mechanism.

A more substantive effect would occur through the effect of greater immigration on the
number of venture capital-backed companies formed in the region every year (and
increase of 25 for every 30,000 immigrants). The addition of 30,000 immigrants would
add 8,540 jobs and $1.8 billion in sales at venture capital backed companies.
However, the Fund might not want to encourage the development of "attractive"
entrepreneurial activity through efforts to increase the amount of immigration to the
region for several reasons. First, at a ratio of 5,160 immigrants for each venture capital
firm that operates in a region, it is not clear that encouraging immigration to the region is
the most effective way to enhance venture capital-backed company formation. Even at a
cost of just $5,000 to attract and settle each immigrant, this approach is likely to cost far
more than a direct subsidy to convince a venture capital firm to set up operation in the
region. Second, even an effort to add only 5,160 immigrants, at a cost of $5,000 per
immigrant, is likely to be an intervention beyond the budget of the Fund.
25

II.)  Interventions to Enhance Technology Creation in the Region
Some observers argue that interventions to increase the amount of technology created will enhance the amount of "attractive" entrepreneurial activity that occurs in a region. Technological change creates opportunities for new companies. It allows people to do things that could not be done before or only could be done in a less efficient manner.
59

Moreover, it can be disruptive and undermine the competencies and capabilities of
existing companies, thereby creating advantages for new firms.

The data support the idea that increasing the amount of new patented technology in a
region will increase the amount of "attractive" entrepreneurial activity. Although the
number of patents per capita is not significantly related to the number of high impact
companies per capita, it is significantly related to the number of companies that receive
external equity investment per capita (0.19), the number of angel group-backed
companies per capita (0.15), and the number of venture capital firms per capita (0.53).

However, interventions to increase the amount of technology invented in the region are
not an effective use of the Fund's resources. In addition to the fact that the amount of
technology in the region is not associated with the number of "high impact" companies,
the size of the effect on angel group-backed companies and companies with external
equity is negligible. It will take an extra 1,000 patents to increase the number of angel
group backed companies by one. And each additional 100 patents per year will increase
the number of companies with an external equity investment by 4, generating 28 jobs and
$1.7 million in sales.

An additional 100 patents will increase the number of venture capital backed companies
by 9. While more substantial an effect than that on external equity or venture groupbacked
companies, the effect on venture capital backed firms is still low relative to the
costs. The R&D cost of creating each U.S. patent in 2004 was $1.7 million. Therefore,
the cost of generating the technology necessary to increase the number of patents in the
region by 100, and thereby increase the number of venture capital backed companies by
nine, would be $170 million. Stated differently, the amount of R&D necessary to add the
number of patents necessary to generate one venture capital backed company would be
$19 million. Clearly, there are less expensive ways to add an additional venture capital
backed company.
 
III.)  Interventions to Enhance the University Research Base of the Region
26
Some observers argue that interventions to enhance the amount of research conducted at area universities, such as through grants and programs to attract eminent researchers to the region, would increase the amount of "attractive" entrepreneurial activity in the region. The argument behind programs to encourage "attractive" entrepreneurial activity through support for academic research is threefold. First, academic research exposes a region to leading technological ideas, which helps to foster the development of new, high tech companies. Second, it supports the development efforts of small and start-up firms which tend to conduct a good portion of their R&D in conjunction with universities.
60
Third, it helps university researchers found companies that commercialize their research.
Because a strong relationship exists between the size of university research budgets and
the number of spin-off companies that they create,
61 increasing the amount of university
research funding is said to be a way to increase "attractive" entrepreneurial activity in a
region.

Research shows that that university spinoff companies tend to be very high performing
start-ups. According to the Association of University Technology Managers, from 1980
to 1999, American university spinoffs generated $33.5 billion in economic value added
and 280,000 jobs.

62 That is, the average American university spinoff generated approximately $10 million in economic value and 83 jobs.
63
Moreover, this economic activity tends to stay close to home. University spinoffs tend to
locate very close to the universities that spawn them, while other licensees of university
technologies are less geographically proximate. For instance, a study conducted by Lori
Pressman reports that, in the United States, 80 percent of all spinoffs operate in the same
state as the institution that they came from.
64
However, interventions to enhance the amount of university research may not be a cost
effective way to increase the amount of attractive entrepreneurial activity in a region.
First, several studies show that there is no relationship, across MSAs, between the
amount of university R&D and the number of technology jobs created over time.
65
Second, the number of university spinoffs created annually is quite small, and is
concentrated in a small number of industries, with data from the Association of
University Technology Managers showing an average of only 2.7 new businesses per
institution in 2005.

66 In fact, with 12 of the 418 U.S. university spinoff companies founded in this country region in 2006, this region, we are already at more than twice our proportional level.
67
Third, and most importantly, university spinoffs are very expensive to produce. Across
the universities and research hospitals in NEO, in 2006, it cost $46.3 million in research
funding to create a single university spinoff.
68 And this rate of spin-off company creation
per dollar of research was not below the national average.
 ________________________________________________
 

full report can be found at the following link:
 
 http://www.advancenortheastohio.org/files/White%20Paper%20on%20Economic%20Growth%20Through%20Business%20Formation2_0.pdf

----------------------------------------------

Not mentioned in Dr. Shane's report is the recent study commissioned by Venture Capital Association,  which found the following correlation between immigrant talent & "attractive" entrepreneurial activity:

Immigrant-Founded Public and Private Venture-Backed Companies

• Over the past 15 years, immigrants have started 25 percent of U.S. public companies that were venture-backed, a high percentage of the most innovative companies in America.
• The current market capitalization of publicly  traded immigrant-founded venture-backed companies in the United States exceeds $500 billion, adding significant value to the American economy. This is an example of the enormous wealth-creating abilities of immigrant entrepreneurs.
• Immigrant-founded venture-backed companies are concentrated in cutting edge sectors:  high-technology manufacturing; information technology (IT); and life sciences.
• As evidence of how important immigrant entrepreneurs have been to the U.S. technology base, the study found 40 percent of U.S. publicly traded venture-backed companies operating in high-technology manufacturing today were started by immigrants. Moreover, more than half of the employment generated by U.S. public venture-backed high-tech manufacturers has come from immigrant-founded companies.
• The largest U.S. venture-backed public companies started by immigrants include Intel, Solectron, Sanmina-SCI, Sun Microsystems, eBay, Yahoo!, and Google.
• The data show immigrants possess great entrepreneurial capacity, particularly in technical fields. The proportion of immigrant entrepreneurs among publicly traded venturebacked companies is particularly impressive when compared to the relatively small share of legal immigrants in the U.S. population. Today, legal immigrants encompass approximately 8.7 percent of the U.S. population and represented only 6.7 percent of the population in 1990.
• Most venture-backed companies started by immigrant entrepreneurs are technology-related companies that pay high salaries for white collar professional positions but employ fewer people than, for example, venture-backed retail stores such as The Home Depot or Starbucks.
http://www.nvca.org/pdf/mericanMade_study.pdfNDINGS



_______________________
 
Also not mentioned in Dr. Shane's report are Brookings and other studies that find strong correlation between immigrant population and a community's high-tech high-growth activity:
 
"Metropolitan areas with high concentrations of foreign-born residents
also rank high as technology centers.

Eight out of the top ten metropolitan areas with the highest percentage of foreign-born residents
were also among the nation's top 15 high-technology regions: Los Angeles, New York, San Francisco, San Diego,
Chicago, Houston, Boston, and Washington D.C."

 http://www.brookings.edu/es/urban/techtol.pdf
__________________
 
 
In his book, illusions of entrpreneurship, published jan 7, 2008, Dr. Shane dismisses as a "myth" the proposition that immigrants are big entrepreneurial performers in the U.S.  The new report for the Fund contains similar language.

This and similar contrarian views may sell books, and may be used to justify policy positions that are being questioned, but they are not supported by the weight of the nation's leading researchers and economists.
 
Building a tech-rich, prosperous, job-creating, globally-connected economy in Northeast Ohio will not happen without policies that prioritize the inclusion for immigrant talent, entrepreneurship and capital.
 
richard herman
cleveland