NPR has a show on entrepreneurs called From Scratch. I caught the episode on Bear Naked while listening on satellite radio, and I’m left wondering a few things:

1. How many similar stories of business start ups do we not hear about because they end in failure?

2. If there are important differences between failures and successes, what are they?

3. Why don’t they have a show dedicated to failed start ups?

William Baumol is one of the leading economists who has done research on entrepreneurship. Here is a google scholar list of his work ion the area.

His article/book titled: Education for Innovation: Entrepreneurial Breakthroughs vs. Corporate Incremental Improvements captures an important empirical fact:

This paper explores the following hypotheses on the appropriate education for innovating entrepreneurship: a) breakthrough inventions are contributed disproportionately by independent inventors and entrepreneurs, while large firms focus on cumulative, incremental (and often invaluable) improvements; b) education for mastery of scientific knowledge and methods is enormously valuable for innovation and growth, but can impede heterodox thinking and imagination; c) large-firm R&D requires personnel who are highly educated in extant information and analytic methods, while successful independent entrepreneurs and inventors often lack such preparation; d) while procedures for teaching current knowledge and methods in science and engineering are effective, we know little about training for the critical task of breakthrough innovation.

According to this article in the Economist entrepreneurs in Japan have had a hard time.

Japan scores poorly on almost every measure of entrepreneurship. It has the second-lowest level in the OECD of venture-capital investment as a share of GDP, and what little venture capital is available goes disproportionately into existing firms rather than start-ups. Venture-capital investment in Japan amounts to some $2 billion a year, around a tenth of the figure in America. Start-ups account for 4% of all firms, compared with 10% in Europe and 14% in America. Japan also came last in the International Institute for Management Development’s rankings on entrepreneurship and second-last in the Global Entrepreneurship Monitor’s ranking of early-stage entrepreneurial activity (defined as the proportion of people of working age who are involved in such activity). Why?

Cultural factors are a big part of the explanation. As a hoary old Japanese saying has it, “the nail that sticks out is hammered down.” Conformity is valued over individualism. “Students work hard at school, but they learn how to take tests, not how to think,” laments Sakie Fukushima of Korn/Ferry. And unlike American culture, which venerates the maverick self-made millionaire and is tolerant of failure, Japan frowns upon public displays of wealth and stigmatises business failure.

Although innovation doesn’t just happen in start ups. If the culture, incentives, and environment are right, it can be just as likely to occur in large corporations. Look at Google for a good example. They allow their staff to commit 20% of their time to any project of their choosing.

Given the innovative prowess of Japan’s industrial giants, does it matter if start-ups have a hard time? The Economist Intelligence Unit, a sister company of this newspaper, ranked Japan first in a recent study of innovation, based on the number of patents awarded per million people. Japan generates 51% more patents than America in absolute terms, which works out at around 3.5 times as many patents per person. It also has more scientific researchers per million people (5,900 compared with 4,200 for America) and a higher research and development (R&D) intensity, at 3.4% of GDP compared with 2.8% for America.

But things may not be as rosy as these numbers suggest. Patents are an imperfect proxy for innovation; Japan’s armies of researchers spend more time than their foreign counterparts on non-research activities such as administration, which reduces their effectiveness; and a report by the Cabinet Office found that the effectiveness of Japan’s private-sector R&D—the ratio of operating profits to R&D expenditure—declined throughout the 1990s (see chart 7).

Akira Takeishi of the Institute of Innovation Research at Hitotsubashi University has investigated why Japanese firms are highly competitive in some industries (carmaking, electronics, imaging products, video games) and less so in others (personal computers, software). He concluded that Japanese firms did best in manufacturing industries with closed product designs that do not require collaboration with the rest of the industry, and worst in fields based on open standards and modular architectures. So if the nature of innovation has changed, and it now depends on collaboration with other firms around the world, Japan could be in trouble. Japanese patents with foreign co-inventors accounted for less than 3% of the total, compared with 12% in America.

If government is going to try to steer the process it is extremely important to create a level playing field for ALL industries and not favor one over another. After all 10 years ago who would have predicted the composition of products we’ll see this Christmas?

Another concern is that too much government effort to encourage start-ups and promote innovation is concentrated on manufacturing and technology rather than services, which is arguably where change is most needed. To keep the momentum going, the OECD recommends reductions in capital-gains tax to encourage venture capital; more portable pensions and performance-based pay for researchers to encourage mobility between academia and industry; a broader educational curriculum; and the promotion of cross-border trade and investment, since good ideas often come from abroad. Changing Japanese attitudes to entrepreneurship will take time and further reforms, but at least the wheels have started turning.

The next Economic Indicators Breakfast meeting will be April 2nd and we’ll be discussing entrepreneurship. In preparation, I’ll be linking to a lot of the research I come across on the topic. Here is a paper which is part of a larger publication coauthored by Dean Karlan from Yale.

Looks like even David Stern realizes stadiums are difficult to justify on purely economic grounds.

NBA commissioner David Stern is putting the screws to Seattle in his attempts to get the community to provide taxpayer subsidies that are lucrative enough to keep the team from departing the “Emerald City” to even greener fields in Oklahoma.

Stern blasts city officials and the overwhelming majority of voters in the city for passing a law requiring (gasp!) that any funds used to help build an arena earn the same rate of return as a treasury bill. “That measure simply means there is no way city money would ever be used on an arena project,” Stern said. Effectively, Stern has just confirmed what sports economists have known all along: taxpayer spending on sports infrastructure is unlikely to provide significant returns on the investment.

Some evidence that my prognostications were correct:

The areas studied, and the gross metropolitan product growth expected next year, include Appleton at 2.7 percent, Duluth, Minn.-Superior 2.6 percent, Eau Claire 2.8t, Fond du Lac 3.1, Green Bay 2.9, Janesville 3.3, La Crosse 3.1, Madison 3.4, Milwaukee 2.5, Oshkosh 2.7, Racine 2.3, Sheboygan 2.6 and Wausau 2.6.

Diffley said the result is better in Wisconsin because area prices and mortgage values did not climb as much or as rapidly as in other parts of the country.

Even a blind squirrel finds an acorn once and awhile.

I was just interviewed for a piece on WSLU/WPR concering this article in the Journal Sentinal.

According to the Legislative Fiscal Bureau, the state had $8.28 billion in general-obligation, transportation and environmental debt in mid-2006; the same debts totaled $4.41 billion in 1996.

The 87% increase was three times the U.S. inflation rate over that period.

Figures show that debt rose the most – by $1.8 billion- under Thompson between 1996 and 2001, when he resigned to become a cabinet secretary for President Bush. Debt increased by more than $1.5 billion in Doyle’s first three years.

Todd Berry, president of the Wisconsin Taxpayers Alliance, said the growing debt is another risky budget decision governors and legislators have made to benefit themselves politically.

Also rising is annual debt-service payments on those bonds: Principal and interest payments on general-obligation bonds will exceed $700 million for the first time this year; and payments on transportation bonds will cost an additional $174 million.

That $874 million is cash that can’t be used for other important programs. By comparison, that amount is close to what it cost to run the state’s prison system last year.

There are two real issues. The first is that the increase in bonding burdens future generations, which is alright if they are the ones who benefit. The second issue concerns the state’s bond rating. As it falls debt service costs rise, crowding out other budget items.

The article could have been improved by publishing the debt as a percentage of the state economy, as it has grown by 50% over the last 9 years. That makes the outstanding debt about 2.9% of Gross State Product in 1997 and about 3.6% in 2006. Not exactly an enormous increase.

Below is a memo I’ve written on the stadium:

DATE: 11/07/2007

TO: Interested Parties

FROM: Taggert J. Brooks

Associate Professor of Economics

RE: Memo on Stadium Finance Request

I’m writing this in response to questions I have received regarding my letter to the La Crosse Tribune editor dated October 26^th, 2007: In the letter I note that academic research by economists finds little support for the idea that stadium projects have a positive net economic impact on their communities. That is not the same thing as saying they always have a zero net economic impact, and it is not the same thing as saying all money invested in such projects has a zero rate of return.

My comments in the rest of this memo will pertain directly to the request for the county to provide $250,000 to the UWL Stadium plan.

If we consider that an alternative investment for the county might earn a 5% annual rate of return, then a one time investment of $250,000 would return $12,500 annually.

How might the new stadium project achieve this? The main return for the county will happen through increased county sales tax revenue due to attendance at stadium events and its associated tourism. In order for this return to have a positive net impact it must have a net increase in sales relative to the alternative scenario. There are many possible alternatives that could be considered.

More specifically in order to generate an additional 12,500 in sales tax revenue, there needs to be an increase in annual county wide taxable sales of $2,544,529. This represents an increase of 0.13% over sales for the entire 2006 year. It is only a 1.58% increase in the amount of sales in an average month.

One important note, there are many different things the county can do with 250,000 it is up to the elected officials to evaluate the relative merits and therefore relative returns on those alternative projects.

Below are the details of these calculations.

250,000	County Investment
5.00%	Annual Rate of Return
12,500	Dollar value of annual return
0.50%	County Sales Tax
1.75%	DOR take on county sales tax
0.4913%	Net county sales tax after DOR take
$2,544,529	Required increase in taxable sales to generate 12,500 Dollars in additional tax revenue
$1,932,219,847	December 2006 Retail Sales for Previous 12 Months
0.13%	Required increase in sales as percentage of total annual sales
$161,018,321	December 2006 Retails Sales Monthly average for prev 12 months
1.58%	Required increase in sales as percentage of total monthly sales

This position is not inconsistent with my earlier statements. I still believe the economic impact of the project will be quite small, however it need not be very large to justify (from a return on investment standpoint) the amount of money the county is being asked to commit.

I am free to answer any questions anyone might have of me. You are also free to share this memo with anyone you wish, so long as it is shared in its entirety.

Sincerely,

Taggert J. Brooks

Ed Glaeser has an excellent piece on the past and the future of Buffalo but the best piece of advice for the economic development folks is:

The truth is, the federal government has already spent vast sums of taxpayer money over the past half-century to revitalize Buffalo, only to watch the city continue to decay. Future federal spending that tries to revive the city will likely prove equally futile. The federal government should instead pursue policies that help Buffalo’s citizens, not the city as a geographical place.

My letter to the editor on the stadium can be read here. What I actually wrote is below. Notice the additional reasons to contribute to the stadium which were cut.

If you are planning to donate to the stadium project do so because you like to go to UW-L home football games. Do so because your son has the opportunity to play his high school football games there. Do so because you want the opportunity to watch your daughter compete in the state track meet in her hometown. Do so because you are an alum who takes pride in the appearance of his alma mater, or do so because you enjoy running around the track on your lunch hour.

But do not contribute to the stadium because you think it is going to bring jobs and economic growth to the area or even a return on tourism dollars which “alone will far exceed the investment”. Unfortunately with the latter statement the co-chairs of the UW-L Stadium fundraising campaign fall victim to an economic fallacy economists have been debunking for years. It turns out sports stadiums (and here we are talking about professional sports stadiums) do not tend have a statistically positive economic impact on the surrounding community. And in countless other studies academic economists have been hard pressed to find any evidence that hosting a professional league championship such as the World Series, the Superbowl or an All Star game brings a return through tourism dollars. Even as large as the WIAA state track meet is, I think we can all agree it is smaller than any of the those events.

But surely all of those people who come to town and spend their money must have some impact? The right question to ask is what is their net impact? How many other people would have come to La Crosse but didn’t because the state track meet was happening? How many people left town to avoid the crowds of the track meet? I think you’ll find the answer is that in the end there isn’t a big net change in the number of people in town from what there would have been without the track meet, and that means their isn’t much of a return on investment in terms of tourism dollars.

This is not an argument against donating to the stadium effort. Rather it is merely an argument against some of the arguments made in favor of donating to the stadium. Even so you won’t see my name on the list of donors, unless new plans suddenly include a velodrome, in which case my check book is open.