Building a tech-rich, prosperous, job-creating, globally-connected economy in Northeast Ohio

Submitted by Norm Roulet on Wed, 10/29/2008 - 20:15.

Our region's greatest champion of promoting immigration - high-skills immigration - Richard Herman has sent me many progress reports on successes in some areas - most recently Detroit - referenced below. I've been meaning to post these notices from Richard but haven't found the moment (Richard, I believe you have an account). Today, I received the unsurprising update below on a local study discouraging the Fund For Our Economic Future from focusing on this objective in economic development for the region - discouraging attracting high skills workers and entrepreneurs from afar. This seems a seems a good way to introduce the subject... "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,

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
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:

----------------------------------------------
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."

__________________
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

Economic Development Fund to Create "Global Detroit"

"New Ideas Sought to Spark Michigan," Detroit Free Press, October 7, 2008

"I talked last week with John Austin, hired in April to head the
initiative (New Economy Initiative), formed by 10 national and local
foundations to help the Detroit region diversify its economy and boost
innovation. Austin said first steps have been finding consensus on
what's holding back economic growth in the state and studying what
other regions have done....

Others blame our low immigration rate. The most vibrant cities and
states, economically, tend to be magnets for immigrants, who have
historically had high rates of self-employment. But Michigan is a
low-immigration state and thus a laggard in entrepreneurship....

Austin said two initial thrusts of the $100-million fund will be
growing the creative talent base in the region and nurturing a robust
venture capital network....

Another, longer-range agenda item is an outreach effort, tentatively
called "Global Detroit," to be more welcoming to immigrants. In
Michigan, 37% of the state's foreign-born residents have college
degrees, compared with 25% of the population overall. But only 6.1% of
Michigan's residents are foreign-born, compared with 12.6% nationally.

While metro Detroit is home to many nationalities and global companies, it also has a reputation for being insular.

That's understandable, given the region's racial history and the
huge manufacturing job losses that have accompanied globalization.

But it's also a bias that no state, city or region can afford if it
wants to succeed in whatever world the New Economy has in store for us."

 

 

Disrupt IT