Opinion

Felix Salmon

US export du jour: Korean entrepreneurs

Felix Salmon
Nov 30, 2011 15:30 UTC

South Korea, by rights, should be an entrepreneurial paradise. It’s rich, and growing fast, and well-educated, and urban, and open, and has the best IT infrastructure in the world. But it’s also very conservative, as Max Chafkin reports:

Jiho Kang, who is chief technology officer of a start-up in California and CEO of another one in Seoul, says that when he started a company after high school, his father, a college professor, kicked him out of the house…

To many South Koreans, being an entrepreneur—that is to say, going against the system that made the country rich—is seen as rebellious or even deviant. “Let’s say you’re working at Samsung and one day you say, ‘This isn’t for me’ and start a company,” says Won-ki Lim, a reporter for the Korea Economic Daily. “I don’t know how Americans think about that, but in Korea, a lot of people will think you of you as a traitor.” …

The penalty for failure is even more onerous for female entrepreneurs. When Ji Young Park founded her first company, in 1998, her bank not only required her to personally guarantee the company’s loans—a typical request for a male founder—it also demanded guarantees from her husband, her parents, and her husband’s parents. Park persevered—her current business, Com2uS, is a $25 million developer of cell-phone games—but her case is extremely rare. According to the Global Entrepreneurship Monitor, South Korea has fewer female entrepreneurs, on a per-capita basis, than Saudi Arabia, Iran, or Pakistan.

Markets, however, tend to find a way around such obstacles. And in the case of Korea, it’s a very interesting one: Korea is, essentially, importing its entrepreneurs from the US. Ambitious Koreans who are born or educated in America are going back to Korea — where the opportunity space for entrepreneurs is much less crowded than it is here — and making large, swift fortunes.

In the grand scheme of things, this has to be positive: good for Korea, certainly, and good for the world. But is it good for America that many bright Koreans are setting up shop over there rather than over here? Chafkin hints that it isn’t — that Korea’s gain is America’s loss. But I’m willing to let this one slide, especially on a day when US immigration policy seems likely to become just a tiny bit more sensible.

The US has always been the biggest importer of entrepreneurs on the planet. It’s perfectly OK if we export some as well. After all, a strong and economically vibrant Korea is very much in the US national interest.

COMMENT

“It’s perfectly OK if we export some as well.”

We? Is Salmon an American citizen? But I suppose all the colonies treat the imperial capital as home.

Posted by billyjoerob | Report as abusive

The unhelpful lionization of small business

Felix Salmon
Oct 24, 2011 14:11 UTC

Jared Bernstein has the wonky version in the NYT, but Jim Surowiecki has the soundbite:

Small businesses are, on the whole, less productive than big businesses, and though they do create most jobs, they also destroy most jobs.

Both of them are making the important point that high-flying rhetoric about the importance of small business is much better politics than it is policy. We’ve been hearing a lot about the individual 99% of late; here’s the corporate 99%, from Bernstein.

New research by the Treasury Department finds that small businesses — defined as those with income between $10,000 and $10 million, or about 99 percent of all businesses — account for just 17 percent of business income, and only 23 percent of them pay any wages at all.

The facts of the matter are stark: larger businesses are more productive (this will come as a shock to anybody who spends most of their life in meetings, but it seems to be true), and they even create more jobs, once you control for firm age. Or, to put it another way: it’s not small businesses which create jobs, it’s startups. Here’s the chart, from this paper by Haltiwanger, Jarmin, and Miranda (HJM):

haltiw11.png

The statistic that small companies create the most jobs comes from the purple line. But firms mean-revert when it comes to size: as they fluctuate in size over time, they tend to add jobs when they’re smaller, and lose jobs when they’re bigger, and even if they add no jobs overall, that still makes it look as though smaller companies add more jobs.

If you control for mean-reversion effects and look at a firm’s average size, the effect seen in the purple line becomes much less pronounced, and you get the green line instead.

And then look what happens when you add age controls — that is, when you control for the fact that younger companies are more likely to create jobs than older companies. A small family business which has been around for decades is unlikely to be an engine of job growth; meanwhile, large young companies (think Groupon) can hire extremely quickly.

Once you adjust for company age, you get the blue line in the chart — small companies actually lose jobs, on average, and it’s not until you get to about 500 employees that they manage to create any jobs at all.

Here’s Bernstein:

The big story here is that startups—which can only grow at first but which also have high death rates—play an important role in these dynamics. They’re small at first, and many perish—about 40% of the startups’ jobs are lost through firm death after five years. But if they survive, they will generate significant job growth (HJM: “conditional on survival, young firms grow more rapidly than their more mature counterparts”).

This finding and the flip of the lines in the figure when the proper controls are applied have important policy implications. Once we account for the startup effects, small businesses, per se, are not the engines of job growth they claim to be.

The policy implication here is that if you want to create jobs, you’re much better off encouraging startups than you are bending over backwards for small businesses, most of which are reasonably long in the tooth. And the interests here do diverge, although of course there are overlaps.

For me, the most important difference is the degree to which the two groups are reliant on a social safety net. Precisely because most startups fail, the founders and employees at such shops need to be able to know there’ll be someone to catch them if they fall. The success of Silicon Valley can be attributed in large part to a culture where people who have worked and failed at a startup are extremely employable. But on a national level, there are good reasons why we would want to move towards the Norwegian model.

Finally, it’s worth resuscitating this classic Kinsley column from 2008: the fact is that some of the richest members of the 1% are small business owners, while many of the hard-working 99% are in fact large business owners.

Big businesses are not owned by big people, and small businesses aren’t necessarily owned by small people. The typical shareholder in a big business is a worker in some other big business whose pension fund has chosen to invest in that company. Or a retiree who has bought this stock as his or her nest egg. Or it’s somebody’s 401(k).

So the next time a politician lionizes small business owners, remember that you are in fact a large business owner. And that small business, while it sounds romantic, isn’t nearly as important as the political rhetoric tends to make it out to be.

COMMENT

Commuting distance, time and rising cost of employees to reach the bigger employers must be having its effect on employees of the big box stores and other larger firms.

I live in a rural area where all the major big boxes are located in two of three regional cities that have small to middle sizes populations (30,000 to under 200,000). From where I live, commuting distance to the nearest is about a 50 mile round trip. To the farthest, it is about 150 miles RT. That eats into a low wage job quickly.

The town I live in is comprised of mostly small businesses but they are accessible within ten miles. There are only two large employers. One is a chain supermarket and the other is a subsidiary of a European manufacturer. It pays starting wages somewhat higher than locals, and as Felix notes, the locals are not large employers or good paying either. The super market put several smaller groceries out of business over night. The big manufacturer pays some benefits but isn’t generous. I think only management gets any benefits in the supermarket and the pay for most in near minimum wage. The local small businesses seem to hire mostly part timers.

There are several small scale manufacturers within a fifty mile commute south of here. Some of them have been around for decades and some for at least 50 years, I think. And there are several smaller manufacturers of lumber products, sand and crushed stone, some pre-cast concrete products and related building materials in the next town.

What difference does it make to lionize small firms of not? The fact on the ground say that the small employers are more numerous but no amount of praise is going to make them grow. But now, if either of the two big employers go under, the lower wage employees and a large part of the town would be out of luck. The town would have to live of the property tax from some well-heeled homeowners. Its small “downtown’ intersection is made of of four building and only one is occupied.

If fuel costs go up dramatically, the economic sense or even the possibility of working for the distant big firms is going to wither and there will be no room for those job seekers locally. Even the big town employers could face problems with long distance employees who will find their budgets erode just to get to work.

This country was designed for the private automobile and cheap fuel. High fuel costs will have disastrous consequences, especially for outlying suburban and rural areas. And there will be no cheap fuel no matter what anyone does. Cheap fuel makes the distances between towns and cities seem smaller and expensive fuel will have the opposite effect. There are no “emergency management” plans for that problem because I doubt anyone has given the possibility that fuel costs could cripple the country gas could much thought. All the wars in the ME are doing is transferring the costs of fuel security to the federal level and raising the price at the same time.

A possible RX for this difficulty would be to adopt some of the principles of what has been called “the New Urbanism” that tires to create mixed-use neighborhoods that incorporate residential, employment and institutional uses within walking distance. But the real estate collapse will make that a difficult fix now. Many of those most in need of more sensible housing within an easy commute of employment, will not be able to sell their underwater homes without a loss.

Posted by paintcan | Report as abusive

Norway, entrepreneurial paradise

Felix Salmon
Jan 20, 2011 15:25 UTC

Max Chafkin has a fantastic story in Inc magazine about how to structure an economy so as to encourage entrepreneurship, full employment, and general happiness and contentment, all while drastically reducing inequality. It’s easy, in fact: all you need to do is become Norway.

There’s loads of great stuff in this piece, and I’d encourage you to read the whole thing. But a few things stand out.

Chafkin starts with the tale of Wiggo Dalmo, an industrial mechanic with a high-school education who chafed under his bosses, set up his own shop, and is now running a $44 million company with 150 employees. That’s the kind of story which should be common in the US but is in fact rare. But ask yourself: in the US, how much would such a person be paying in taxes? Dalmo paid $102,970 in personal taxes on his income and wealth last year, which is probably lower, not higher, than the CEO of a $44 million company would pay in taxes in the US.

The reason is that there’s much less income inequality in Norway. With a strong social safety net, the downside to starting a company and failing is small. As a result, entrepreneurship isn’t a lottery, so much as a lifestyle choice. If you succeed, you’ll get to run a large and successful corporation. But you probably won’t pay yourself a monster income.

Why not? Well, for one thing, you won’t need to pay yourself a monster income, since things like healthcare and college education — even through grad school, even outside the country — are covered by the state. Another part of the reason is that income, in Norway, is a matter of public record. And then there’s the fact that money which would otherwise be going to the top of the pyramid is instead going to the bottom, where it does much more good:

In a country with low unemployment and generous unemployment benefits, a worker’s threat to quit is more credible than it is in the United States, giving workers more leverage over employers. And though Norway makes it easy to lay off workers in cases of economic hardship, firing an employee for cause typically takes months, and employers generally end up paying at least three months’ severance. “You have to be a much more democratic manager,” says Bjørn Holte, founder and CEO of bMenu, an Oslo-based start-up that makes mobile versions of websites. Holte pays himself $125,000 a year. His lowest-paid employee makes more than $60,000. “You can’t just treat them like machines,” he says. “If you do, they’ll be gone.”

Incentives matter, of course. But not all incentives are purely financial. And there are serious problems with the US system where the incentives seem to be structured so that a large number of people are competing to become one of a very small number of monster success stories — multi-millionaire startup founders, or sports stars, or CEOs. Most of us, it turns out, have problems with the idea of playing that kind of lottery. As Chafkin reports:

I also became convinced of this truth, which I have observed in the smartest American and the smartest Norwegian entrepreneurs: It’s not about the money. Entrepreneurs are not hedge fund managers, and they rarely operate like coldly rational economic entities. This theme runs through books like Bo Burlingham’s Small Giants, about company owners who choose not to maximize profits and instead seek to make their companies great; and it can be found in the countless stories, many of them told in this magazine, of founders who leave money on the table in favor of things they judge to be more important.

There’s a lot of talk, in the US, about how small businesses are the engine of employment growth — something we clearly desperately need. And it looks like Norway has cracked this nut: it leads the world in the creation of small businesses, and it has just 3.5% unemployment, not to mention essentially zero poverty.

Raising taxes on small businesses in and of itself won’t help the rate of small-business creation — but it’s actually unlikely to hurt it that much, either. (And interestingly, taxes paid by an employer in New York are actually higher than those paid in Norway.) What would help would be a much stronger social safety net, so that someone who starts a company doesn’t need to fear a life of poverty in the event that she fails. Encouraging small businesses necessarily means encouraging failure — but the cost of failure is very high, in the US. Instead, we spend far too much time worrying about tax rates on the successful.

There is precious little evidence to suggest that our low taxes have done much for entrepreneurs—or even for the economy as a whole. “It’s actually quite hard to say how tax policy affects the economy,” says Joel Slemrod, a University of Michigan professor who served on the Council of Economic Advisers under Ronald Reagan. Slemrod says there is no statistical evidence to prove that low taxes result in economic prosperity. Some of the most prosperous countries—for instance, Denmark, Sweden, Belgium, and, yes, Norway—also have some of the highest taxes. Norway, which in 2009 had the world’s highest per-capita income, avoided the brunt of the financial crisis: From 2006 to 2009, its economy grew nearly 3 percent. The American economy grew less than one-tenth of a percent during the same period. Meanwhile, countries with some of the lowest taxes in Europe, like Ireland, Iceland, and Estonia, have suffered profoundly. The first two nearly went bankrupt; Estonia, the darling of antitax groups like the Cato Institute, currently has an unemployment rate of 16 percent. Its economy shrank 14 percent in 2009.

You can’t blame all of Estonia’s problems on its low taxes, of course — the currency issue (Norway’s kroner is floating, while Estonia just joined the euro) is also huge. And Norway does have all that oil revenue, too. But looking at Estonia’s housing bubble and bust, one sees an economy where people are striving to get rich quick, in contrast to Norway’s culture of simply trying to be as happy and successful as possible. Which turns out to be extremely successful.

COMMENT

Great article! I’ve been wondering about the fact that in the USA the top environments for startups seem to be mostly in some of the highest taxed places…Silicon Valley, New York, Boston, etc. I’m not sure about taxes in Boulder and Austen relative to average communities but I know the top three are much higher. And yet young entrepreneurs continue to migrate there.

Posted by MikeInAtlanta | Report as abusive
  •