State vs entrepreneurial capitalism
The post-crisis world has been in part shaped by the growing presence of sovereign wealth funds, which have become an important source of funding with their $4 trillion assets, replacing private equity and hedge funds. But some people are wondering whether state capitalism really is the way forward, to boost the potential growth rate of the post-crisis world.
Robert Litan, senior fellow at the Brookings Institution, believes that in fact it’s entrepreneurs who would play a key role, and it’s important for policymakers to come up with a mechanism to help them.
Litan estimates that the United States needs 30-60 new “home-run” firms a year with annual sales of $1 billion to boost U.S. growth rate by one percentage point beyond its post-war average of 3 percent. This is double the past 150-year average of 15 firms a year.
“Enterpreneurial capitalism is the defining concept of 21st century economics. The state firm model might work for countries that are behind, but at some point we need entrepreneurship,” Litan told a briefing hosted by Legatum Institute, an independent public policy think tank.
Litan, who is also vice president for research and policy at Ewing Marion Kauffman Foundation, says “crowd funding” is one innovative way to help entrepreneurs.
Currently popular with film, tech and art start-ups, crowd funding is a new capital-raising technique that allows investors to take small equity stakes in new firms over the Internet.
Currently, U.S. companies are allowed to raise up to $2 million annually from investors pledging no more than $10,000 or 10 percent of their annual income, without registering with the SEC. But plans are under way in the United States to review rules to make it easier for start-ups to access crowd funding and protect investors.
Critics worry that since it’s based on the Internet, anyone (including crooks) can potentially raise money and it could lead to investor scams. Litan disagrees:
“I’m becoming a religious convert to this. When eBay started, people thought it was an invitation to fraud… People will find ways to validate themselves. I think the market will develop trust mechanism,” he says.
“I’m highly confident the UK will consider this seriously… It’s a huge opportunity for companies to raise money. People who will figure out crowd funding will be the next Facebook.”