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American Formula For Growth- National Commission on Entrepreneurship

A research paper by the National Commission on Entrepreneurship delves into an interesting question -whether or not public policy had something to do with the developing entrepreneurial economy from 1958-1998.

The belief is a mix of federal policies may have incubated the growth of the entrepreneurial economy. During this period, lawmakers began to set into motion the complex legal framework that defines entrepreneurship and the small business.

Increased access to capital, research, development, and intellectual property protection, and establishing small business infrastructures were three structurally significant steps taken by lawmakers to ease into the entrepreneurial economy of today.

The rise of entrepreneurial growth
companies (EGCs) has been one of the most
significant developments in the American economy
over the last 40 years.

These companies have not
only created millions of new jobs and brought
thousands of innovations to market, but they have
also been important change agents in the
economy and society—contributing to large
productivity gains, radically transforming whole
industries, and, in turn, contributing to an everimproving
standard of living for Americans.

Although this report appears at a time of
sluggish economic growth, preceded by the
Internet-telecommunications boom and bust of
1998-2001, and accompanied by the market and
political turmoil caused by major corporate accounting
scandals, it takes a longer view. It focuses not on the last four years, but on
the last 40 years of an “entrepreneurial revolution” that changed the
dynamics of the American economy.

The question occurs: did public policy in the United States have anything to
do with the rise of this entrepreneurial economy?
The founding members of the National Commission on Entrepreneurship had
an instinctive, intuitive sense that there was, in fact, a complex mixture of
public policies that, intentionally or not, contributed basic ingredients for
developing the American formula for growth through entrepreneurship. This
formula helped lead to the creation of the entrepreneurial economy. The
Commissioners also believe that there remains an unclarified combination of
policies that, if acted upon, will enhance that formula and advance the entrepreneurial
revolution over the coming decades.

There is a kind of genetic
3
ingredients
code of democratic capitalism that, if protected and extended, would expand
entrepreneurial opportunities for future generations.
To explore this intuition, the National Commission on Entrepreneurship
gathered experts on both the east and west coasts who participated in
building this entrepreneurial economy over decades. These builders of our
entrepreneurial economy—veteran venture capitalists, lawyers, accountants,
educators, and entrepreneurs themselves—shared their ideas about policy
decisions that support today’s entrepreneurs. They identified five major areas
of public policy that made a profound difference. Policymakers may not have
fully understood what they were doing, since the effects of many policies on
the entrepreneurial sector are often by-products of policies addressing other,
broader issues. They also may not have intended the consequences that
resulted.

But it is hard to imagine the success of American EGCs—and thus
much of the success of the American economy in the last 40 years—without
these policy measures.
Importantly, policymakers began their work in a legal framework that is too
often taken for granted but lies at the foundation of the entrepreneurial
economy’s success. The most useful measures which helped develop the
American formula for growth fall into five key areas. But policymakers could
craft useful measures in these five areas only because of the nation’s prior
commitment to a rigorous constitutional and legal system. This system
provides a foundation of a society governed by the “rule of law”—a standard
that many emerging economies cannot yet meet.

Five Key Ingredients Contributing to the American
Formula for Growth:

Creating Financial Markets to Fund EGCS.

The capital needs of EGCs range
widely, depending on the stage of development: start-up (up to $300,000);
early stage ($300,000 to $3 million); and the venture capital stage ($3
million and up). To increase capital access at each of these stages, policymakers
from time to time made critical changes to the securities, banking,
bankruptcy, tax, and pension laws, as well as creating some new programs to
fund businesses directly. Moreover, public policy supported a framework for
increasing market liquidity. For example, the creation of NASDAQ greatly
enhanced investor liquidity and, consequently, EGCs’ ability to raise capital
in public markets. And the accounting, anti-trust, and tax law treatment for
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mergers and acquisitions provided alternative and robust avenues for
investor liquidity.

Providing R&D and Intellectual Property Protection For Technologies that
Underlie Many EGCs.

Public policy played an instrumental role here in
several ways. First, policymakers funded the research and development of
new technologies. Second, over time they allowed universities and labs to
license for commercial use any and all of the technologies developed with
federal funds via the Bayh-Dole, Stevenson-Wydler, and National
Competitive Technology Transfer Acts. And finally, they steadily pushed the
pendulum back in favor of increasing intellectual property protection for
EGC innovations through myriad changes to the patent and copyright laws
and to the judicial process through which such rights may be asserted.

Investing in Technically Talented People and Enabling Them to Move to
EGCs.

Federal policymakers’ response to the Sputnik challenge was to
channel more money into research universities and student aid programs to
produce new caches of scientists and engineers. Liberal immigration policies
allowed large numbers of technically trained immigrants to join the effort.
And to encourage the movement of key people to EGCs, they adopted taxfavored
Incentive Stock Option, Employee Stock Purchase, and Employee
Stock Ownership Plans.

Finally, policymakers made it easier to move from
company to company by giving COBRA protection to employee health-care
benefits, and by establishing defined-contribution pension plans that vest
early and follow the employee.

Opening New Markets and Easing Entry for EGCs.

Policymakers opened
this 40-year period by creating a truly national domestic market through the
adoption of the Uniform Commercial Code. The most significant policy
contributions in this area came with the deregulation of the airline industry,
the package delivery industry, the trucking industry, the telecommunications
industry, and to some extent, the information technology industry—opening
large new market opportunities for EGCs.

Finally, these efforts were complemented
by 40 years of aggressive trade policies to open overseas markets,
beginning with the General Agreement on Tariffs and Trade.

Establishing a Robust and Dependable Infrastructure.

Entrepreneurial
growth companies also benefited from federal policymakers’ attention to
establishing the nation’s extensive transportation and communication infra-
5
structure. Large sums of money were appropriated to build the federal
interstate highway system, the national port (air and sea) system, and the
telecommunications/wireless and Internet infrastructure. And the generous
federal support for the nation’s colleges and universities—through the G.I. Bill
of Rights, the National Defense Education Act of 1958, the Higher Education
Act, and the National Science Foundation’s investments—helped make
America’s higher education system the best in the world.

Finally, while we have recognized in recent years the higher rates of job and
wealth creation generated by innovative EGCs as they grow, we sometimes
fail to note that federal public policy over the last 40 years also has
encouraged this entrepreneurially created wealth to be reinvested in the
nation’s communities by providing for tax-favored philanthropy.
The Policy Challenges for the Future. These five major areas of public policy
contributions produced an environment conducive to the start-up and
growth of EGCs.

But issues remain. What challenges do we face to improve
America’s international competitiveness, long-term economic growth, and
national security? And what particular policies figure into those challenges?
Before addressing specific policy challenges, the report urges two guiding
principles on federal policymakers. First, policymakers should be aware of and
should do no harm to the existing federal policy formula from which entrepreneurs
and the nation benefit.

Second, in attempting to further accelerate
entrepreneurship in America, policymakers should note that for entrepreneurs,
the best role for government is to set up the “rules of the game” at the macrolevel
and to use the private sector to deliver program services at the microlevel.

For example, public policy is most effective when it:

• fosters institutions (NASDAQ, SBICs) that are based on private investors
as the first risk-takers and are privately run;

• increases investor confidence in the integrity of self-regulatory mechanisms
(FASB, GAAP, NASDAQ);

• invests in long-term institutional research and development, including
basic research, that businesses may not do on their own (NIH funding);

• clarifies who owns what property and thus who has the incentive to
exploit it commercially without conflict of interest (Bayh-Dole, patent
and copyright law);

• uses its uniquely governmental prerogatives (the power to tax, regulate
immigration, procure goods and services for itself) to encourage the
formation and growth of entrepreneurial companies (favorable capital
gains tax rates on EGCs, tax-favored stock options plans, H1-B visa
program);

• uses its trade negotiation powers and statutes regulating domestic
commerce to enhance market opportunities for EGCs generally (trade
expansion, industry deregulation, vigorous competition policy); or

• provides the physical, education, cultural, and recreational infrastructure
that is especially valuable to start-up and growing companies.

A supportive policy framework has proven to be more effective in creating
an entrepreneurial economy than have programs providing direct funding to
companies. Such programs have too often resulted in companies’ continued
dependence on subsidies by substituting political imperatives for market
imperatives.

For the full report: http://www.ncoe.org/research/4367_NCOE_AMERFORM.pdf

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