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Bailouts Don't Create Jobs: Startups Do

To spark job creation, the Obama Administration should invest in training and funding programs for entrepreneurs

by Vivek Wadhwa

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The government is spending hundreds of billions of taxpayer money to bail out companies like General Motors (GM), AIG (AIG), and Citibank (C) that are deemed too big to fail. Economists argue that these huge handouts are required to ensure the financial meltdown doesn't get any worse—and they may well be right. But these same economists would be hard-pressed to argue that favoring behemoths over startups and existing small businesses benefits the economy over the long term in any significant way. That's because massive, mature companies, particularly those that are struggling, don't create new jobs. Instead it is new businesses that fuel this country's employment growth. They're the key to our economic recovery.

Consider these stats: From 1980 to 2008, startups, defined in this case as companies less than five years old, accounted for all net job growth in the U.S., according to the Kauffman Foundation's Business Dynamics Statistics, a series of reports that rely on newly released data from the Census Bureau. The reports show that average annual net employment growth rate for startups was about 3% a year while the growth of the rest of the U.S. private sector for the same period was about 1.8%. So, without these startups, the U.S. net employment growth rate would actually be negative.

In other words, if President Barack Obama wants to foster a recovery, a good way to do so through the private sector is to focus on creating and supporting new companies. The current approach of pouring money into decrepit, poorly managed companies is actually a way to reverse job and productivity growth in the U.S.

Middle-Aged, Well-Schooled, and Married

Where should the Administration target its efforts? And who, exactly, is the typical entrepreneur? First, be aware of a few pervasive myths that surround entrepreneurship. For example, most tech entrepreneurs aren't young college dropouts, according to research conducted by my team at Duke along with Harvard's Richard Freeman. Instead they are typically middle-aged—39 on average—and well educated. Twice as many start ventures after 50 than during their early 20s. We also found they tend to be very well educated (92% have bachelor's degrees, 31% have masters, and 10% have completed PhDs).

I helped conduct a broader survey with Raj Aggarwal at University of Akron and Krisztina Holly of the University of Southern California of 549 company founders in a range fast-growing industries. It showed 70% of respondents were married when they launched their first company. What's more, 60% indicated they had at least one child when they launched their first business, and about 43% had two or more children. So much for the myth that entrepreneurs are single workaholics.

We also found that the majority of respondents (75%) had worked as employees for more than six years before launching their own company. Nearly half launched their companies with more than 10 years of work experience. A surprisingly high percentages of respondents started their first company after working 11 to 15 years (23%), 16 to 20 years (14%), or more than 20 years (10%) for someone else. So much for the myth that entrepreneurs are born, not made. (We plan to release more on the survey's findings in a report in May.)

 

What's holding workers back from starting businesses? What we learned was that most people simply don't know how to start companies. They have ideas and industry knowledge, but are afraid of the risk, lack certain skills, and need financing. With the recession causing millions to face unemployment, risk isn't much of a factor any more. We have a unique opportunity to start educating these workers on the basics of starting a profitable business.

Boot Camp

The Administration should start by taking some of the money it has allocated for economic recovery to set up entrepreneurship boot camps. It could take advantage of successful programs like Kauffman's FastTrac and set them up in community colleges throughout the country. To ease the financial burden on workers undergoing this training, the government could fund scholarships.

Once trained, entrepreneurs will need seed capital to get going. But most big banks, angel investors, and VCs have been reporting big drops in their small-business funding activities. The Administration should invest a few billion to create a dedicated fund for promising entrepreneurs. The fund would provide loans at attractive interest rates to encourage folks to strike out on their own. Such a fund should not be administered by government bureaucrats who don't understand industry or by venture capitalists preoccupied with exit strategies, but by regional organizations such as the Council for Entrepreneurial Development that have an interest in fostering entrepreneurship and boosting economic growth in their areas.

Imagine what we could have helped create with the $12.9 billion that went to Goldman Sachs (GS): tens of thousands of startups. One or two might have even become the next Google (GOOG), Amazon (AMZN), or FedEx (FDX). They would have ended up creating hundreds of thousands of jobs. And they might've developed innovations like the car, airplane, air conditioner, personal computer, or game-changing Internet applications. After all, previous generations of entrepreneurs invented these products. Let's give the next batch a hand.

Wadhwa is Wertheim Fellow at the Harvard Law School and executive in residence at Duke University. He is a tech entrepreneur who founded two technology companies. His research can be found at www.globalizationresearch.com.


New Challenges of Business Leadership
for Gen X

By Suresh K. Sharma

The earlier generation made a sea change to the way we now live in 21st century.

They invented new technology, innovated new tools, made vast number of new products, industrialized the world, lent tremendous impact to our homes, cities, land, geography, national boundaries, and boosted global economic activity. This 20th century era created its own generation of business leaders. Large iconic personalities recognized by their large enterprises. They were mostly global in operations, many a times bigger than the size of several smaller nations.

However, continuous innovation is inherent to man. We continue to march forward. So, what are the challenges facing the GenX in leading the businesses of the 21st century?

Firstly, it will help to understand the underlying speed of change happening right in front of the eyes of Gen X. The native ability of man is such that if you know someone can do a job, others will figure out how to do it too. And, in all likelihood, they will improvise, innovate and do a better job than before.

Take the example of Henry Ford, in Detroit U.S.A. He, at the turn of the 20th century, led the innovations in automotive mass production through assembly line manufacturing. The Germans followed suit and engineered their products very well. Both dominated up till WW II. But, soon enough, the Japanese Toyota & Honda significantly improvised car manufacturing for reliability and quality. The 70s and 80s saw their emergence as market leaders. Now they dominate it. Quick on their heels are the Koreans. Hyundai and others are already giving a tough competition to the Japanese, Germans, and Americans – and that too at a much lower price. During my extensive travels to China & India I’ve seen the same surge in subsequent innovations in this industry - the day may not be far when the likes of ‘Cherry’ and ‘Nano’ will be seen on the roads all over!

However, not surprisingly, while it took the automotive industry 100 years to become what it is, it is taking much less time for many other industries today. Given the nature of rapid knowledge sharing through telecom, travel, transportation, internet, global sourcing, and the fuzzy boundaries of global enterprises - the new world of innovation has become global – a virtual 24/7 knowledge factory. A new TV model takes only a few months to improvise, a new cell phone or a look-a-like iPOD appears every other week in the market place, and so on.

Managing and leading this rapid change with skills of 20th century management science, while driving the vision for the new millennium, is the fundamental new challenge for GenX business leaders.

Unfortunately, Gen X is neither sufficiently trained nor educated to meet these rapid changes – especially on a global scale. But, they are figuring it all out, while on the job. Can do they better?

Before we talk about what the Gen X can do, it is good to recognize that they do understand the main building blocks driving rapid global change.

Talking to several young professionals I discovered that the Gen X recognizes the impact of global homogenization more than the elder generation. On hind sight, it seemed very logical to me. However, a few quick points to recap the scene:

Much of the basic science, engineering and management knowledge have become very pervasive. They see extreme diversity of their class-mates in colleges attending all the same basic course work, and doing as well as anyone else. It does not surprise them. What was once considered ‘black magic’ in the ‘Industrial Age’ has gotten commoditized globally. How hard is it to build a bridge, a road, a machine, a tall building, a railroad, a metro, or a dam? Therefore, our young future business leaders of the 21st century do understand the value of outsourcing functions that are commoditized to anyone who can do it better than it would cost them to do. They do not politicize it as much as the elders do. For them, it is a fact of knowledge rather than an emotion-laden political issue.

Majority of the industry domain-knowledge has gone global too, especially in sectors like finance, automotive, power utilities, Telecom, infrastructure, etc. They are no more the privy of subject-matter experts of the advanced world. Further, opening up of markets has led to products looking the same. Our Gen X realizes it very well. They share the similar images of the kids playing the same music, sharing the same life style, same iPods. Malls look the same all over the globe (Did I say this was the most intangible U.S. export in 20th century?).

Last but not the least, given the right business eco-system – this process of global innovation can happen that much faster in a given society. The recipe for economic progress is no secret either. Increasingly, the Gen X is realizing the role a country and its policies play in making a business successful. Seeing this, on one hand, they are not only active in public political life, but they also do not hesitate to switch to other international locations where business environment is better. They are the true inventors and innovators of a ‘new brand of patriotism’ that does thrive outside our national boundaries for the real good at home. They indeed are global but yet thrive in its local pride and execution.

Now, how do you manage global product development, global project management, global brand, and then stay on top of global innovation? As it is, it is very hard to do it under ONE roof. How do you do it globally? There is a world-of-a-difference between the two.

The reality is: Traditional definitions of CEO, CFO and CMO have significantly changed in today’s world of fast changing global innovation. There lies a big opportunity for Gen X to emerge as the new Business Leaders of the 21st Century.

A new brand of CXO is in the making that will have the businesses in harmony with global environmental balance. In this context, the DNA of Gen X is far more compatible to evolve, lead the businesses in new ways to not only make them bigger, reach out globally, and also to strike a new harmony between business and sustainable environment.

Here are my TOP 5 reasons – the ones I believe may be the drivers and I believe that the Gen X has the potential to do better if they continue to be true to their existing DNA going forward:

• Learning to lead 21st Century businesses has to be done on the job. There is no good formal training or education program, even in some of the best corporations. This is a great competitive neutralizer for Gen X. Further, as always, B-schools are way behind in teaching this as their education curriculum content. However, the field operations in the business lead to the innovations. Therefore, the Gen X must not regret not having to go through any formal M.B.A. in this regard. The traditional science of M.B.A. and the decision-making tools one learns there are a commodity, anyways.

• What the Gen X can do … and it comes logically to them … is to lead the business through their own creative thinking … and questioning the prior art all the time.

• They adapt and are inclusive. It is natural to them. They must leverage it.

• They understand the power of commodity global sourcing and discrete supply chains easily.

• They are very comfortable with diversity and thrive on its complementary strengths.

The Gen X’s ability to fully grasp all the underlying issues is a strong indicator for success of the next generation businesses. I feel pretty confident that the young generation is ready to take a clearer and transparent role where they will indeed be driving a better balance between business, global society and the environment.

Suresh Sharma is Co-founder and CEO of JS3 Global ( www.js3global.com ), and Executive Director of India, China and America Institute ( www.icainstitute.org ).

Formerly, a senior executive at General Electric, he is a certified Six-Sigma Quality Master Black Belt well-known for his business leadership that combines pragmatic vision with operational excellence in the areas of Global Sourcing and Cross-border M&A.

Co-author of a recently published book "Global Outsourcing: Executing an Onshore, Nearshore and Offshore Strategy", he is widely recognized for his pioneering contributions in setting up global sourcing centers in R&D, Engineering Services, IT, Business Process, Manufacturing, Healthcare in India, China, Canada, Mexico, Central Europe and Asia. Further, his most recent position at GE was Global Technology Leader for a $1.2 billion business-segment of GE Energy, Atlanta wherein he played a key role in the creation and integration of this business from scratch through 22 global acquisitions.


GM and Chrysler face possibility of
a government enforced bankruptcy

By Matt Welsh

President Obama recently declared, “We cannot, we must not, and we will not let our auto industry simply vanish.” These strong words echo the gravity of the current economic situation facing GM and Chrysler. In order to help them survive, the government is proposing an enforced bankruptcy.

President Obama explained how a bankruptcy might help when he said,

"I know that when people even hear the word 'bankruptcy,' it can be a bit unsettling, so let me explain what I mean," he said. "What I am talking about is using our existing legal structure as a tool that, with the backing of the U.S. government, can make it easier for General Motors and Chrysler to quickly clear away old debts that are weighing them down so they can get back on their feet and onto a path to success; a tool that we can use, even as workers are staying on the job building cars that are being sold." The current administration prefers this option rather than the out-of-court process that has frustrated administration officials.

This proposed bankruptcy comes after GM and Chrysler received $17.4 billion in government loans in December. The government has also stepped in by guaranteeing warranties on cars sold by GM and Chrysler. GM and Chrysler responded to this by asking for $22 billion more. GM has not been profitable since 2004 and their stock price has dropped from $70 in 2000 to as low as $3.62 in April 2009. The bankruptcy filings would virtually eliminate bondholder debt and retiree health care costs from the companies.

GM and Chrysler may avoid bankruptcy in the next two months. But, they would have to get the UAW to agree to an entirely new labor contract that would include significant reductions in health-care benefits. Newly appointed GM CEO, Frederick Henderson told employees and dealers the company will end up in bankruptcy court if it does not significantly accelerate its restructuring efforts.

President Obama outlined what will happen if there is an enforced bankruptcy when he said,

"What we are asking is difficult," he said. "It will require hard choices by companies. It will require unions and workers who have already made painful concessions to make even more. It will require creditors to recognize that they cannot hold out for the prospect of endless government bailouts."

This proposed enforced bankruptcy is another troubling sign of America’s economy. There is no way to sugar coat an enforced bankruptcy. It is essentially the result of an economic triage. The basic argument in favor of government intervention is that the auto industry to vital to America’s economy and national security to let it fail and the government needs to do something. However, there is no guarantee these companies will be profitable again, even with this continued government intervention - as seen with the first auto industry bailout.

Matthew Welsh graduated from Indiana University-Indianapolis Law School in 2007. After graduating from law school, he worked for a top entertainment agency in Hollywood. While working in the entertainment industry, he realized the importance of raising public awareness for emerging spiritual entertainment. This drove him to create http://www.spiritualmediablog.com, the news source for spiritual entertainment. He is also the author of The Bottom Line and speaks to high school and college students about how to turn your passions into your career path.

He can be reached at Matthew@MatthewWelsh.com

Disclaimer: The views and opinions expressed in these columns are solely those of the writers/interviewees and do not necessarily represent those of the editor/publisher.


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