“Startup America”: A Vision for American Entrepreneurs: What Role for Global American Entrepreneurship?
Posted February 11, 2011 by Bierce & Kenerson, P.C. · 
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On January 31, 2011, President Barack Obama’s office released a “Startup America” plan to promote entrepreneurship. The “Startup America” initiative proposes to “celebrate, inspire, and accelerate high-growth entrepreneurship” throughout the nation by coordinating public and private effort to create “innovation ecosystems” that brings together innovative entrepreneurs, corporations, universities, foundations, and other leaders, working in concert with a wide range of federal agencies. The “Startup America” initiative seeks to promote entrepreneurship as the core of an innovation strategy for achieving sustainable growth and quality jobs. It builds on the Job Creation Act of 2010, but does not address many legal issues in the global economy.
Overview. Given the high level of unemployment in America, President Obama is taking a new initiative to promote small businesses for U.S. job growth. The program addresses key issues in:
- capital investment in “high-growth startups,”
- education and mentorship to empower entrepreneurs,
- commercialization of federally-funded research and development in which taxpayers invest about $148 billion per year,
- identification and removal of “unnecessary barriers” to high-growth startups; and
- collaborations between large companies and startups.
Tax Incentives for Small Businesses.
Capital Gains Tax Exemption. “Eligible small businesses” would qualify for permanent elimination of capital gains taxes on their share. Already the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Job Creation Act”) provides a 100-percent exclusion from tax for capital gains realized on the sale of certain small business stock held for more than five years. Under current law, the amount of gain eligible for the exclusion is limited to the greater of $10 million or ten times the taxpayer’s basis (net investment) in the stock. This tax relief applies to qualified small business stock issued after December 31, 2010, and before January 1, 2012. President Obama’s FY2012 budget proposal would make this provision permanent to increase private sector investment in small businesses.
Eligiblity Rules. The 2010 Job Creation Act limits the tax incentive to C corporations, whose profits are taxed at the corporate level and again, upon distribution of dividends, at the shareholder level (where shareholders pay their proportionate tax share on dividends received) This limitation contradicts decades of efforts to promote small business through S corporations, limited liability companies and limited partnerships, whose owners are taxed on the entity’s income but the entity does pay taxes.
Empowerment Zones. The Job Creation Act of 2010 extended through 2011 the period for designation of “empowerment zones” in the U.S. Jobs created in “empowerment zones” allow certain tax incentives for investment in such zones, including wage credits, accelerated depreciation of business equipment, tax-exempt bond financing, and deferral of capital gains on the sale of business and investment property. The one-year extension would become permanent under the “Startup America” initiative.
Work Opportunity Credit. The Job Creation Act of 2011 extended through 2011 the existing work opportunity credit for employers.
Small Business Administration.
The Obama initiative would use the SBA for additional lending to small businesses. This would be useful but is already available and merely represents an effort to allow some adjustments in existing lending criteria.
Piggybacking on Private Sector Initiatives.
The “Startup America” program would rely on existing non-profit organizations and private businesses to promote mentorship, special educational training in entrepreneurship and private equity investments in new small businesses. This is nothing new, including “partnership” with existing initiatives that the government did not initiate or specially support till now.
Critique.
Dysfunctional Tax Policy. As a matter of tax policy, exemption from capital gains stimulates capital risk investment. New business investment typically includes R&D, capital expenditures and jobs. But most entrepreneurial ventures are small, do not hire large numbers of employees and cannot expand employment because they focus on R&D and product development. Venture capital is essential since, unlike large corporations, small businesses lack cash reserves and the ability to issue bonds in capital markets.
This tax policy is dysfunctional because it fails to grant tax benefits for operations and thus fails to assist investors who would invest (or not) regardless of the capital gains incentives. Small businesses lack working capital, so long-term capital gains exemptions do not fill the gap caused by increased caution and reduced levels of bank lending. As one commentator noted, with no working capital, small businesses just go bankrupt. The legislation would have been more effective if it hadincluded some incentive for increased lending rates for banks (allowing the banks to lend to smaller companies with some levels of viability risk). Further, capital gains tax exemption is not the prime motivator for venture capital or private equity, which both seek high growth in cash flow, market share and slower growth in employment and capital expense costs.
Band-Aid® Solutions. The Job Creation Act of 2010 was a temporary palliative to extend expiring tax incentives, expiring exemptions under Bush-era estate tax reductions and other plans. The Startup America program focuses on making such incentives permanent.
Aside from putting one Band-Aid® on top of another, the Startup America initiative fails to address the core challenges of the global “knowledge economy” built on the WTO’s Uruguay Round agreements in 1993. The initiative lacks inspiration or information about the global services economy, global sourcing, comparative advantage in sourcing of services, and the viability of the American entrepreneur as a competitor in global markets. The vision for “entrepreneurial education” has roots in private enterprise and private initiatives for private enterprise. It does not seek to understand foreign cultures, purchasing habits or languages. It seeks to promote clean-tech and “innovative” jobs, but these sectors are small. There are limits to both the wisdom and financial capacity of the Government to promote local jobs.
But, at least, it’s not as nationalistic as certain countries, which merely convert the Government into the Employer of Last Resort in lieu of the dole.
Global Entrepreneurship. President Obama’s newfound zeal for promoting small business might be more effective if he were to promote “global American entrepreneurship.” A global approach would promote:
- sustainable cash flows from global revenues to support, upon repatriation, American investors;
- increased American wealth from classic global capitalism;
- increased American competitiveness, as to small and large businesses, as entrepreneurs look to global markets for both sourcing of innovative talent and sales of goods and services;
- substitution of American services for foreign services, in cases where foreign BPO service providers have developed robust service delivery models with lower costs per employee.
Global entrepreneurship needs to address key challenges for any modern business:
- the procedures for developing and implementing an entrepreneur’s business plan, including the unique selling proposition that relies upon proximity to the customer, cultural fit, flexibility and speedy adaptability;
- the uses of insourcing and outsourcing in innovation, global entrepreneurship, strategic alliances and capital allocation;
- mobility of people, process, technology and products and services to reach growth markets;
- technological innovation, including process innovation;
- intellectual property rights as the core foundation for a knowledge-management economy, especially in countries that lack either the laws or the culture for protection and vigorous enforcement;
- redundancy, resiliency and robustness of the technological platforms, such as the public cloud;
- branding;
- compliance with complex regulatory mandates;
- internal operational governance including transparency and responsiveness to stakeholders (as broadly defined); and
- risk management.
The editors welcome your thoughts on this controversial topic of law, public policy and international trade in managed services. To contact us, please e-mail: publisher@outsourcing-law.com.
Further reading:
• “Startup America” Initiative: http://www.whitehouse.gov/startup-america-fact-sheet (Federal Government website)
• Private Sector Entrepreneurship Training: www.startupamericapartnership.org (Not-for-profit organization)