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Harvard University Study: Government Venture Capital Programs Tend not to Work

March 13, 2010 at 8:32 pm Matt Leave a comment Go to comments

David Luberoff, Executive Director of Harvard University’s Rappaport Institute for Greater Boston, talks about an interesting study that I think matters to the Third Frontier ballot issue debate:

Why are some metropolitan areas so much more entrepreneurial than others? Silicon Valley seems almost magically entrepreneurial, with a new startup on every street corner, but in declining Rust Belt cities such startups are far and few between.

In a new Policy Brief published by Harvard’s Rappaport Institute for Greater Boston, which is sponsoring a series of talks on geography and entrepreneurship, economists Edward Glaeser and William Kerr report that high levels of entrepreneurship are closely correlated with regional economic growth, which means that local policy makers who are looking for ways to rev the economic engines of their cities often are interested in policies that can generate more entrepreneurship.

Glaeser and Kerr use the presence of small firms as a proxy for entrepreneurship and find, that all else being equal, regional economic growth is highly correlated with an abundance of smaller firms. Specifically, they found that a 10 percent increase in the number of firms per worker in a metropolitan region in 1977 was associated with a nine percent increase in employment growth in that region between 1977 and 2000. Looking more closely at the connection between small independent firms and subsequent growth, they report that a 10 percent increase in average establishment size in 1992 was associated with a 7 percent decline in subsequent employment growth due to new startups. Regions with lots of small firms, in other words, tend to experience faster job growth than those with a few big ones.[...]

Even so, they note, the available evidence does suggest a few tentative policy conclusions. First, investing too much in attracting large, mature firms may not be good policy. These firms may provide an immediate headline associated with new jobs, but encouraging a profusion of small, independent firms is more likely to lead to sustained economic growth

Second, there is little reason to have much faith in the ability of local governments to play venture capitalist through public investment funds. Classic economic research found that Japan’s Ministry of International Trade and Investment, which was staffed with Japan’s best minds, generally picked losers. Why should local investment funds be able to do any better?

Interesting, but not surprising results. Private sector investors are more savvy at picking winners, since political considerations are not involved in the investment process.

While “angle investors” are nimble and savvy enough help capitalize promising new businesses, Ohio’s angelic politicians are only concerned with campaign contributions.

And the pressure not to oppose the 3rd Frontier — which would put many Republicans on the outs with various business interests – is so intense that this debate over principles and wasteful spending will only matter if politicians start paying a serious political price for redistributing your money.

But unlike the easy-to-grasp concept of the 39 MPH train, this is a harder sell to Ohio’s MSM, because the waste and inherent abuse in such a program takes actual reporting skills and an education in economics.

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  3. 3rd Frontier’s Job Creation
  4. Rob Portman’s Plan for a 12-Month Payroll Tax Holiday is a Joke
  5. Selling Ads on Government Websites

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