14 posts categorized "Entrepreneurship"

Made in (but not owned by) the USA

Investment is typically seen as a sign of economic strength, as people and financial entities put their money where they believe it can be most productive and profitable. Foreign direct investment (FDI) tracks the amount of money international firms invest in the United States, and a recent report on the matter by the Brookings Institution shows that it’s growing in the Ninth District, but not as fast as it is elsewhere in the country.

In 2013, for example, companies invested $1.46 trillion in locations outside their home country, and the United States is the single largest destination of that capital, receiving $193 billion, according to the report. This investment manifests itself in many forms: spreading technology, facilitating the exchange of knowledge and inducing new trade.

It also employs millions of people, which the Brookings report investigated more closely. Among Ninth District states, the trends are somewhat diverging. In five Ninth District states (cumulative), total employment at foreign-owned establishments (FOEs) grew by about 50 percent from 1991 to 2011, and the share of total private employment at FOEs increased as well (see Chart 1). The growth in this share of employment tended to be modest—about one-half of a percentage point—with the exception of North Dakota, whose share of FOE employment tripled over this period, most likely as a result of foreign firms investing resources in (and hiring workers for) the Bakken oil patch.

However, across the board, district states have a lower share of FOE employment than the national average and (with the exception of North Dakota) saw less growth in the share of FOE employment. As a result, most distrct states fell in ranking among their peers in FOE’s share of total private employment (see table embedded in Chart 1).

One caveat to FDI trends: Much of this investment is the result of acquisitions or mergers of U.S. companies by international firms. So a considerable amount of the resulting “growth” in FOE employment is a methodological quirk—namely, a shift in the nationality of the parent company. This was particularly the case in North Dakota. Among district states, only Wisconsin was close to the national average in the share of FOE employment growth coming from new openings (see Chart 2).

FDI Ch1-2

New businesses: The young and the (hopefully) established

Research has shown that young firms are an important source of economic activity and innovation. While their numbers took a beating during the recession, there are signs of life in Minnesota for new establishments. Unfortunately, employment at these businesses has not yet rebounded.

The Bureau of Labor Statistics tracks the annual number of establishments by age, as well as employment at these businesses. In Minnesota, total establishments less than one year old tended to run around 10,000 annually—give or take—until the recession, when they plunged to a low of 7,300 in 2009 (see chart). They have rebounded modestly in recent years, including 9,500 in 2012.

Survival rates of these young establishments have also faltered, though this trend got started before the recession. From 1994 to 2003, new establishments had an average five-year survival rate of almost 56 percent. Survival rates for the 2004 cohort group—those still around in 2009—fell below 50 percent and got as low as 44 percent before rebounding to 49 percent for the most recent 2008 cohort group.

But one important measure has yet to recover: jobs. Since 2001, employment at these young businesses has fallen steadily, getting cut in half to 40,000 as recently as 2011—with most of the loss coming during and subsequent to the recession (see chart). While there has been a small bounce over the last two years, young establishment employment is still well below prerecession levels.

  Establishments -- 4-25-14

Businesses expect hiring to continue in 2014

There are renewed signs that the Ninth District economy continues to grow based on a recent poll of more than 100 business contacts from around the district (see methodology).

Businesses are expecting to expand; 41 percent plan to increase employment at their firms, and 58 percent of these firms cited expected high sales growth as the most important factor. Only 9 percent plan to decrease employment. In the same survey a year ago, 40 percent planned to increase employment and 7 percent planned to cut jobs (see chart).

Other important factors cited for new hiring were overworked staff, the need for additional skills, and improved financial condition of firms. The vast majority of respondents plan to use current employee referrals, word of mouth and advertising to get new employees. Twenty-two percent plan to use a recruiting firm, and only 8 percent plan to raise starting pay.

For those respondents not planning to hire additional people this year, most reported that finding skilled candidates is hampering hiring, or they wanted to keep operating costs low or expected sales growth to be low.

Ad hod survey chart -- 1-14-14

Methodology: On Jan. 13, the Minneapolis Fed invited, via email, about 500 Beige Book contacts from around the Ninth District to answer the special question in a web-based survey. By Jan. 14, 104 contacts had filled out the survey. The respondents come from a variety of industries (see table).

Ad hod survey table -- 1-14-14

Little GDP engines that could: District metros see strong growth

Metropolitan regions now account for more than 90 percent of the nation’s gross domestic product (GDP), according to the Bureau of Economic Analysis. Given their economic and geographic diversity, metros offer a more detailed look at growth across states and the nation—one which shows that metros in the Ninth District are generally seeing faster growth.

Nationwide, 305 of 383 metropolitan regions (80 percent) saw economic growth in 2012. In the Ninth District, 13 of 15 metros grew last year, or almost 87 percent, and two of three district metros beat the national average of 2.5 percent (see left chart). A large region encompassing much of the lower half of Minnesota—including the Twin Cities, St. Cloud, Rochester and Mankato metros—saw growth over 3 percent (see map, at bottom).

But as has become the norm, North Dakota metros were leading the metro pack, with Bismarck at the top at 8.5 percent growth last year, one of the top rates in the country. The region is seeing spillover effects from strong growth in the Bakken oil shale region to the west. Other shale regions are also seeing explosive growth; in the Eagle Ford oil shale region of Texas, the metros of Midland and Odessa both saw growth of 14 percent.

There were two district metros whose economies shrank last year: Duluth, Minn., and Great Falls, Mont. The source of contraction is hard to determine exactly. In the case of Duluth, the city and broader region experienced a major flood in June, which likely dampened economic activity, particularly tourism; the previous two years it had experienced annual growth near 3 percent.

Last year’s growth among district metros continued a general trend in outperforming metros elsewhere. Over the previous three years, 11 of the district’s 15 metros had faster annual growth than the national average (see right chart).

GDP of metros -- CH1-2

GDP metro MAP - 9-18-13

Newborn businesses crawling again, jobs not following in tow

It’s well known that starting a business is tough. New data on establishments suggest that entrepreneurs are starting to regain their appetite for risk after getting scared to the sidelines during the recession and slow recovery.

According to figures from the U.S. Census Bureau, the annual number of establishments that are less than one year old has been slowly rising. While still not above prerecession levels across Ninth District states, all states saw positive growth in 2012; for most, it was the second consecutive year (see Chart 1). For North Dakota, it was the second straight year of record new establishments.

New establishments Ch1 -- 7-31-13

It’s also well known that these young businesses are an important source of employment because young companies tend to be growing and thus require more labor compared with older companies (for those who need convincing, see the July 2011 fedgazette). Jobs have been rising at these young establishments, but the overall track record is a little less consistent and upbeat. For most district states, last year was the first real year of solid job growth (see Chart 2). These jobs declined last year in Wisconsin, its trend line zig-zagging since 2009 along with Minnesota’s.

New establishments Ch2 -- 7-31-13

Annual job levels are still well below prerecession levels in four states. That’s because average employment at these young establishments has been going down steadily (see Chart 3). Minnesota’s average employment has gone down by one and a half workers since 2007; Wisconsin and South Dakota saw a drop of almost one worker.

The exception to all the job trends is North Dakota, whose economy is the best in the country and comparable to almost no other state right now. Last year, both new establishments and total jobs at these businesses outstripped those of Montana, whose population is more than 40 percent larger. North Dakota even saw small growth in the average number of jobs per young establishment between 2007 and 2012.

New establishments Ch3 -- 7-31-13

An economic development idea worth patenting?

What helps economies grow? That question vexes economists, economic development professionals, policymakers and local government officials looking for something to generate faster growth in local and state economies.

Innovation is widely believed to be important for local economies because the invention and introduction of new ideas can create long-lasting effects for business. But getting your hands around that notion and turning it into pursuable policy might be another matter.

Some equate innovation with patents. A recent Brookings Institution argued that “inventions, embodied in patents, are a major driver of long-term regional economic performance.” The study mapped patents nationwide and found that U.S. patent levels have been increasing in recent decades, and an increasing concentration of patents is coming from the top 20 metropolitan statistical areas (MSAs).

But do high patent levels lead to measurably better economies? The Brookings report did not answer that question definitively, and there are enough struggling metros in the top 20—Detroit, Philadelphia, Phoenix—to suggest that it’s not a perfect correlation. California has four of the top eight MSAs in patent production, yet all of them have high unemployment rates; San Francisco took the top patent spot, but its average unemployment rate from 1990 to 2011 ranked 161st of almost 360 MSAs analyzed.

Among 24 MSAs in Ninth District states (including 10 in Wisconsin that are located outside Ninth District boundaries), there was a wide range of patents per thousand workers (see Chart 1). Rochester, Minn., lapped much of the competition several times over—it ranked third best nationwide in patents on a population basis, thanks mostly to being home to an IBM campus. Wisconsin MSAs, many of them manufacturing hubs, also tended to rank high. But patent levels at a majority of MSAs in district states were less than one per thousand workers; only one in three regional MSAs was above the national average of 0.6 patents per thousand workers.

Not surprisingly, the top ranking MSAs tended to have a larger share of technology jobs as a share of all employment, as well as a higher proportion of workers with degrees in science, technology, engineering and math (so-called “STEM” degrees; see Charts 2 and 3. In the four scatter graphs, the MSAs from Chart 1 are rank-ordered, so low-ranking Great Falls = 1, high-ranking Rochester = 24).

However, patents themselves are not a particularly good predictor of economic growth over time. As Charts 4 and 5 demonstrate, there is virtually no relationship between recent patent trends and either growth rates per worker or unemployment rates.

None of this means that patents and other innovations are not valuable to local economies. It only means that local economic activity is a complex recipe, and patents are likely only one ingredient for faster growth.

Patents -- 2-20-13

More evidence that businesses expect to grow, increase hiring

Signs are upbeat that the Ninth District economy will continue to grow, according to a recent poll of more than 300 business contacts from across the district (see methodology below).

For starters, 40 percent plan to increase employment at their firms, and nearly three-quarters of these firms cited expected high sales growth as the most important factor. Only 7 percent plan to decrease employment. In the same survey a year ago, 38 percent planned to increase employment and 10 percent planned to cut jobs.

Other important factors cited for new hiring were overworked staff, improved financial condition of firms and the need for additional skills. The majority of respondents plan to use word of mouth and advertising to get new employees. Twenty-eight percent plan to use a recruiting firm, and surprisingly few (9 percent) plan to raise starting pay.

For those respondents not planning to hire additional people this year, most expected low growth sales and a desire to keep operating costs low. Many reported difficulty finding skilled candidates. Though fiscal policy developments were not a factor for most respondents, 35 percent said they had a detrimental effect on hiring and 4 percent said they would increase hiring plans.

The survey also asked about wages and benefits; 36 percent expected wage growth of 2.5 percent or more, and a similar amount expected positive wage growth of less than 2.5 percent (see Chart 1). Respondents generally believed benefit increases would be larger than those for wages (see Chart 2).

  Ad hoc survey Ch 1-2 -- 2-5-13

Methodology: On Jan. 15, the Minneapolis Fed invited, via email, about 1,000 Beige Book contacts from across the Ninth District to answer the special question in a web-based survey. By Jan. 31, 303 contacts had filled out the survey. The respondents come from a variety of industries (see table below).

Ad hoc survey METHOD TABLE -- 2-5-13

The state(s) of entrepreneurship

Everybody loves a ranking, except when you’re on the unflattering end. That’s particularly the case when it comes to business and entrepreneurial types of rankings, because economic activity and jobs are so desperately desired.

So it is that some states are clapping or wringing their hands over a recently released annual index of entrepreneurial activity by the Kauffman Foundation, the largest foundation in the world dedicated to entrepreneurial research. The index captures new business owners in their first month of significant business activity and then tabulates a score based on a state’s adult population (per 100,000 people). Kauffman uses consecutive-month reports from the Current Population Survey from the U.S. Census Bureau. It flags people who report working for themselves for at least 15 hours per week during the past month (and not doing so the month before that).

District states didn’t fare particularly well in the rankings. Montana was the only state to exceed the national average, and South Dakota came within a whisker (see chart). But North Dakota, Minnesota and Wisconsin lagged well behind.

Entrepreneur -- 4-18-12

Such rankings hold some interesting insights into entrepreneurial activity. But they are not particularly good barometers of a state economy or the economic well-being of its residents. For example, among the top six in entrepreneurial activity, half of the states were in the bottom half of per capita income, compared with only two of the six states with the lowest index ranking. Average income gains in 2011 also favored low-ranking states over high-ranking ones. On average, those in the bottom of the index also had lower unemployment than high-entrepreneurial states (see chart). That shouldn’t necessarily be a surprise: States with high unemployment tend to have more self-employed people by necessity as they hustle for any income they can find.

On the other hand, the performance of district states implies an old adage: in all things, moderation. District states rank toward the middle of the index pack, and even toward the lower third for Minnesota and Wisconsin. But their unemployment rates are all considerably below the national average, and per capita income was higher than the national average for three of the five states (Wisconsin and Montana are ranked 25th and 35th, respectively, among states). More to the point in annual rankings, every district state ranked in the top half in per capita income gains in 2011.

One final tidbit: North Dakota saw its 2011 index score drop from a year earlier and is considerably below the national average, yet it has by far the best unemployment rate in the country and had the highest gains in per capita income last year (6.7 percent). That doesn’t mean North Dakota’s entrepreneurial activity is necessarily in a good spot, but it does mean that one can’t read too much into any economic index.

State tax credits are heavenly to angel investors

With a strong desire to spur job growth, states are eager to nurture young, entrepreneurial firms in hopes that they will develop into booming companies. And you might say the angels have been answering.

Angel investment groups have been popping up across Minnesota and Wisconsin. These are groups of high net worth individuals who seek investment opportunities, often in local or regional businesses. While other investment markets have been fairly static since the recession—and possibly because of it—angel investment groups in Wisconsin and Minnesota have been busy.

Last year, angel investors in Wisconsin doled out $61 million to needy startup firms, and the state has seen a heady increase in total (measured) angel investment since the recession (see Chart 1). Since 2005, the state has seen angel investment groups expand from a small handful to 24 today, sprinkled across the state, including six in the fairly sparsely populated northern and northwestern part of the state located in the Ninth District.

Angel investment -- ch. 1&2 -- 3-20-12

Many attribute that growth to the presence of tax incentives. Wisconsin was an early adopter of tax credits for investors who put their money into very young companies. The state has two such programs, initiated in 2005: an angel tax credit, which allows an accredited investor to offset up to 25 percent of an investment, and a similar program for so-called early-stage seed credit, which is considered the next financial step for a firm after angel investment, but before more sizable venture capital. Investor tax credits in the state topped $9 million for the first time last year (see Chart 2).

The net benefits of such tax credit programs are less obvious than recent activity might suggest. While data imply that tax credits have generated more angel investment, it’s unknown how much angel-like investment was occurring before tax credits and formal angel organizations came around, and how it would have evolved without tax credits. And it shouldn’t be surprising that investors are taking advantage of free money to cushion their risk-taking.

Still, angel activity across the border was enough to convince Minnesota lawmakers in 2010 to create a similar angel tax credit modeled after the cheesehead version, with annual program caps of $12 million in credits. The program wasn’t launched until July of that year, yet investors claimed $7 million in tax credits, and almost $16 million last year (thanks also to $4 million of unallocated credits from the previous year that were rolled over). The state saw $63 million in angel investments in 113 companies last year, which topped Wisconsin.

Not to be outdone, Wisconsin lawmakers greatly expanded their state’s investor tax credit program, allowing the program to allocate up to $40.5 million in tax credits per year, split between angel and early-stage seed investors.

Flyover country? Not for Fortune 500 HQs

For most people, the words “Fortune 500” conjure up images of Manhattan, maybe Silicon Valley or southern California, even the gleaming office towers of Dallas. So here’s a heart-warming economic stocking-stuffer for the holidays: You should be thinking “Minnesota.”

In spite of real and perceived obstacles—from weather to business environment—the Gopher State has been a decades-long powerhouse in nurturing Fortune 500 companies, according to recent research by J. Myles Shaver, a professor of strategic management at the Carlson School of Management at the University of Minnesota.

Shaver is a Twin Cities transplant. He said he was aware of the fact that the Twin Cities metro area was home to a number of major corporations, but once here, “I soon found out that the extent of HQ activity was much more than I thought.” So he began to look into the matter “with the recognition that such things evolve over decades. I wanted to start with getting a picture of what this looks like now and what things have looked like over the last 50 to 100 years.”

Today, Minnesota has 20 companies on the Fortune 500 list—almost double the number (11) from 1955—and is tied with New Jersey and Virginia for eighth-most in the country. These companies represent such diverse industries as health care (Medtronic and UnitedHealth Group), food (Land O’ Lakes and Supervalue), retail (Best Buy and Target), energy (Excel Energy), finance (Ameriprise and U.S. Bancorp), manufacturing (3M) and mining/agriculture (Mosaic).

New York, California and Texas have the most Fortune 500 headquarters, each with over 50. But on a population-adjusted basis, Minnesota is tops in the nation, and by a considerable margin (see table). In fact, flyover country avails itself rather well, with Nebraska, Illinois, Ohio and Michigan also making this top 10 list on a population basis.

MN HQs -- 12-6-11

Because of the size of Fortune 500 companies, people tend to think of them as economic mainstays, unchanged over the years. But in fact this list sees significant turnover through the course of decades. Shaver found that only three of Minnesota’s 11 Fortune 500 companies in 1955 remain today: 3M, General Mills and Hormel. Others on the list merged with other firms (Seeger Refrigerator, ranked 264th in 1955, merged with Whirlpool the same year) or were bought outright (Pillsbury, ranked as high as high as 61st in 1987 and acquired by General Mills in 2001). Archer Daniels Midland ranked 155th in 1955 and 39th in 2011, but is no longer on Minnesota’s list because it moved its headquarters from Minneapolis to Decatur, Ill., in 1968.

Minnesota’s net gain of nine Fortune 500 firms over this period—seventh best in the country—also tells a fraction of the turnover story. Since 1955, a total of 51 Minnesota firms have been on the Fortune 500 list, and 31 subsequently fell off the list by 2011, leaving the current list of 20. The state also has 16 firms on the Forbes 500 list of the nation’s largest private firms, including the top company, Cargill. That ranks ninth nationally and second (to Missouri) on a population basis.

Shaver pointed out that few companies relocate their headquarters to Minnesota. Combined with a lot of turnover among the nation’s biggest companies, he said the state has shown a penchant for “creating and growing new businesses that grow really big.” The reasons behind Minnesota’s success are mostly a matter of conjecture.

Some cite the state’s strong education system or its hard-working Nordic culture. “Most of the answers to ‘why’ are an individual’s pet theories,” said Shaver, adding that common explanations may have some merit, “but I think they’re incomplete at best.”

Shaver expects to tackle the source of Minnesota’s success in future research. What he’s learned so far is that the state and Twin Cities in particular have “an amazingly dynamic business community. When my colleagues around the world ask if I like being here, this is one of the things I note. Most are surprised by what is here.”

A powerpoint presentation of Shaver’s research is available here.

 

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