Archive for June, 2010

Small Business and Economic Development

Wednesday, June 30th, 2010
Small is Best for Growth

Small is Best for Growth

Harvard Professors Edward L. Glaeser and William R. Kerr caution policymakers to refrain from “smokestack chasing”, or using tax breaks to attract large corporate employers. Their research shows that regional economic growth is highly correlated with the presence of many, small entrepreneurial employers, not a few large ones. In the July-August 2010 issue of the Harvard Business Review, they cite a study of U.S. metropolitan regions that shows that cities whose numbers of firms per worker were higher than average in 1977 experienced 9% faster employment growth in the two decades that followed. They write:

“Politicians enjoy announcing a big company’s arrival because people tend to think that will mean lots of job openings. But in a rapidly evolving economy, politicians are all too likely to guess wrong about which industries are worth attracting. What’s more, large corporations often generate little employment growth even if they are doing well. Automakers, for instance, often source parts and other inputs from their internal networks, which limits employment spillover effects. Or a firm may fill staffing needs by transferring employees. Instead of trying to buy their way out of the recession with one big break to one big employer, politicians should reduce costs for start-up companies and small businesses. Research shows that once entrepreneurship gets established, it tends to be self-perpetuating.”

What I particularly enjoyed about their piece in HBR was the plot of small firms vs. entrepreneurial growth by city. Cities like Colorado Springs and Sarasota appear to be hotbeds of entrepreneurial activity, while New York City, which offered every kind of tax break and subsidy to Wall Street, was ranked near the very bottom.

Low-Cost Marketing In a Tough Economy

Tuesday, June 29th, 2010

Shamless Self Promotion

Queensboro Shirt Company, an online corporate apparel company in Wilmington NC, conducted a national survey of 3,700 of its small business customers. They found that their employees regard corporate logo shirts as a status symbol of sorts, a sign of gainful employment in a rough economy. Even better, the shirts advertise employment with a small business at a time when large corporations have lost the public trust. “It used to be that I would only wear a company shirt if I had to, otherwise it would hang in my closet collecting dust,” says Nicole Volpe of Elle Hair and Spa in Raleigh, NC. “But I’m happy to have this job right now, I’m proud of where I work, and I’ll wear our shirts just about anywhere.” Queensboro claims to be the first to put a company logo on a collared shirt, twenty-eight years ago. Admittedly the survey has inherent bias: the company polled its customers who had already purchased its shirts, not a random selection of small businesses. Nevertheless, I was intrigued to read that employees would wear corporate-branded items in social settings outside of the workplace. It is a low-cost advertising option that I had not considered.

Let’s Reach Out and Be Aware

Monday, June 28th, 2010
Let's Raise Awareness

Let's Raise Awareness

Allen “Rookie” Kruse, the 55-year-old charter fisherman who lost his livelihood in the Gulf Coast, committed suicide last week. He is the first known casualty of the disaster after the oil rig workers who lost their lives in the explosion. The psychological effects of disaster can be severe and unexpected. The morale in the Gulf Coast is admittedly low and those who are vulnerable, perhaps with prior addictions or other emotional issues (although there were no such issues in Mr. Kruse’s past) need special care. We respond very differently to disasters that are acts of God and acts of man. The latter appears to be more painful to the survivors, perhaps as we struggle to interpret what happened and what our fellow human beings did. In Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (Wiley, second edition paperback 2009), I wrote (page 195) “Now I am going to make a politically incorrect statement. Be attentive to the emotional needs of the men in your life. I was impressed by the men in my life and how many of them suffered silently and perhaps put themselves at greater risk of illness and injury …. sometimes we forget the difficult burden of masculine conduct, so listen carefully and be particularly attentive to the men in your life, who may have needs that they are too embarrassed to admit.” And some of these reactions may be very delayed. So let’s do what we can to reach out and offer support.

IRS Provides Advice on Oil Spill Payments

Sunday, June 27th, 2010

On July 17, the Internal Revenue Service will hold a “Gulf Coast Special Assistance Day” in four states: Alabama (Mobile), Florida (Panama City and Pensacola), Louisiana (New Orleans, Houma and Baton Rouge) and Mississippi (Gulfport). The intent is to address questions related to tax liabilities arising from compensation for losses incurred in connection with the Gulf Coast Oil spill. “This is a very difficult time for many people affected by the oil spill in the Gulf of Mexico. As residents of the region cope with the evolving situation, I want to assure them that the IRS will be doing everything it can to provide tax help to those who need it,” IRS Commissioner Doug Shulman said. “We encourage anyone who has an issue with the IRS to contact us and explain their hardship, and we will work with them to find a solution. We’ll do everything we can under current law to help taxpayers.” The IRS has published guidance on its website to explain that BP payments for lost income are taxable as the payments replace wages or business income that would otherwise be taxed. Reimbursement for property loss is generally not taxable. The IRS is setting up a toll-free telephone hotline to answer taxpayers’ questions in these matters. Gulf Coast residents should also be certain to ask about the deductibility of uninsured or unreimbursed losses.

Good News and Bad News from the Insurance Industry

Saturday, June 26th, 2010
Better Numbers, But...

Better Numbers, But...

This week the property-casualty industry reported some good news and some bad news. According to the ISO and the Property Casualty Insurers Association of America, the industry returned to profitability, reporting a 6.7% return on policyholder surplus for the first quarter this year, a marked improvement from the 1.2% loss from the first quarter of 2009. The industry-wide results would have been even better, but for steep losses reported by mortgage and financial guaranty insurers.

“This is further proof that home, auto, and business insurers are fiscally sound, that we have been strong and stable throughout the economic downturn of the last two years, and that we are able to pay claims to policyholders during their times of need,” said David Sampson, PCI’s president and CEO. “With experts forecasting an active hurricane season, the $102.9 billion increase in policyholders’ surplus from $437.8 billion at the end of first-quarter 2009 to $540.7 billion at the end of first-quarter 2010 provides us all with an extra measure of confidence that insurers will be able to fulfill their obligations to policyholders when the wind blows. Nonetheless, it only takes one storm like Hurricane Ike in 2008, Hurricane Katrina in 2005, or Hurricane Andrew in 1992 to disrupt millions of lives and cause tens of billions of dollars in property damage. And this means now is the time for all of us — insurers, businesses, public safety officials, elected leaders, and the general public — to prepare for hurricane season to minimize the human hardship and economic loss in the event of a natural catastrophe this year.”

But the news isn’t all good, either for the industry or the businesses they insure. The property-casualty insurance industry returned to profitability, despite continuing declines in premium volume. Premium volumes have declined for twelve consecutive quarters.

“The 1.3 percent decline in net written premiums in first-quarter 2010 reflects the ongoing consequences of a once-in-a-generation economic storm. In first-quarter 2010, seasonally adjusted total private-sector employment fell 2.7 percent compared with its level a year earlier, private-sector wages and salaries dropped 1.4 percent, and the average unemployment rate rose to 9.7 percent from 8.2 percent in first-quarter 2009,” said Sampson. “This challenging economic environment reduces demand for insurance. Nonetheless, our industry remains stable and is financially well positioned.”

I am concerned about declining premium volumes. Understandably, businesses and consumers are looking for ways to reduce expenses in this difficult economy. But foregoing insurance coverage may be shortsighted. I have met homeowners in Rhode Island who stopped their flood insurance once their mortgages were paid off, only to suffer major financial losses when the record floods struck the state earlier this year. If you are buying insurance only to satisfy a lender’s requirements, you need to seriously reconsider your risk management strategy. An uninsured loss will only increase financial stress and it will be too late to go back and reinstate insurance coverage retroactively.

Ready for All Risks

Friday, June 25th, 2010

O Canada!This week, a 5.5 magnitude earthquake struck Canada, with its epicenter at Ottawa, Canada’s capital city. Tremors from the quake were felt as far away as Ohio, Vermont and New York City. With attention justifiably focused on the developments in the Gulf Coast, this event was largely overlooked. But it serves as an important reminder to train all of your employees on the basic response to each major natural disaster, even if you believe that your business is located in a “safe” area. After all, we typically associate earthquakes with California or Japan, but that is not a safe assumption. Indeed, businesses in those locales are more likely to be familiar with safety procedures as they recognize the risks.

You can reduce the risk of injury due to tremors or other seismic activity by bolting heavy furniture to the office walls and ensuring that drawers and cabinet doors securely close, so that they don’t spill their contents out. I have a very heavy desk and wall unit which I bolted to the walls as I didn’t want the items to tip and fall on someone. Thankfully, I have not experienced an earthquake in my office, but as the tenants above me often stomp around and blast their stereo system, I often do experience the walls shaking, so I am glad to have taken the precautions!

Time to Fix Our Patent System

Thursday, June 24th, 2010
A Squeaky Wheel

A Squeaky Wheel

Reform of our patent process could help stimulate innovation and entrepreneurial activity by offering more cost-effective means of protecting intellectual property. But despite bipartisan support, the Senate reform bill has not made it to the floor for a vote. The stakes are high; patents are often critical to securing venture capital funding and without protection of their intellectual property, entrepreneurs are often reluctant to undertake risky investment in commercializing their innovations. At our recent small business briefing in Washington DC, members of the National Small Business Association told White House officials that at least six years pass from the time of filing for patent protection to the first office action and hundreds of thousands of dollars in legal expenses are incurred in the process. The backlog of applications to the U.S. Patent and Trade Office exceeds 700,000. Other countries offer clearer, more transparent processes, such as a first to file system. The United States is the only major developed country to award patents to those who can prove that they invented something before someone else filed a patent on it. As a result, our system is mired in costly litigation to resolve needless disputes. The reform bill would transition the U.S. to a first to file system and would reduce by one-half filing fees for smaller businesses. Let’s make our voices heard by our Senators and Congressmen that patent reform is a top priority for the small business community.

Plus Ça Change

Thursday, June 24th, 2010
Reflecting Failure

Reflecting Failure

Waste and abuse that was tolerated in the boom economy is now coming under long overdue scrutiny. The Associated Press reports that New York State is preparing to junk the Empire Zone program, which was ostensibly to help businesses create jobs and expand the tax base in under-served communities. In fact, it was nothing more than welfare for politically connected large corporations. The independent Citizens Budget Commission found that most companies failed to deliver the promised jobs in exchange for substantial tax breaks awarded by the Empire Zone program. Companies that failed to meet the targets for job creation or their own investment include major Fortune 500 companies, such as Coca-Cola and Target. But before we break out the champagne and celebrate, let’s ask two questions: first, does New York State intend to demand a refund of the tax credits improperly used by close to 5,000 companies in the Empire program? Second, does New York really believe that the Excelsior Program, which it is touting as the success to Empire, will be any less prone to corruption and abuse?

Morale in the Gulf Coast

Wednesday, June 23rd, 2010

Source: NOAA

Residents of Louisiana must be on pins and needles as their fate is decided. A judge overturned the moratorium on offshore drilling imposed by the federal government, which government action caused additional hardship for the state, as it depends on the jobs and taxes generated by the oil industry. And the rest of the country would share the pain, as recent research by the energy analysts of Goldman Sachs found that a ban on offshore drilling would reduce expected oil production by one-half by 2015. As long as we depend on fossil fuels to meet our energy needs, a complete ban appears shortsighted. Even worse, according to the State Department, the administration declined offers put forward by 30 countries and international organizations to assist in containing and cleaning the oil spill.

The White House indicated that it plans to appeal the ruling. A news report that the judge who overturned the moratorium may have undisclosed financial ties to the oil industry likely strengthens the government’s position. And just when you think that the news cannot be worse for the Gulf Coast, the National Oceanic and Atmospheric Administration reports a 30% likelihood that a tropical wave coming from Haiti may develop into a serious cyclone. A hurricane would only worsen the environmental crisis, as high winds and storm swells could spread the contaminants.

But for the fishing and tourism industries, the storm has already hit. CNN reports that P&J Oyster Company, a business in the heart of New Orleans’ French Quarter that has been operating for 134 years, was forced to close. A study published by Texas A&M University Press reports that the four largest industries in the Gulf of Mexico, accounting for $230 billion in economic activity annually, are oil, tourism, fishing and shipping. It may be years, according to the report, if not decades, before these industries fully recover. No wonder USA Today reports of the importance of keeping up morale in the region; recovery will be a long and tough process.

Words of Inspiration

Tuesday, June 22nd, 2010

Jeff Bezos, the CEO of Amazon, delivered the commencement address at Princeton University and his words should resonate with every entrepreneur, as they inspire the graduates:

“After much consideration, I took the less safe path to follow my passion, and I’m proud of that choice.

Tomorrow, in a very real sense, your life — the life you author from scratch on your own — begins.

How will you use your gifts? What choices will you make?

Will inertia be your guide, or will you follow your passions?

Will you follow dogma, or will you be original?

Will you choose a life of ease, or a life of service and adventure?

Will you wilt under criticism, or will you follow your convictions?

Will you bluff it out when you’re wrong, or will you apologize?

Will you guard your heart against rejection, or will you act when you fall in love?

Will you play it safe, or will you be a little bit swashbuckling?

When it’s tough, will you give up, or will you be relentless?

Will you be a cynic, or will you be a builder?

Will you be clever at the expense of others, or will you be kind?

I will hazard a prediction. When you are 80 years old, and in a quiet moment of reflection narrating for only yourself the most personal version of your life story, the telling that will be most compact and meaningful will be the series of choices you have made. In the end, we are our choices. Build yourself a great story. Thank you and good luck!”