It is an American dream — a staple diet for all school boys in that land of opportunities. Indeed, the American economy has been driven for decades by innovation and entrepreneurship. As a recent Brookings study (Declining Business Dynamism in the United States, May 2014) puts it, “Business dynamism is the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others destroyed, and others still are turned over.” Joseph Schumpeter, the legendary economist, would readily endorse this.
In recent years several research surveys suggest a waning of the entrepreneurial spirit measured by new startups. Successive annual reports of the Kaufman Foundation bear this out. A report in 2012 suggested that “even before the overall economy started its most recent downturn”, the number of new business had “peaked” and, with the onset of the Recession, the number began to “plummet.” There are articles in mainstream papers bemoaning “the slow motion collapse of American entrepreneurship.” The most recent one is by Brookings already referred to. This study concludes thus: “Business dynamism and entrepreneurship are experiencing a troubling secular decline in the United States.” It is also observed that the decline is not isolated to particular sectors or firm sizes but also, geographically, to all states.
These trends have caused serious concern among the public and policymakers and several remedial steps are being debated. There is renewed emphasis on “innovation” and state funding is offered for R&D efforts. There is emphasis on funding by banks for small and medium sized enterprises. Venture capital companies are expected to play an aggressive role. All the same, it is reckoned that the problem has arisen due to the impact of globalisation and companies becoming too big to be promoted by individuals. Part of it has been due to the build-up of supply chains by conglomerates where developing countries have turned more competitive. Several blue ribbon groups are studying the related problems in many countries.
It is this phenomenon that Daniel Pinto addresses in this book. He is not an economist or a social theorist. He is a financial consultant. He was earlier with the Warburg Group and later established Stanhope Capital, a private investment firm based in London and Geneva. Thus, he has expertise on current trends in the markets and industries in developed and emerging economies. However, he has a “market” (tunnel!) vision which limits his analysis to the immediate context and does not relate it to broader global trends and compulsions. Markets, after all, are the sub-texts of a global economy whose architecture is determined by the given global power structure. His examination or treatment of several of the issues is unbalanced; and even the language adopted is propagandist.
Pinto bemoans the loss of the American dream and pines for the entrepreneur (rail road robber!) who was driving the economy. For many modern management consultants, this may sound like an appeal to revive the nostalgic past where small agents were driving the coach. He laments the separation of management from ownership and the way joint stock companies are run. His complaint is that quarterly shareholder capitalism is robbing the west of the investments that will enable it to revive again. “By locking stakeholders into a system plagued with divergent interests and obsessed with immediate results, western capitalism is effectively committing suicide.” He pleads for the conversion of the mere apparatchik CEO back into a real entrepreneur. These are truly impassioned pleas to restore a forsaken model.
Referring to recent trends in the economy, the Brookings study made this sane observation: “…it is clear that these trends fit into a larger narrative of business consolidation occurring in the U.S. economy — whatever the reason, older and larger businesses are doing better relative to younger and smaller ones.” Sociological changes abound and firms and individuals become more risk averse and smaller firms are holding on to cash and workers are less mobile and unwilling to switch jobs in an economy under the grip of recession. Income distribution is highly skewed and ownership of capital is concentrated in the hands of less than one per cent of the population.
Though unrelated to the main theme — decline in entrepreneurship in the U.S. — Pinto devotes a substantial part of his book to the emergence of the BRICS (Brazil, Russia, India, China and South Africa) alongside the demise of the West. As a consultant, he has deep insight into the rise of the corporations from emerging economies like China and India and how they, abetted by sovereign funds, are capturing western companies, stealing their technologies and winning the race. He gives the impression that the BRICS do not have any right to invest, trade with the West, or take over western companies even if they abide by globally defined rules! He does not narrate the roadblocks which the OECD countries have erected on the march of these emerging economies. His record of the efforts of G-20 to get a better share of quotas in the IMF and World Bank is a travesty of truth. He does not admit that a shift in the balance of economic power should also result in a change in the management structure of those institutions.
Surprisingly, Pinto is no diehard capitalist. He is not leaving it all to the entrepreneur or to the market. He believes in a “magic triangle” formed by the entrepreneur, market and the state. He wants equilibrium or a balance of power between them. He attributes the success of earlier entrepreneurs to the state support — even in the U.S.! — and how, in later years, the BRICS copied the same formula to promote their global reach. He has very interesting stories to offer on recent developments. Sadly, his ideas will be anathema to the Republican Senator. Pinto adores family owned companies such as Sainsburys, Agnellis, Halleys, Wallenbergs and Mittelstands. He includes groups like Tatas and Mittals from India. They exude dynamism and commitment to the companies created and owned by them. They are unfettered by shareholders, fund managers, banks or quarterly returns in their corporate pursuits. These are partially true, but cannot wholly replace the giant public limited companies. Moreover, he is not aware of the stagnation which many of these companies have undergone or the legal battles among siblings over their share. For every successful family group, there are many which stagnate or languish.
In Part three of the book, Pinto has a few suggestions to foster entrepreneurship in the U.S. No doubt, these are based on his experience as a consultant. He pleads for a better role from big corporations to promote SME entrepreneurs as a social corporate responsibility (CSR). He urges banks and their regional managers to take a more constructive and promotional role in financing new, high-risk projects. These amount to Sunday preaching of gospels. Given the current magnitude and rationale of corporate/banking growth, these prescriptions will hardly excite the executives.
The tragedy is that the modern corporate executive has eaten the forbidden fruit and lost the Garden — the American dream! No amount of lamenting or breast beating can reclaim the paradise. Pinto’s book disturbs us at places. It offers interesting, if melodramatic, details on the fall of the West and the rise of BRICS. At the end of it all, it fails to convey a balanced message.