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BEHIND AMERICA’S SMALL BUSINESS SUCCESS STORY.

The OECD became latest organisation to hail America as the rich world’s most entrepreneurial economy. Businesses with fewer than 100 people are credited with creating two out of every three of America’s net new jobs. Last year 37% of its venture-capital investments went to start-ups, compared with l2%in Eu­rope. The National Federation of Indepen­dent Businesses (NFIB) boasts that Ameri­ca’s small businesses count as the world’s third-biggest economy in their own right.

But is America winning these plaudits by default? To be deemed a better breeding ground for small businesses than, say, Ger­many (which does not even have a precise word for venture capital) is hardly difficult. It says nothing about how much better America could be; nor about the growing suspicion that American entrepreneurs face an increasingly inhospitable legal and regulatory structure.

Most people’s idea of a successful small American business is a fast-growing Inter­net company, backed by venture capital. Kent Bowen of the Harvard Business School argues that reality is more mun­dane: a small family firm in an established industry, growing at around 15% a year, with that growth financed internally. Many of its bugbears, such as big companies that settle their bills late, are familiar to its peers in Kyoto or Cannes. But not all of them. Small American companies have to deal with litigiousness on a scale that their European and Japanese peers can only laugh about.

Most people assume that big firms an more vulnerable to the excesses of America’s tort system because they are fatter targets for lawyers. But big firms also have the money - and the time - to fight back. Small firms have no such resources. Over half the owners of small businesses take home less than $50,000 a year in pay: the average court case costs more than $l00.000. No wonder, the boss usually tries to deal with the complaint himself, and will often settle quickly.

Employment-practices liability insurance is already a $l00m-a-year business - even though insurers often cover only legal costs and the rates are extortionate. Law suits are also restricting the freedom of small American firms to hire and fire employees, long one of their chief advantages. Many small firms no longer give references for fear of subsequent lawsuits; many more do not fire anyone without consulting their lawyer first. Hopes for reform look slim. In any case, according to one British-born businessman in New York, most Americans “have no idea that this sort of hassle does not happen anywhere else”.

Small businesses the world over complain about bureaucracy, but the red tape spinning out of Washington is copious and the country’s small businesses, handicapped by a lack of resources, find it disproportionately restrictive.

One particular irritation for small businesses is the tax code, which is riddled with loopholes and exemptions, many of them created by large businesses. In a recent se­ries of Senate hearings, various Internal Revenue Service officials admitted that small businesses such as mom-and-pop shops were easy “audit hits”, because they lack the resources to defend themselves.

Given all this, why are American small businesses optimistic about their future? Why are new firms still sprouting across the country? And why is it virtually impossible to find an entrepreneur anywhere in America who would rather set up shop anywhere else?

Some of this is due to the country’s booming economy, but there are two other reasons as well. The first is structural. Despite all the lawyers, the HMOs, the increased regulation and so on, America still provides more of the things entrepreneurs want than anywhere else: access to capital to start businesses (California and Massachusetts alone have bigger venture-capital industries than the whole of Europe); a relatively flexible labour market that allows, you to hire and fire workers more easily than elsewhere; a legal system that does not stigmatise you if you fail; and a tax system that allows you to keep most of the spoils if the business succeeds.

The second reason is that American entrepreneurialism seems more rooted in culture than structures. As Paul Morin of the Wharton School of Business points out there is no obvious shortage of capital in Europe or Japan: it just does not go into the same sort of risky endeavours.

VOCABULARY:

entrepreneurial	предпринимательский
venture-capital investment	«рискованные» («венчурные») инвестиции, т.е. инвестиции с высокой степенью риска в основном в новые компании или наукоемкие отрасли
start-up (s)	новая (ые) компания (ии)
bugbears (s)	те, кто представляют собой угрозу; являются причиной опасений и трудностей
to settle bills	оплатить по счетам
litigiousness	споры или дела, подлежащие судебному разбирательству
tort	гражданское правонарушение, деликт
employment-practices liability insurance	страхование обязательств по трудовым отношениям (контрактами)
insurer	страховщик
extortionate	зд. очень высокие «грабительские»
law suit (s)	судебный процесс (разбирательство)
reference (s)	рекомендательное письмо, характеристика
hassle	зд. трудность, препятствие
red tape	бюрократический механизм
tax code	налоговый кодекс
loophole (s)	«лазейки» (уход от уплаты налогов)
exemption (s)	налоговые льготы
mom-and-pop shop (s)	зд. семейный бизнес (магазин)
HMO Health Maintenance Organisation	организация медицинского обеспечения (организация поддержки здравоохранения) (амер.)

 

 

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THOROUGHLY MODERN MONOPOLY

Are the barons of high-technology in­dustries a threat to free markets? Some of the world’s antitrust authorities fear that they are. In both America and Europe they look warily at new ventures by giant telecoms firms. In Europe, there are worries that a handful of companies could eventually dominate digital televi­sion, once it starts to develop. And Ameri­ca’s Department of Justice frets most about the best-known computer baron of them all: Bill Gates.

Simple statistics can make the case against Microsoft, the computer-software firm of which Mr Gates is the chairman. Over 80% of the world’s personal comput­ers contain Microsoft’s MS-DOS or Win­dows operating systems; and Microsoft is by far the biggest supplier of desktop soft­ware applications.

But these facts mean little. Trustbusters’ fears should be based not merely on the idea that Big is Bad, but on the eco­nomics of the industry in question. More­over, as in any other business where they are worried that consumers might be fleeced, regulators should step in only if they can do better than market forces at keeping powerful companies in check. In nearly all industries (the notable excep­tions include utilities, such as gas and wa­ter supply), they cannot.

So why might antitrust authorities be especially nervous about high-technology markets? Economic theory suggests sev­eral good reasons:

Networks. One possible cause of mar­ket failure is that many information-age industries serve their customers via differ­ent kinds of networks. These links may be physical - eg, telecommunications sys­tems or computer networks - or they may be more loosely defined, consisting of the users of, say, a particular piece of com­puter software. Networks bias industries towards monopoly, or at least oligopoly, because on the demand side they are sub­ject to economies of scale: the value placed on membership by a consumer rises with the number of other people on the network.

Systems. Computer software, television decoders and other products of the in­formation age are not used in isolation. They are bits of “systems”, in which one particular component cannot be used without another. There is little point in buying a personal computer without an operating system; and operating systems are useless without applications, such as word-processing programs, databases and spreadsheets.

This may mean that if a firm controls one part of the system, it can lever its way into others - so spreading its monopoly. Microsoft’s critics say that it could, for in­stance, use profits from the operating-sys­tem market to subsidise applications pro­grams. And by embedding programs for free in its operating system, it could re­move any incentive for customers to pay extra for rivals’ programs.

Standards. Networks and systems need common standards: without them, net­work users cannot communicate with one another, and one part of a system might not be compatible with the next. But while standards make industries run more efficiently, they may also have draw­backs of their own.

One is that if a firm creates an industry standard, it can wield enormous market power. Since individual consumers and other firms need to invest time and money in acquiring skills specific to the industry standard (eg, learning how to use Microsoft Windows), they get “locked in”. As switching systems means learning new skills, would-be entrants face a con­siderable entry barrier.

Another potential drawback, say some economists, is that big companies can use their market power to ensure that their way of doing things becomes the standard - and, in consequence, make themselves more powerful still. There is no guarantee that the standard they im­pose will be the most efficient.

Innovation. Computing, telecoms and the media have all seen rapid technologi­cal change. A stream of new ideas and products has sustained vigorous compe­tition in most areas of these industries, driving costs and prices down. Thus, even if the product market were monopolised, trustbusters could afford to be sanguine if producers of new ideas were still able to make their way to market, or at least to force dominant companies to keep inno­vating and cutting prices themselves. But if such innovations also became monop­olised, antitrust authorities would be right to worry.

Even if any of these worries are justified, there may still not be a good case for anti­trust authorities to wade in. The existence of economies of scale in networks, for ex­ample, does not mean that monopoly is inevitable: several networks can coexist. If costs are cut in the process, and if the threat of new competition is maintained, consumers will enjoy lower prices.

Jumpy antitrust authorities may try to pre-empt anti-competitive behaviour by framing rules of entry into infant markets. That is more likely to work in mature monopolistic industries, such as utilities, where technological change is slow and trends fairly predictable. The speed of change in high-tech industries has consis­tently wrong-footed trustbusters. For the time being at least, it may be more sensi­ble to trust the market.

VOCABULARY:

antitrust	антитрастовый
venture	рискованное начинание, коммерческое предложение
telecoms firm	фирмы телекоммуникационной связи
trustbuster (s)	сторонники антитрастовых мер
utilities	коммунальные службы (услуги)
oligopoly	олигополия (доминирование на рынке небольшого числа крупных фирм)
innovations	новшества; новые изобретения; инновации
infant markets	зарождающиеся, новые рынки

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