Above the Crowd

Entrepreneurialism and Protectionism Don’t Mix

May 6, 2004:

"I think it’s time
That you found what the world is waiting for
I think it’s time
To get real."
     -Stone Roses, What the World is Waiting For

It is quite bizarre to see John Kerry, Pat Buchanan, and Ross Perot all on the same side of a political issue. Of course, regular Above the Crowd readers might find it equally bizarre to be reading about politics in this newsletter. However, one recent political issue directly threatens the high-tech community. Economic protectionism, the mandate that strangely ties the above three gentlemen together, suggests that in order to protect jobs in America, the government should put up barriers to free trade that "advantage" the American worker over others. If implemented, a protectionist policy will have a profoundly negative affect on high-tech startups, entrepreneurialism, and innovation.

Here are seven reasons why Silicon Valley should be very alarmed over protectionism:

1) Protectionism Will Hurt the Overall Economy:

History has confirmed that Adam Smith’s theory of comparative advantage was remarkably prophetic. Not only have scores and scores of countries thrived as they initially encountered global trade, but many others have crashed dramatically upon raising barriers to the same. While there are many examples of such catastrophes, including China at the end of the first millennium, Holland in the 1600’s, Great Britain in the 1800’s, and Japan in the late 1900’s, perhaps the most relevant is America’s own protectionist movement in the late 1920’s, which led to the single worst economic drought in American history. Ignoring the theory of comparative advantage is the intellectual equivalent of harboring thoughts that gravity might be a myth or suggesting that diet and exercise really aren’t that important. While it may seem trite to mention it, crashing the overall economy will certainly hurt the market for startups.

2) Startups Don’t Collect Subsidies:

One typical method for implementing protectionism is to offer subsidies or tariff advantages to local companies such that they have an advantage vis-à-vis foreign competition. Here is the catch: startups have no idea how to file for subsidies. They don’t have large lobbying groups in Washington. They have no idea how to schmooze their Congressman in order to increase their chances of receiving preferential treatment on some new multi-billion tax credit program. These are the skills of large, bureaucratic companies in staid industries that already have hundreds of employees in the nation’s capital.

3) Diversity Is Critical to Startup Success:

The startup world embraces diversity like no other industrial sector. It is not unusual for a company in Silicon Valley to have employees from numerous geographies, representing numerous religions, and numerous languages. More importantly, no one seems to notice. Companies succeed, because they can recruit the very best from all around the globe. Multiculturalism is ingrained in the fabric of everyday life. The xenophobic notion that someone deserves a job over someone else simply because of religion, ethnicity, or nationality has no place in the 21st century. Protectionism will only serve to bring tension to a community that has none.

4) Startups Are Increasingly Global at an Early Age:

Ironically, the protectionists in Washington are beginning to beat their drums just as startups have become dramatically more adept at crossing boarders. Jamdat*, an emerging player in the mobile gaming space, is distributing software in 29 countries, transacting business in 9 currencies with 60% of its employees living outside the U.S. Skype, a company that began just 18 months ago in Europe, already has 40% of its users in the Americas and Asia. Google may have grown internationally faster than any company previously. It already offers its search service in 97 languages across 95 international domains and in its recent quarter, international revenues were already 30% of its overall results. The Internet has reduced friction in communication and distribution and has enhanced the speed at which young companies can serve the entire world. Protectionism will put a quick end to this remarkable development.

5) The Critical Emerging Markets Are Outside the U.S.:

The leading cellular markets are in Europe. The most innovative broadband carriers are in Korea and Japan. Increasingly, the majority of consumer electronics are being designed and assembled in Taiwan and China. The largest emerging market for every product under the sun is also in China – the country with the leading GDP growth, and the country that will one day be the largest industrialized country in the world. America is interesting, but it’s hardly where the action is. Startups are increasingly focusing on markets outside the U.S. – sometimes bypassing the U.S. and entering the market elsewhere. Protectionism will slam the door on the most critical opportunities for startups.

6) Taking a Step Backwards:

The U.S. Government, as well as leading companies such as Intel, just spent the past year convincing the Chinese government to embrace a single global standard for 802.11 wireless products, bypassing its previous decision to implement a proprietary security standard. This single feat will have an overwhelmingly positive impact on thousands of small companies that build products based on 802.11 in the United States. All of their products will now work out of the box in the most important emerging market on the planet. It seems laughable that just as we convinced the most historically communist country of the benefits of free trade and comparative advantage, a few of our own leaders seem to have contracted amnesia.

7) Protectionism Is Inconsistent with the Entrepreneurial Mindset:

It is hard to imagine a successful entrepreneur arguing that he or she deserves a job over someone else that is equally skilled and willing to work for a lower wage. The entire spirit of entrepreneurialism is based on finding ways to do something better, faster, and cheaper. It is the whole nature of the game. If someone can do something better somewhere else, it simply means it’s time to innovate again – with intellect and technology, not politics.

Perhaps the only saving grace is that the international community may protect Silicon Valley from Washington. Just as our entrepreneurial founding fathers must have had choice words for a maturing Europe, America is now being criticized by the emerging economies of our time such as India and China. The WTO has taken on a significant role in the global economy and many of its members are specifically targeting U.S. protectionist polices as their key agendas. Just as many countries criticized what they consider to be unilateral U.S. military behavior, they are equally up in arms with regards to unilateral economic behavior.

What many in America may miss is that the rest of the world will go on without us. Over the past thirty years, the key market for technology products was obviously the U.S. Startups in Europe, Israel, and Asia would develop their products at home, but quickly shift the focus to the U.S. when it came time for marketing and sales. This is no longer the case. In many instances, Europe and Asia are quickly becoming the enviable markets. What’s more, as recently noted in the New York Times, "Foreign advances in basic science now often rival or even exceed America’s, apparently with little public awareness of the trend or its implications for jobs…" If America closes its borders, intelligent and resourceful entrepreneurs in Europe and Asia will cheerfully step in and generate tomorrow’s leading break-through companies.

*Benchmark Capital has an investment in Jamdat

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