Globalization and Start-Ups

In a comment on this article about declining startup activity and the growing average size of businesses, a commenter wrote:

The high foreign trade deficit is also a barrier to the formation of small new companies. The annual trade deficit of the US is greater than the rate of GDP growth, which explains a lot of things. Probably more companies are being destroyed than created in the US. Legislate and reverse the foreign trade deficit and there will be a massive surge in small companies.

I wrote in return

As for wolf-dogs comment on the trade deficit, I think this is totally wrong. Most of the trade imbalance is with stuff like cars and steel which are unlikely startup businesses. The easy availability of Asian manufacturing sources for nearly anything you want to make or can dream up facilitates startups and entrepreneurship. My gut feel, just seeing what entrepreneurs around me are doing but not from any hard data, is that globalization and easy international sourcing is a net positive for small business formation.

I have never seen any data on this though.  Thoughts?

  • Vypuero

    The deficit is being entirely driven by government expenditure. Private deficit is non-existent

  • craftman

    I agree with you in the sense that a trade deficit doesn't automatically mean "more companies are being destroyed than created in the U.S." One explanation that I could see as plausible: Foreign governments and individuals are given massive amounts of US dollars in exchange for their goods and services. What do they do with these US dollars? They either invest them in US banks (which then lend those same dollars back out to others) or they invest directly in US companies. In this case I could see their direct investments favoring larger, established companies rather than start ups. But the foreigner's money stored in banks would be treated the same as US citizens' deposits and wouldn't lead to higher/lower rates of small business lending...

    So to summarize - I have no data, just thinking through the mechanisms at play...

  • Seattle Steve

    Sorry, no data, just another anecdote to support your thesis. I'm a small (very, very small) manufacturer, and access to overseas production has been a huge benefit. Often, we've been able to obtain fully finished components for not much more than raw material cost stateside.

  • NL7

    I don't get the mechanism by which an economic metric is blocking business formation. You can't just point to two metrics and claim one causes the other - especially since the so-called trade deficit has been high forever, unrelated to business formation.

    I also fail to see why purchasing services or goods from China or India will hurt unrelated businesses but purchasing them from Nevada or Iowa will help unrelated businesses. If there's no proposed mechanism, then it's no different than blaming the rate of small business formation on the fortunes of the US space program or the orange crop harvest.

  • abtinf

    High foreign trade deficits support startup and small business formation.

    The only reason to engage in foreign trade is because comparable quality domestic goods are either more expensive or unavailable. Instituting a cap on trade deficits would result in severe deadweight losses as domestic customers are forced to pay higher prices (or settle for inferior quality) for domestically produced goods and services.

    Such deadweight losses reduce overall capital available for business formation, while simultaneously imposing cost increases on both large and small business. Small businesses have less leverage to negotiate prices and are generally less able to absorb vendor price increases compared to larger businesses, putting them at a disadvantage.

    Further, the countries receiving our domestic currency must eventually turn back around and purchase our goods and services. Generally, this means they will purchase different products than the ones they export, which may result in new business formation. Alternatively, they may instead choose to invest, which again results in new business formation.

    This is not to say that we should legislate even higher foreign trade deficits, as that would have similar negative effects. Instead, the point is that the disturbing the trade equilibrium can only result in losses for all parties.

    At right about this point, an economically ignorant person will say something about chinese currency manipulation being bad. But there is only so much time in one day to comment on blogs.

  • Adam

    There is a huge boom in small business startups on Amazon right now that are purely driven by cheap products and shipping from Asia combined with Amazon's fulfillment infrastructure.

  • Q46

    I think the issue here is loss of manufacturing. There is a curious idea that if an economy is gowing because of an expanding service sector this is the 'wrong' growth and somehow is not sustainable and happening at the expense of developing manufacturing.

    The worriers offer as evidence the shrinking percentage of manufacturing as a portion of the economy and the reduction in the number of people working in manufacturing.

    This then is attributed to manufacturing jobs going overseas as evidenced by the Trade Deficit which arises because we are buying in the things we used to and should make for ourselves.

    The truth is, at least in the UK (USA too?) manufacturing has been growing, just that other sectors have been growing too and so manufacturing has been a growing part of a growing whole in an economy which is no longer dominated by it.

    Reduced employment is due to automation to reduce payroll expense.

    Wage costs are now too high to make all our own goods, manufacturing which is largely assembly is low skill and low wage. Do we want low skill, low wage jobs to make up the dominant part of the economy?

    Without automation and low wage workers, we would not be able to afford most goods, so the jobs that are 'lost' abroad or to machines would not exist anyway.

    It is also the case, that the hardest jobs to export are service jobs, and many of these... software, design, finance, legal, pharama,marketing, etc... are high skill and cannot be done abroad, so we do supply ourselves and export these lucrative services.

    Economies most reliant on manufacturing are most exposed to global economic problems which see the demand for manufactured goods diminish.

    Trade Deficit, seems to be widely misunderstood and considered like national debt, somehow accumulating. It is a snap-shot of the national external accounts payable versus external accounts receivables on a particular date. What is owed and what is due will not have to be cleared on the same date, and is a matter of cash flow.

    Many companies operate a 'Trade Deficit' because goods invoiced in the month will not be paid in that month, and invoices payable will be from previous months.

    Where there is a large Trade Deficit, look for a wealthy population whose credit is considered excellent by suppliers.

    The World is just a large shopping mall.

    Countries who run a Trade Surplus are poor because their populations do not have the money to 'shop' and almost nobody thinks them credit worthy.

  • Bwawahaha

    I think a good chunk of the trade deficit is energy, does the author think higher energy prices would help small companies?

  • obloodyhell

    }}} declining startup activity and the growing average size of businesses.... Thoughts?

    Vastly increased startup headaches due to asinine new government regulations?


  • James

    Like Seattle Steve, I also make very small quantities of things. I'm working on a new product that would just not be feasible without the low cost of printed circuit boards from Asia. Even after paying for air shipping, the cost is 1/8th of domestic sources. In the end, I can offer a product provides a benefit to my customer, I make a little money on it (I hope), and the Asian workers and economy benefits as well. I'm trying to figure out who the loser is - since there would be no product if I had to pay the domestic price for the PCB anyway?

    The "maker" movement is on one side quite dependent on access to these low-cost manufacturing sources, while on the other hand creating wealth for people domestically. I think this is strong support for Coyote's point. The high-value part of the product is the idea and design. The markets that these products would appeal to do not necessarily coincide with the most cost-efficient place to manufacture them.