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Does Financing Spur Small Business Productivity?

December 19, 2014 Comments off

Does Financing Spur Small Business Productivity?
Source: Cato Institute

cess to adequate financing is an important issue for firms, particularly younger and smaller ones. Given the role these firms play in the process of creative destruction, alleviating financial constraints for start-ups and small businesses is an important concern around the world. More recently, the financial crisis of 2008 demonstrated the critical role of bank financing, at both the firm and economy wide levels. While prior studies have examined how financing affects entrepreneurial firm starts and closures (e.g., Black and Strahan, 2002; Kerr and Nanda, 2009), no study has directly analyzed the link between bank financing and firm productivity, particularly for smaller firms where access to financing is critical. This is important given that most start-ups appear to rely on bankdebt financing (Robb and Robinson, 2013).

Determining the relation between bank financing and firm productivity is difficult because of the possibility of reverse causality. A positive correlation between bank financing and productivity might mean that more productive firms seek additional bank financing, or that increased access to bank financing enhances productivity. Yet another possibility is that unobserved factors affect both access to financing and productivity.

Our research addresses reverse causality by exploiting an exogenous shift in firms’ access to bank financing due to deregulation of interstate bank branching. During the 1990s, states began allowing out-of-state banks to set up and acquire local branches. This increased interstate banking and thus allowed greater access to financing for firms. Consistent with prior literature, we show that deregulations were not driven by prior productivity of firms. The key question is whether this increased access to cheaper financing is dissipated by firms taking on unproductive or less productive pet projects or whether it increases firms’ ability to undertake additional productive projects.

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New From the GAO

December 12, 2014 Comments off

New GAO Reports
Source: Government Accountability Office

1. DOE and NNSA Project Management: Analysis of Alternatives Could Be Improved by Incorporating Best Practices. GAO-15-37, December 11.
http://www.gao.gov/products/GAO-15-37
Highlights – http://www.gao.gov/assets/670/667405.pdf

2. Nuclear Weapons: DOD’s Plan for Implementing Nuclear Reductions Generally Addresses Statutory Requirements but Lacks Some Detail. GAO-15-89R, December 11.
http://www.gao.gov/products/GAO-15-89R

3. Small Business Credit Programs: Treasury Continues to Enhance Performance Measurement and Evaluation but Could Better Communicate and Update Results. GAO-15-105, December 11.
http://www.gao.gov/products/GAO-15-105
Highlights – http://www.gao.gov/assets/670/667449.pdf

4. Flood Insurance: Forgone Premiums Cannot Be Measured and FEMA Should Validate and Monitor Data System Changes. GAO-15-111, December 11.
http://www.gao.gov/products/GAO-15-111
Highlights – http://www.gao.gov/assets/670/667412.pdf

5. DOD Contract Services: Improved Planning and Implementation of Fiscal Controls Needed. GAO-15-115, December 11.
http://www.gao.gov/products/GAO-15-115
Highlights – http://www.gao.gov/assets/670/667431.pdf

6. Federal Subcontracting: Linking Small Business Subcontractors to Prime Contracts Is Not Feasible Using Current Systems. GAO-15-116, December 11.
http://www.gao.gov/products/GAO-15-116
Highlights – http://www.gao.gov/assets/670/667409.pdf

7. Professional Misconduct: DOJ Could Strengthen Procedures for Disciplining Its Attorneys. GAO-15-156, December 11.
http://www.gao.gov/products/GAO-15-156
Highlights – http://www.gao.gov/assets/670/667402.pdf

Finance and Social Responsibility in the Informal Economy: Institutional Voids, Globalization and Microfinance Institutions

December 12, 2014 Comments off

Finance and Social Responsibility in the Informal Economy: Institutional Voids, Globalization and Microfinance Institutions
Source: Social Science Research Network

We examine the heterogeneous effects of globalization on the interest rate setting by microfinance institutions (MFIs) around the world. We consider MFIs as a mechanism to overcome the institutional void of credit for small entrepreneurs in developing and emerging economies. Using a large global panel of MFIs from 119 countries, we find that social globalization that embraces egalitarian institutions on average reduces MFIs’ interest rates. In contrast, economic globalization that embraces neoliberal institutions on average increases MFIs’ interest rates. Moreover, the proportions of female borrowers and of poorer borrowers negatively moderate the relationship between social globalization and MFI interest rate, and positively moderate the relationship between economic globalization and MFI interest rate. This paper contributes to understanding how globalization processes can both ameliorate and exacerbate challenges of institutional voids in emerging and developing economies.

Canada — Taking the “temporary” out of the TFW program

December 10, 2014 Comments off

Taking the “temporary” out of the TFW program
Source: Canadian Federation of Independent Business

In a new report released today, the Canadian Federation of Independent Business (CFIB) calls for the Temporary Foreign Worker Program (TFWP) to be replaced with a stronger solution to address permanent labour shortages. Geared towards entry-level workers, CFIB’s proposed Introduction to Canada Visa would simultaneously address critical shortages for small businesses while providing a clear path to permanent residence for foreign workers.

Occupational Licensing Can Crimp Entrepreneurship, According to Latest Kauffman Policy Digest

December 5, 2014 Comments off

Occupational Licensing Can Crimp Entrepreneurship, According to Latest Kauffman Policy Digest
Source: Ewing Marion Kauffman Foundation

High rates of new business creation are the sign of a dynamic economy in which barriers to entrepreneurship are low.

However, according to a new Entrepreneurship Policy Digest released today by the Kauffman Foundation, increasing licensing regulations in certain professions have the effect of building barriers to innovations and opening new businesses.

The Policy Digest states that nearly 29 percent of jobs now require a government-issued license, which is an increase from 40 years ago when just 10 percent were licensed. These requirements lead to a decreased supply of practitioners and reduce competition.

The Digest looks at different forms of occupational regulation, highlights the requirements to obtain a license, and offers recommendations to reduce barriers to entrepreneurship, including:

  • Replace licensing with a less onerous form of regulation where public health is not seriously threatened.
  • Reform licensing boards to give greater representation to non-licensed practitioners.
  • Create public committees to evaluate licensing boards, provide independent analysis of newly proposed licensure requirements, and make recommendations to lawmakers.
  • Establish mutual recognition of other state licenses to improve worker mobility and, thereby, boost economic dynamism.

Does Enforcement of Employee Noncompete Agreements Impede the Development of Industry Clusters?

November 28, 2014 Comments off

Does Enforcement of Employee Noncompete Agreements Impede the Development of Industry Clusters? (PDF)
Source: Federal Reserve Bank of Richmond

Employee noncompete agreements are widespread among technical workers and managers in technology companies. Policies regarding the enforcement of these agreements vary among states, however. The rise of the technology industry cluster in Silicon Valley and the car industry cluster in the Detroit region occurred during periods when California and Michigan courts did not enforce noncompete agreements. Research has sought to determine the extent to which enforcement of noncompetes may suppress the formation of industry clusters by restricting labor mobility and entrepreneurship.

Fleecing Uncle Sam; A growing number of corporations spend more on executive compensation than federal income taxes

November 26, 2014 Comments off

Fleecing Uncle Sam; A growing number of corporations spend more on executive compensation than federal income taxes
Source: Institute for Policy Studies

This report reveals stark indicators of the extent to which large corporations are avoiding their fair share of taxes.

Of America’s 30 largest corporations, seven (23 percent) paid their CEOs more than they paid in federal income taxes last year.

  • All seven of these firms were highly profitable, collectively reporting more than $74 billion in U.S. pre-tax profits. However, they received a combined total of $1.9 billion in refunds from the IRS.
  • The seven CEOs leading these tax-dodging corporations were paid $17.3 million on average in 2013. Boeing and Ford Motors both paid their CEOs more than $23 million last year while receiving large tax refunds.

Of America’s 100 highest-paid CEOs, 29 received more in pay last year than their company paid in federal income taxes—up from 25 out of the top 100 in our 2010 and 2011 surveys.

  • These 29 CEOs made $32 million on average last year. Their corporations reported $24 billion in U.S. pre-tax profits and yet, as a group, claimed $238 million in tax refunds.
  • Combined, the 29 companies operate 237 subsidiaries in tax havens. The company with the most subsidiaries in tax havens was Abbott Laboratories, with 79. The pharmaceutical firm’s CEO paycheck was $4 million larger than its IRS bill in 2013.

For corporations to reward one individual, no matter how talented, more than they are contributing to the cost of all the public services needed for business success reflects the deep flaws in our corporate tax system. Rather than more tax breaks, Congress should focus on addressing these deep flaws by cracking down on the use of tax havens, eliminating wasteful corporate subsidies, and closing loopholes that encourage excessive executive compensation.

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