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Understanding Venture Migration: Lessons from the U.S. – vision of Professor Anokhin

Jan 12, 2018 by

Venture Migration vs. Venture Creation

Traditionally, when it comes to economic development, policy makers see entrepreneurship as a magic bullet. New firms, we are told, create new jobs, introduce innovations, push the frontier, and increase efficiency. The logical choice for policy makers, then, is to create conditions that are attractive to potential new entrants with the hope of stimulating startup rates in the region.

The logic gets more complicated, explains Entrepreneurship Professor Sergey Anokhin from Kent State University, when one realizes that most new firms fail quickly thus rendering the entrepreneurs’ efforts unproductive. It is important not to forget to adjust the startup rates by the rates of business failure to have a more accurate sense of the impact that new firms have on the local economy. It makes little sense to invest public resources in encouraging more people to start businesses if those businesses are not likely to survive. Besides, in reality there is very little that policy makers can do to make their specific locale spawn successful new ventures at higher rates. Entrepreneurs simply tend to open businesses where they themselves live, and not overanalyze alternative locations for the search of the best deal. That is, although local people may be enticed to start up, it is hard to attract enterprising individuals from elsewhere. And if more local people start businesses, it may simply result in more business failures.

The situation changes drastically when looking at relocating ventures. Unlike startups, they are less likely to fail because they have already withstood the test of time? Unlike startups, they think of their location strategically, which is why they may choose to migrate in the first place. They tend to be more productive than typical startups, and they pay attention to various policies that local authorities may implement to encourage in-migration of firms. When new business creation statistics is adjusted for business failure rates, venture migration dynamics are actually comparable to startup rates in terms of magnitude. That is, migrating and not new firms are more likely to heed local authorities’ efforts at making their locations desirable, they are less likely to fail, and they contribute to the economy more – which is why it is essential to understand what makes firms move and choose a particular location over alternatives. «Yet, most policy makers rarely think of business migration strategically?»- commented Professor Anokhin

Why do Firms Move?

Contrary to the popular belief, by and large, migrating firms are not interested in innovation hotspots, and not all taxes imposed by the local authorities are seen as an obstacle to them. For the most part, venture migration is a quest for a low-hanging fruit. Firms move to places where there is a void they can fill more effectively than the local players. If local businesses cannot match the best business practices that have been proven effective elsewhere, alert entrepreneurs will move in to take advantage of the opportunity. This process, says Dr. Anokhin, is known as entrepreneurial arbitrage, and it allows existing firms to profit disproportionally without much risk.

And while migrating firms predictably do not like higher income tax rates, they do not mind places with higher property tax or sales tax rates. Property taxes are often used by the local authorities to develop infrastructure, and moving to a place with a higher property tax rate allows businesses to take advantage of the superior facilities. It becomes particularly attractive when firms are labor-intensive and not capital-intensive, which is true for many modern companies. As for the higher sales tax rates, paradoxically, they may help businesses. At least in the U.S., the sales tax is not included in the price that the consumer sees (with few exceptions such as gasoline), and so it does not discourage customers. At the same time, while the firms collect the sales tax at the moment of closing the sale, they do not remit the amount collected to the authorities immediately but pay it on a monthly or even semi-annual basis. As a result, it becomes a free source of financing for entrepreneurs to develop and grow their business.

Venture Migration vs. Venture Creation

Traditionally, when it comes to economic development, policy makers see entrepreneurship as a magic bullet. New firms, we are told, create new jobs, introduce innovations, push the frontier, and increase efficiency. The logical choice for policy makers, then, is to create conditions that are attractive to potential new entrants with the hope of stimulating startup rates in the region.

The logic gets more complicated, explains Entrepreneurship Professor Sergey Anokhin from Kent State University, when one realizes that most new firms fail quickly thus rendering the entrepreneurs’ efforts unproductive. It is important not to forget to adjust the startup rates by the rates of business failure to have a more accurate sense of the impact that new firms have on the local economy. It makes little sense to invest public resources in encouraging more people to start businesses if those businesses are not likely to survive. Besides, in reality there is very little that policy makers can do to make their specific locale spawn successful new ventures at higher rates. Entrepreneurs simply tend to open businesses where they themselves live, and not overanalyze alternative locations for the search of the best deal. That is, although local people may be enticed to start up, it is hard to attract enterprising individuals from elsewhere. And if more local people start businesses, it may simply result in more business failures.

The situation changes drastically when looking at relocating ventures. Unlike startups, they are less likely to fail because they have already withstood the test of time? Unlike startups, they think of their location strategically, which is why they may choose to migrate in the first place. They tend to be more productive than typical startups, and they pay attention to various policies that local authorities may implement to encourage in-migration of firms. When new business creation statistics is adjusted for business failure rates, venture migration dynamics are actually comparable to startup rates in terms of magnitude. That is, migrating and not new firms are more likely to heed local authorities’ efforts at making their locations desirable, they are less likely to fail, and they contribute to the economy more – which is why it is essential to understand what makes firms move and choose a particular location over alternatives. «Yet, most policy makers rarely think of business migration strategically?»- commented Professor Anokhin

Why do Firms Move?

Contrary to the popular belief, by and large, migrating firms are not interested in innovation hotspots, and not all taxes imposed by the local authorities are seen as an obstacle to them. For the most part, venture migration is a quest for a low-hanging fruit. Firms move to places where there is a void they can fill more effectively than the local players. If local businesses cannot match the best business practices that have been proven effective elsewhere, alert entrepreneurs will move in to take advantage of the opportunity. This process, says Dr. Anokhin, is known as entrepreneurial arbitrage, and it allows existing firms to profit disproportionally without much risk.

And while migrating firms predictably do not like higher income tax rates, they do not mind places with higher property tax or sales tax rates. Property taxes are often used by the local authorities to develop infrastructure, and moving to a place with a higher property tax rate allows businesses to take advantage of the superior facilities. It becomes particularly attractive when firms are labor-intensive and not capital-intensive, which is true for many modern companies. As for the higher sales tax rates, paradoxically, they may help businesses. At least in the U.S., the sales tax is not included in the price that the consumer sees (with few exceptions such as gasoline), and so it does not discourage customers. At the same time, while the firms collect the sales tax at the moment of closing the sale, they do not remit the amount collected to the authorities immediately but pay it on a monthly or even semi-annual basis. As a result, it becomes a free source of financing for entrepreneurs to develop and grow their business.

What it all means

What it means, according to Sergey Anokhin, is that policy makers have the ability to make their regions attractive to high-quality firms that can help spearhead economic development while at the same time balancing their budgets. They need to change their focus from trying to encourage more people to become entrepreneurs to making their areas appeal to existing firms that can bring with them better business practices and share the benefits with the local communities. Although this is a major departure from the way authorities historically tackled economic development, research proves that such policies may be effective – and the cities that recognize it first will see a tremendous growth.

What it all means

What it means, according to Sergey Anokhin, is that policy makers have the ability to make their regions attractive to high-quality firms that can help spearhead economic development while at the same time balancing their budgets. They need to change their focus from trying to encourage more people to become entrepreneurs to making their areas appeal to existing firms that can bring with them better business practices and share the benefits with the local communities. Although this is a major departure from the way authorities historically tackled economic development, research proves that such policies may be effective – and the cities that recognize it first will see a tremendous growth.

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