Text of my Speech in Korea

spoke at the launch event in Seoul, South Korea for Global Entrepreneurship Week, which was hosted by Dr. Park Jin and The Korea Institute for Future Strategies (KIFS). Here is the full text of my speech:

Global Entrepreneurship Week

Kane Speech

Hello and thank you for having me here today. I would like to especially thank Dr. Park Jin and his staff at KIFS for hosting this event, as well as John Fogarasi and Mike Choi of the Commerce Department for all their support. I appreciate this chance to speak to you about a vital environmental issue that concerns all of us. I'm not referring to polar icecaps or carbon footprints—although these are important. I'm talking about a world of competing economic models – where each nation has a unique business environment. Some are clear and organized, others are cold and barren, and others are growing wildly.

Recent financial failures and market meltdowns have left many of us stunned and searching for answers. Some are even talking about the end of capitalism.I'm here to tell you that entrepreneurship is the engine that will drive economic recovery and growth from this point forward. It is in places like South Korea where the spirit of a new kind of capitalism – entrepreneurial capitalism – is taking hold and showing the rest of the world that the miracle of growth is no miracle at all. Growth, as all Koreans understand, is about innovation and new technology and dramatic change for the next generation.

GEW  --  SLIDES 3, 4

This is precisely the big idea behind Global Entrepreneurship Week.  At this very moment, millions of aspiring young entrepreneurs from more than 75 countries are connecting and realizing how they can turn their dreams into reality.

Founded by the Kauffman Foundation in the U.S. and the Make Your Mark campaign in the UK, the first-of-its-kind initiative is engaging young innovators in an array of activities and challenges through November 23^rd—and for a week in  November during the next three years.  Our goal?  To use the intense activity of Global Entrepreneurship Week as fuel to engage a new community of entrepreneurial talent.  And the glue that will connect these creative minds year-round is Unleashing-ideas-dot-org.

The "Unleash It!" crowd-sourcing website will link entrepreneurial problem-solvers around the world with a common mission: To tackle today's key challenges—from simple conveniences in daily life to the biological state of our planet.

"Speednetwork the Globe" activities will help local young innovators sharpen their networking skills.  They'll meet in groups to share ideas with each other, local entrepreneurs, potential investors and community leaders. In essence, with Global Entrepreneurship Week, we are engineering an idea movement.  Our ongoing work will inspire a new generation of revolutionary thinkers to chase their dreams and realize their potential.  Of course, we know that devoting a week each November to entrepreneurship will not sufficiently alter the environment.  It can raise awareness, build excitement and spark new relationships.

GROWTH  --  SLIDE 5

Real change demands real wisdom, namely an answer to the question, What truly causes economic growth?  Many leading scholars would now say innovation is the underlying cause of growth, although many others still echo the old argument that investment and capital are key.  They do call it capitalism after all. But even if the new models that emphasize innovation are right, this begs the next question, Where does innovation come from?  Ewing Marion Kauffman believed that entrepreneurs were the source of innovation, and thus profoundly important to everyone else who dreams of progress.

Economic growth is a challenge for every nation, every city, and every company. A superficial look at any successful country or company will see both growth and heavy capital investment. What could be simpler? Yet research studies over the years have shown that investment is not a cause of growth. Rather, growth comes first, and investment follows.  The story that William Easterly tells of Africa is that many nations were advised by the World Bank to undertake massive "Big Push" national investments, and they did, and they did not grow. Massive centrally planned investment strategies have ended in heartbreak again and again. The same thing happens with every investment bubble.  Money, sadly, cannot buy progress, or innovation, or real change.  Instead, real change comes from incentives, or what we call a pro-growth environment.

GROWTH  --  SLIDE 6

Consider this chart comparing GDP per capita in a handful of countries during the years 1950-2000.

Each country had a different set of institutions – property rights, labor laws, openness to foreign trade and investment, taxes, monetary policy. We can see success and failure, wealth and poverty.  America during this half century defined the productivity frontier. In 1950, the average US citizen made an annual income of $11,000. The average Korean made one-tenth of that amount, roughly $1000, while India and China were both much poorer than that.  During the next 50 years, America's GDP per person grew at 2-3 percent per year.  The theory of convergence implies that other industrial countries should have caught up to the U.S. because they could borrow non-rival technologies – pure ideas – without the R&D expense of invention.  But experience tells us the Europeans as a rule only caught up to a level that was around 80 percent of the productivity frontier. Why?  Meanwhile, Japan proved to the West that prosperity outside of the Atlantic orbit was possible. And Korea proved that even overlooked places can become superpowers.  Real per capita GDP in Korea in 2000 was higher than in the USA back in 1960, and its sustained growth rate has been literally unthinkable to the traditional growth theorists.  But perhaps the most surprising economy on this chart is Ireland (the Korea of Europe).  For centuries, the Irish lagged far behind the average wealth of Britain. Then in 1990, the Irish people tossed off the yoke of anti-business dogma and cut their corporate taxes from 50 to 12 percent.  Ever since, its economy has roared ahead of other EU nations, as well as Japan.  We also see that the giant economies of China and India while growing at rates of 8-12 percent every year, remain far behind the technology frontier.  For now!

KOREA

PHOTO  --  SLIDE 7

Allow me to turn our attention to the economy of South Korea, and to start if I may with some personal reflections. I was personally drawn to Korea as a young man. In college, I learned the game Baduk, and became friends with the Korean-American professional Baduk champion, Janic Kim. So when the U.S. Air Force asked me to choose which place in the world I wanted to go, I put the military base at Yongsan in Seoul at the top of my list. From 1991 to 1992, I lived in the middle of the "miracle on the Han" and saw in the Korean people a hunger for progress. I also learned at the Baduk board how mediocre my sense of strategy can be.

What I witnessed in Seoul and the Korean countryside inspired me to study economic development further, and so I eventually pursued a Ph.D. in economics. I learned there is much unknown about the mystery of economic growth, even though the common sense of farmer can be more insightful than the collected knowledge of the IMF.

The fact is that Korea is a role model to the world.  Too often, people compare the economic "miracle" of South Korea to communism in North Korea. I would like the world to notice that the comparison to North Korea is an outdated lesson from the 20^th century. The world must recognize that growth in Korea is no miracle. Korean growth is the result of intelligence and hard work, a culture and environment of education and entrepreneurship. The world should compare Korea to the leading economies of the Europe, North America as well as the other success stories such as Chile and Ireland

.

WHAT IS THE ECONOMY?  --  SLIDE 8

Entrepreneurs everywhere turn ideas into disruptive breakthroughs. They have no stake in the status quo. So they have no problem flipping it upside down to introduce new products, processes and services.

Left to their own devices in dorm rooms and garages, young innovators will exercise their power to change things for the better.  Their ideas often revolutionize the way we live and increase wealth in all its measures—finance, health, happiness, opportunity and productivity.

Who are today's young innovators? You may first think of Internet geniuses like Facebook founder Mark Zuckerberg or Kevin Rose, the co-founder of Pownce and Digg.  But tech geniuses make up only a small part of the picture.   

Not long ago, a college student in California told two friends about her grandmother's struggle with bulky, restrictive oxygen tanks.  The trio of twenty-somethings put their heads together and devised an idea for a portable oxygen concentrator that would mean unprecedented freedom and mobility for patients everywhere.  They turned their new idea into a business plan, and their business plan into Inogen—a company that now generates $100 million in revenue.

These young people and thousands like them exemplify what's possible when you pursue your dreams. Perhaps they were the inspiration for magazine mogul Steve Forbes when he stated "the real source of wealth and capital in this new era is not material things.  It is the human mind, the human spirit, the human imagination and our faith in the future."

Of course, the traditional Keynesian model of total GDP is simply aggregate demand – familiar to economic students as the classic identity Y = C + I + G + NX. Consumption in this paradigm makes up two-thirds of the economy, with the rest being investment (I), government spending (G) and net exports (NX). Of course, knowing that the economy is two-thirds consumption is about as useful as knowing the human body is two-thirds water. The magic is not in the material, but in how that material is combined.

The new models of prosperity focus on growth, and a highly simplified equation of how growth happens.  Scale and technology.  An economy can stay isolated and grow through innovation.  Likewise, an economy can innovate nothing, but grow through increased specialization enabled by linking to other economies (or by expanding internal connections as the U.S. did during the 1880s with the railroad).  Today, of course, globalization is enhancing trade and communications scale at an unprecedented level.

Another truth that we have learned from economic development empirics is that there are two fundamental stages of growth.  Relatively poor countries can grow by simply adopting innovations made elsewhere.  But that adoption model runs out below the productivity frontier – probably around 80-90 % level, where most European nations and Japan are today. To continue growing, advanced economies must transition to a system that generates innovation internally. That means they must have a robust entrepreneurial culture.  I believe that culture is hard to obtain, but simple to envision.  It is simply economic freedom, especially freedom from a government that is too heavily involved in managing.

From a government perspective, I mentioned earlier how officials in Ireland sparked economic growth by reforming policies. You'll find similar examples in the economic turnarounds of Estonia, Israel, India and the United States.  Mountains of evidence prove that policies designed to encourage entrepreneurial innovation can lead to economic growth.

In 2006, the Wall Street Journal and Heritage Foundation asked me to take on the role of lead editor and author of their annual Index of Economic Freedom. For those of you who don't know, my right hand man on this project was Anthony Kim. He has been working on the Index since 2001 and continues today. Together, we oversaw a reform of the Index methodology and design of the book with new measures and charts. Although this presentation today is not about the Index, this is important because one our objectives was to incorporate measures of entrepreneurship in the measures used by the Index, notably business freedom and labor freedom which are based on exciting new data from the World Bank's DoingBusiness dataset.

Take, for instance, the ease of getting a new venture off the ground.  The World Bank ranks Australia first among 178 nations for being an easy place to start a new business. In 2007, Australia reported a per capita G-D-P of just over $37,000.  On the other end of the scale, Bangladesh ranked 92^nd and reported a per capita G-D-P of $1,400. See the connection?

ECONOMIC FREEDOM – Slide 9

This brings us to the economic freedom score that South Korea received.  I was honestly surprised that Seoul's score was not higher. Although it has a higher score than the world average in 7 out of 10 freedoms, Korea lags in three areas, especially in labor freedom. According to the 2008 Index, "The high cost of laying off a worker creates a risk aversion for companies that would otherwise hire more people and grow."  Like any country, there is room for improvement (incidentally, I also use the Index to criticize the United States). But Korea has two freedoms that are world leaders. Korea 's business freedom score (84 percent) is one of the best in the world. For example, it takes the world average is 43 days to start a company, but in Korea a new company can be established in 17 days. The results show that Korea's level of freedom is good for a developing country, very good. But now that Korea is the 10^th largest economy in the world, the empirical relationship between economic freedom and prosperity suggests that the nation's institutions will have to be reformed for faster long-term growth.

FRAMEWORK  --  SLIDE 10

My colleagues at Kauffman – Carl Schramm and Bob Litan – co-authored the book GOOD CAPITALISM, BAD CAPITALISM with William Baumol to summarize what the economics literature has discovered about growth. One of the central arguments in the book is that there are different kinds of capitalism – state-managed, oligarchic, big-firm, and entrepreneurial. I hope I am not giving away the ending when I tell you that entrepreneurial capitalism is the ideal form.

An economy that gives entrepreneurs freedom to create business leads to innovation which leads to growth and new jobs.  As I mentioned above, investment follows innovation, and hopefully we have learned that bad capitalism is based not on bad intentions, but on misunderstanding this point –neither the state or large corporations can create growth by pushing investments. Only the entrepreneurial process of discovery, experimentation, and tolerance for failure can invention emerge.  Let's not forget that Thomas Edison tried tens of thousands of failed materials before finding a filament that allowed the light bulb to work. The eternal optimist, Edison actually referred to this process as "successfully discovering 10,000 ways not to invent a light bulb."

 

The way to tell if you are living in an entrepreneurial economy is if you see a large amount of turnover in the labor market, what economist call dynamics.  In America – which has a long history of entrepreneurial dynamics – there are 600,000 new firms created each year. These firms are central in the creation of over 8 million new jobs every quarter. But the brilliance of the dynamic economy is its tolerance for lost jobs. Again, in America, there are an astonishing gross decline of 7.7 million jobs each quarter.

Consider the results.

THE FUTURE IS NOW  --  SLIDE 11

This graphic comes from a study of U.S. labor markets dating back to 1800.  It was done by the Federal Reserve Bank in Dallas.  And what it shows is that the U.S. economy has gone through a massive liberation of farm labor which shifted first into manufacturing but then during the last century into services. At the dawn of the 21^st century, more than 8 in 10 workers in the U.S. are in services.  Doctors, actors, lawyers, computer programmers, musicians, artists, designers, and yes, even economists. As Korea prepares to grow in the new century, I imagine it can anticipate a similar transformation.  Manufacturing jobs will become increasingly automated and industrial workers, whether they want this or not, will either be liberated or be uncompetitive. This is not an easy transformation, but it is coming.

Growing economies will see this transformation as an opportunity, because it is clear that the service economy will be dominated by knowledge workers – that is, workers with strong academic potential and achievement. Korea's culture is excellent in these regards. What will enhance Korea's success (and America's incidentally) is greater openness for its knowledge workers to the world. A prime example of greater openness is the pending KORUS free trade agreement. Once in place, the expansion of trade between these two economic giants would lead to greater growth than we can imagine, and arguably it would also provide for greater resilience against future recessionary pressures. The absence of a free trade agreement between our two countries has always been a puzzle to me personally, as a former soldier. We soldiers tend to have a universal bond, regardless of which nation we served.  Is it not odd that our troops have fought together as allies, and mixed blood on the battlefield, yet our politicians are so hesitant to let our goods mix freely in the market?

KANE'S PYRAMID  --  SLIDE 12

What other steps can we take to enhance entrepreneurial growth? To help myself think through these issues, I drew up this conceptual model which I call the pyramid. Every nation has a given physical geography that serves as its foundation, and we know that some locations are more fortunate than others – some rich with natural resources, warm winds and gentle rains, wide rivers and healthy forests.

These other four stages represent steps in the national economic environment for innovation.  Human capital and financial capital are both here, and they are the final steps leading to the ideas themselves.  Interestingly, the model helps us see how little control governments have over the final results, primarily because financial capital is the most liquid of the steps – meaning that it will come and go as it sees fit.  Financial capital without the other foundation stages is ineffective.  Alternatively, if the other stages are strong, then capital will flow in on its own, without any boost from the government.  No, the one critical area for government involvement is establishing institutions and laws and regulations that are pro-growth.

For all of the dreamers and would-be innovators here today, I share with you these thoughts. Moving an idea from concept to disruptive breakthrough requires you to tackle your fears, particularly your fears of risk and failure. Greatness is born from risk.

I urge you to stand on the shoulders of the giants who came before you.  Even Steven Jobs was fired from Apple, before he came back to transform the marketplace with the iPod and iPhone. It must have seemed crazy ten years ago to imagine a world where people could thrive in a job as a professional video game player, but now we know thanks to Starcraft in South Korea, that every young boy's dream can come true (and for the record, I play Protoss).

Let's not listen to those who say entrepreneurs are crazy. Investors often see failure as an asset in your record—not a liability.  To them, failure suggests a tolerance for risk, a perseverance to succeed and, most important, a passion to push the envelope. So don't give up. Learn from every mistake. And at each step, seek out and capitalize on the resources available to you, of the monetary and human varieties.

As for the rest of us, it's our imperative to support the new generation of entrepreneurs and keep the pipeline of innovative ideas full and flowing.  Young entrepreneurs are the world's greatest natural resource.  Innovators and those who inspire, connect and mentor them will lead the way out of economic danger and toward greater prosperity for all of society.

Thank you.

 

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