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Thursday, March 28, 2024

Nurturing billionaires

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Who wants to be a billionaire? Wait. That’s not the right question. The real question is: How do you get there?

An Exclusive Club

A record 290, 71 from China, joined the 2015 Forbes list of the world’s billionaires, up from 268 in the previous year. The number of billionaires on the Forbes list is now at 1,826, also up from 1,645 in 2014. The Forbes 1,826 have an aggregate net worth of US$7.05 trillion, up from last year’s US$6.4 trillion. 138 people dropped out of the list and the average net worth dropped by US$60 million to US$3.86 billion.

Bill Gates, with US$79.2 billion in net worth, tops the list, a slot Forbes reports he has held for 16 of the last 21 years. Gates’ net worth grew a reported $3.2 billion in 2014, an amount net of the $1.5 billion in Microsoft shares donated to the Bill and Melinda Gates Foundation in 2014. Carlos Slim Helu (Mexico) whose family controls pan-Latin American wireless carrier America Movil came in second (he topped the list in 2013). The Oracle of Omaha took the number 3 slot back from Amancio Ortega (Zara) who is now number four again. Buffett topped the list of gainers for the year, with an increase in net worth of $14.5 billion, primarily from capital gains on Berkshire Hathaway share prices. Jack Ma, whose Alibaba accounted for the biggest IPO in history in 2014, took 33rd slot with $22.7 billion. It took $29.2 billion to make it to this year’s top 20 and $18.1 billion to make it to the top 50.

Forty six in the Forbes list are under 40, with Facebook’s Zuckerberg (Age 30, No. 16, $33.4 billion) leading the pack in terms of net worth. 21 of the under 40’s are making their debut in this year’s list, including the very youngest on the list, Snapchat co-founders, Evan Spiegel, 24, and Bobby Murphy, 26, each with an estimated net worth of $1.5 billion.Spiegel and Murphy reportedly turned down a $3-billion buyout offer from Zuckerberg and Fortune reports that they are now getting offers in the region of $19 billion. 27 of these under 40s are self-made and 20 did so in tech. The newcomers include Airbnb creators Blecharczyk and Chesky; Uber’s Kalanicik, Camp and Graves; and Theranos blood test creator Elizabeth Holmes, one of nine in the under 40 list and, at 31, the youngest self-made woman in the world.

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Of the world’s richest, 1,191 (65.2 percent) are self-made billionaires, 230 (12.6 percent) inherited their fortunes, and 405 (22.2 percent) inherited part of their fortunes but are continuing to work to increase it.

Entrepreneurship is clearly the path for majority of the members of this exclusive club.

Making It

There are a handful of ways to make money: inherit it, marry it, or earn it. If you are preparing to earn money yourself, there are three paths: get employed, practice a craft or profession, or start a business.

If you want to be a billionaire, the lesson of the Forbes list seems to be to start a business. There are, of course, many who claim to know what it takes to become a successful entrepreneur. Those lessons cover management tips as well as self-management tips.

There is, however, another side to the question of entrepreneurship and that is a policy question. What nobody seems to dispute is that entrepreneurship is the primary engine for growth for most economies of the world. The question of nurturing entrepreneurship is one that is important to many countries. In April of 2014, the UK Centre for Policy Studies released a report promising to shed light on precisely this question.

The report is entitled SuperEntrepreneurs (Sanandaji & Sanandaji). The study adopts economist Joseph Schumpeter definition of entrepreneurship: the creation of innovative and growth-oriented firms. To identify the creators of the most successful innovative companies, the researchers mined the list of Forbes list of richest people between 1996 and 2000, identify 1000 self-made billionaires, the SuperEntrepreneurs.

The study provides some very interesting observations. The “SuperEntrepreneurs” founded half of the largest new firms since the end of the Second World War. 42 percent of Western European billionaires in the sample are self-made, sharply contrasting with 70 percent in the US and almost 100 percent in China. The proportion of SuperEntrepreneurs vary significantly by country, with Hong Kong (3 per million), Israel, the US, Switzerland, and Singapore topping the list.

The Policy Question

The key policy question is, of course, this: What accounts for country differences? The study concluded that active government and supranational programs (such as the EU’s Lisbon strategy) to encourage entrepreneurship have largely failed. However, governments can encourage entrepreneurship by lowering taxes (particularly capital gains taxes), reducing regulations and vigorously enforcing property rights.The report points out that corruption and regulations go hand in hand, a lesson those in government would do well to heed.

The report concludes that high rates of philanthropy also correlate strongly with entrepreneurship and that SuperEntrepreneurs tend to be well-educated. SuperEntrepreneurs in the US are five times more likely to hold a PhD degree than the general population. In addition, some industries are inherently friendlier to entrepreneurs because of their fixed cost and capital requirements.

The Forbes data indicate that the US outstrips Western Europe in entrepreneurship, with US SuperEntrepreneurs per capita being 4.5 times more in the US. Using observations concerning the negative linkage of taxes and regulation, the report estimates that taxes and regulations explains two-thirds of the difference between Western Europe and the US. The report also explains that per capita income is positively correlated to entrepreneurship, although it is not clear whether this is a cause or a result (or both). Together, taxes, regulations and per capita wealth explain 80 percent of the entrepreneurship difference between the US and Western Europe.

The report cautions policymakers against conflating self-employment with entrepreneurship, pointing to innovation as a key differentiating factor. The self-employment rate in Silicon Valley, a hotbed for entrepreneurship, is half of the California average.

The SuperEntrepreneurs report ends with a few lessons for entrepreneurs themselves. Entrepreneurship is risky and failure is part of the game. Because of the high level of risk, entrepreneurship is a numbers game. Entrepreneurship is knowledge intensive. Entrepreneurship increasingly requires specialization and an infrastructure (think venture capital availability). Entrepreneurship is more common in certain areas than in others. Entrepreneurship often requires industry experience and entrepreneurship requires scaling up.

The lessons for policymakers seem clear. Define entrepreneurship clearly. Innovation is the key differentiator. Lower taxes, especially capital gains taxes. Ease the regulatory burden. Pay particular attention to regulations that affect the preconditions to entrepreneurship, e.g. those affecting capital markets. Eliminate corruption. Encourage education. Focus on industries that are entrepreneur-friendly.

In this year before the elections, this perhaps is what our policymakers need to add to their agenda.

You can email Maya at integrations_manila@yahoo.com.  Please like the Integrations Manila Facebook page or visit her archives atmanilastandardtoday.com/author/maya-baltazar-herrera/ or integrations.tumblr.com or www.mayaherrera.aim.edu.

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