Right after the election of Donald Trump, the soon to become the 45th President of the United States of America, many opinions were voiced and few articles written about the relationship between his administration and “Silicon Valley”, the home to many start-ups and global technology companies and the center of innovation and entrepreneurship in the most dynamic capitalist economy in the world.
Trump’s election also intensified earlier discussions on the separation of the State of California from the U.S., also known as “Calexit”, following in the footsteps of the exit movements and threats in the UK and Greece respectively.
These two political and economic reverberations of the US election, although not widely discussed in the media, are of great importance to businesses in Silicon Valley and in other geographical techno-centers like “Route 128” in Massachusetts, that represent the core generators of innovation, technology, and startups in the U.S.
First of all, if free markets are the only mechanisms that provide incentives and catalysts to the creation of startups and their sustainment, without state intervention, it would not have mattered who reached the White House or if California stayed in the union or became an independent republic. However, that is not the case at all.
In this respect, the most important elements in Trump’s policies that will affect startups and the technological sector, are: first, the effect of the projected slowing down of immigration on the flow of labor skills; second, the domestication of manufacturing in the US forcing companies such as Apple to refrain from internationalizing their production processes; and third, his position on free trade; and finally; his policies on taxation and government benefits such as health provision.
On top of all that, the most critical factor that could affect innovation and entrepreneurship is Trump’s policy on government funding of research and development. In her article in WIRED Magazine, Davey Alba hints that Trump may not have a clear policy on this issue; and quotes Robert Atkinson, President of the Information Technology and Innovation Foundation (ITIF), who says that it is possible that funding for science and R&D to “go by the wayside “and points to the fact that Trump has not mentioned any of his plans for appointing anyone to lead the National Science Foundation or the National Institutes of Health.
In this context, latest research has concluded that entrepreneurship doesn’t operate in the “vacuum” of markets; and that government policy, specifically it’s spending on research and development, have a crucial role in launching and developing startups. In a series of articles published by William Lazonick, Professor of Economics at the University of Massachusetts at Lowell and Co-director of the Center for Industrial Competitiveness, showed that the developmental state is crucial for innovation in the U.S.
According to Lazonick, the National Institutes of Health (NIH) expenditures on the biotech industry, creating a knowledge base to the benefit of such companies, totalled 615 billion (in 2007 prices) between 1938 and 2007. In the early 70s, the U.S. government encouraged startups to benefit from such a knowledge base through lowering taxes on capital gains from 49 % to 20%, a move lobbied for by the National Venture Capital Association.
The US government also issued two legislations in 1980 and 1983. The first allows tech companies to benefit from scientific advancements generated by universities and hospitals that are funded by federal funds. The second legislation allows tax exemptions for R&D for companies developing cures for rare diseases or drugs for small markets. This legislation, known as Orphan Drug Act, also gives those companies exclusivity in markets for seven years. Hence, the decline of potential government funding during the Trump presidency will inevitably lead to deterioration in many technological sectors in America.
After Trump’s election, many voices in California, the state that heavily voted for Hillary Clinton called for the speeding of Calexit. Sam Altman, the president of Y Combinator, reportedly said, after election results came out,“This is the worst thing that ever happened in my life”. The feeling was shared by many in the Valley, leading the Calexit movement.
In this respect, the positive results of California exiting the union must be compared with the negative outcomes that could impact the high-tech sector that heavily relies on government funding, the huge U.S. market, and the free movement of skilled labor.
Here lies also the importance of the nation-state in encouraging (or inhibiting) the technological sector and its role in contributing to economic growth and prosperity which make us posit this question “Are the supporters of California’s independence aware of the economic outcomes of such a secession?”
Ha-Joon Chang, Professor of Economics at Cambridge University, agrees that entrepreneurship in advanced capitalism is no longer the act of “lone heroes” as Joseph Schumpeter assumed. It has instead become a collective work based on the combined contributions of scientific infrastructure, cooperation between companies and the complex internal organizations of companies to technological progress.
Chang says, as an advice to entrepreneurship policies in developing countries, that “unless we reject the myth of heroic individual entrepreneurs and help them build institutions and organizations of collective entrepreneurship, we will never see the poor countries grow out of poverty on a sustainable basis”
All of this must push us in the Arab world towards a paradigm shift with regard to the role of the state, research and development, and the other determinants of beneficial and sustainable entrepreneurship that contributes to building advanced and dynamic economies. Only such economies will help Arab societies escape the economic and social trap that they increasingly find themselves caught in today.