The WSJ reviews Silicon Valley entrepreneur Henry Nothhaft's new book, Great Again: Revitalizing America's Entrepreneurial Leadership
Mr. Nothhaft, ... who is the CEO of the technology-miniaturization company Tessera, chronicles how difficult it has become, particularly in California, to start capital-intensive enterprises. Excessive regulation and Washington policies, he argues, undermine initial public offerings and discourage the launch of businesses that provide jobs and drive productivity. ...
Money for companies that require capital to produce tangible products is much harder to come by [than money for things like Twitter]. Why? Mr. Burke recites the environmental, safety and other bureaucratic regulations that raise costs and slow creative ferment. He also highlights the tax burden beyond the corporate rates. When his company paid $10 million for German manufacturing equipment, California levied a "use" tax—Innovalight was using equipment purchased outside the state—of nearly a million dollars. "That's not a tax on our income," Mr. Burke says, "it's a tax on growing our business."
It might be tempting to dismiss these gripes as the usual complaints of the business class, but consider the consequences of such a tax and regulatory environment. Venture capitalist David Ladd's bluntness is startling: "We would not fund a company that was building hardware or semiconductors, nor any of the tough physical sciences," he tells Mr. Nothhaft. "We'll invest in China instead and let them do it."
Nothhaft lays the blame on several areas, such as corporate tax, but also hits on a subject near and dear to the heart of this blogger:
... despite the recent successful LinkedIn public offering, there is no doubt that the regulations imposed on public companies by the Sarbanes-Oxley Act of 2002 have considerably dampened the IPO market. When Mr. Nothhaft was preparing a mobile-Internet firm called Danger to go public in 2007, he says, the company had to spend $3 million and many precious man-hours to become Sarbox-compliant. When the law was enacted, Mr. Nothhaft dryly observes, the government estimated that the average cost of compliance would be $91,000.
This conclusion is amptly backed up by data, as I documented in my article Corporate Governance and U.S. Capital Market Competitiveness, which argues that:
During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.
Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.
This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.
