STRATEGY

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An Inc. executive editor speaks with noted economist David Birch about how growth companies really behave.
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Face to Face

David Birch was first to tell us how growth companies really behave. Now he's telling us what they really need. Is anybody listening?

"On my tombstone," says an amiably frustrated David Birch, "they'll write, 'David Birch discovered that small firms create most of the jobs.' God gives you one sentence--that's as much as people can remember about anybody--and that's the one they'll be writing about me."

They already are. In Stockholm last year, Birch was awarded the first annual Nutek Prize--a kind of "baby Nobel" is how the Swedes characterize it--which recognizes work in the field of entrepreneurial- and small-business research that has stood up to time and has broken a new path for work that's come after it. Birch, the award's prototype recipient, was feted at a ceremonial gala in the stone-arcaded banquet court of Stockholm's city hall. People from 67 countries were there. So was Sweden's king. And at the heart of the proceedings was another riff on that eulogistic sentence: "Dr. Birch is best known for having identified the role of new and small firms in job creation, which has considerably contributed to the recognition of the small-firm sector."

And contributed it has. In fact, from the moment of Birch's tide-changing 1979 study, innocuously titled "The Job Generation Process," his career seems to have moved in lockstep with entrepreneurship's march from irrelevance to center stage. Sometimes it was Birch himself who had to kick the campaign forward. "You should have seen the audiences I got when I started in 1980 to 1982. I was like the freak show at the carnival. There was the mainstream thinking--all about the role of the large company--and then there was this kook over here talking about something else. If I got 30 people in a room, it was a good day. Once, when I was invited to a huge university auditorium, I got 12--half of them my own employees. God, it was awful."

Those stories of the early days remind us that it's only much later, when everyone's mind has been changed and important people show up with prizes, that it feels good to be a pioneer. But Birch carried on. And events caught up to his small-business obsession: as it turned out, 1979 was more than the year of his research breakthrough--it was also when the employment rolls of the Fortune 500, which had expanded every year for a quarter century, began a contraction that still hasn't stopped.

Today, Birch speaks about company growth in countries throughout the world and draws audiences in excess of 1,000. His own company, Cognetics Inc., in Cambridge, Mass., continues to thrive as a repackager of his research on job generation and entrepreneurial activity. And foreign leaders, corporate CEOs, and fellow academics call him for advice. Birch, like the once-peripheral subculture he studies, has arrived.

Imagine our surprise, then, to find him still feeling misunderstood. We began our interview by asking what misconceptions have remained about the birth, life, and death of businesses, and he immediately cited the oversimplification that could one day become his epitaph: Small companies create the most jobs. "That implies that Norman Rockwell's Main Street America is where growth is coming from, and that's not true," Birch says. "In fact, most small firms don't grow. The gazelles do. And that's only 3% of all the small companies out there."

The behavior of those "gazelles" --companies that grow at least 20% a year for five years in a row--has preoccupied Birch in recent years. That preoccupation has made him an expert on their makeup. Where do they come from? What are their special characteristics? What nourishment do those fast growers need?

We asked him what he's found.

Q. You've said that the role of the entrepreneur, of small businesses creating jobs and wealth, has become such a clichÉ that most people miss one critical fact: only a tiny subset of small companies--3%--do most of the growing. What danger does that misunderstanding pose? What does it cost us?

A. It costs us the chance to have a meaningful discussion about how to really help nurture young firms--how to take some of the terror out of company building--and that's dangerous for our economic future. The claim that small firms create jobs greatly oversimplifies things and leads us as a country into some very fuzzy thinking.

Q. Leading to bad public policy?

A. Yes. Things like small-business exemptions from health-plan requirements or other regulatory measures. Special subsidies and incentives based solely on a company's size. You've heard the argument offered whenever such special treatment is being proposed--it's that these are the companies that create jobs. Well, most of them don't. But people keep using our findings to make the job-creation argument when they need it, neglecting the fact that you're wasting an enormous number of bullets when you institute a program so broadly. If there are 10 million small companies out there, and you've got only 200,000 you're trying to encourage, it's awfully wasteful to give something to 10 million to do it, right?

Q. So, forgetting the 10 million for a minute, what do the fast-growing job creators need? Is there something crucial about the economy that we're missing by not distinguishing gazelles from the general run of small businesses?

A. Two things, I think, things that people are missing and that, if we keep ignoring them, are so dangerous that they could kill our economy: immigration and education.

Q. Hardly overlooked subjects. What are we missing?

A. We don't think about them from this perspective: our economy has reached basically 2% or 3% unemployment. Now, if I'm an entrepreneur, how am I going to grow a company--how are we going to keep an economy vital--if there's nobody left to do it with? And if I can't grow it at all, then all of a sudden the incentive for growth vanishes, and the whole system becomes very stagnant--and very demoralizing.

The threat to our economy isn't a lack of entrepreneurs; it's a shortage of the raw material they work with. We're out of raw material. It's like being in a room with all the doors shut and running out of oxygen. And you say, "My God, we've got to get more oxygen or we'll die." But the response is, "Well, if we open up the windows, we'll get cold."

Our leaders don't get it. We need oxygen.

Q. What do you mean by oxygen?

A. Brains. We need brains. And there are two ways we can get them. One: we can take people who don't have enough education and give them more. Right now we produce the worst high school graduate in the world. Literally. The least skilled. And yet we produce the best university student. So we're putting the half of our kids that don't go to college on an economic scrap heap.

We could get them off the scrap heap. We could give the gazelle population a workforce to work with, and we're not doing it. That's a big threat. If we don't solve the problem, then our economy is down the chute, and the gazelles are going to be the most frustrated people on earth. Except, of course, that gazelles don't stay frustrated for long. What they'll do is go to Taiwan and Singapore and Mexico. They'll find a way to get what they need. But it will not be good for America.

The second thing we could do to solve the raw-material problem, and we could do it in a week, is simply change our immigration laws. I mean, every time I run a help-wanted ad for Cognetics in the newspaper, it gets put on the Internet, and half the people who respond are from outside Massachusetts, and half of those are actually from abroad.

Q. From which countries?

A. Romania, Russia, China. And I can't hire any of them. I mean, the government won't let them stay. I get them over here, and the feds send them home. I had a woman lined up whom I really wanted to hire as a computer programmer. She was Chinese, and she had made it over here as an environmental engineer.

Well, it turned out that she was really a computer programmer and she happened to work for an environmental company. I said, "Boy, I'd love to hire you." And she said, "Can't do it." I asked why. "Because that will change my job classification," she said. "You're not an environmental company, and they'll send me home." I said, "But you'd be doing exactly what you're doing now." She said, "I know, but that will completely disrupt my green-card application, and I can't risk it."

So I can't hire these people. Nor can anybody else. We're letting in only around 900,000 people a year. We could easily admit 2 or 3 million people a year--skilled people only, people with a university degree. And if we did that, we could double the growth of the American economy.

We're only 5% of the world's population. How can we be so arrogant as to sit here and think we don't need anybody else, when we desperately do?

Q. What prevents politicians and others from agreeing with you?

A. I'm not sure they wouldn't agree if they understood. I think it's more an unawareness of what's happened to the economy overall. The protectionist mentality will be there forever, as long as it thinks it's protecting what's important. For instance, if you have a bunch of trade unions that are protecting the manufacturing workforce, however small it may be, they will forever resist all these changes. Because they feel deep down that they're protecting something very important.

And yet, we haven't added one manufacturing job to the U.S. economy in the past half century. Fifty years--not one job. We've added more than 70 million jobs overall, and they're virtually all in the "knowledge value" economy, as Taichi Sakaiya has termed it. But the interests of the industrial economy, the interests of the past, don't want to see it. They don't want to see that the raw materials that matter aren't steel and boats and rail lines. They're brains. That's the oxygen. And the people who do understand aren't involved in the political debate. Because they're off working.

Q. Are you surprised at the number of contacts you get at Cognetics that come from overseas?

A. At first I was. But then it began to seem commonplace and to mirror the experience of the gazelle companies I study. The extent to which I deal with people from other countries has gone up so sharply that, particularly over the past year, I've almost stopped thinking of the U.S. economy as a self-contained thing. I find myself talking to people from Sweden and Denmark and Taiwan and Singapore. And you know, the really striking thing is that we're all talking the same language: English. Our nationalities aren't really an issue at all. I mean, I don't even think about it the way I would have two or three years ago.

Q. When did it change?

A. I'll tell you an anecdote. I was in Denmark in 1996, and I gave a talk in the original stock market in Copenhagen. And at the end of my talk, we had a performance by the Royal Danish Ballet--orchestra, the whole bit. I mean, this is pretty high cotton, right? And at the end of the performance, the ballerinas and the lead dancers put on their sweats and had a discussion with the audience. We're halfway through this discussion with the prima ballerina of the Royal Danish Ballet, and it suddenly hits me that the entire discussion is being conducted in English, despite the fact that I'm the only one in the room who doesn't speak Danish. Think of that. There are 350 or 400 business executives sitting in this room. They're all having a discussion with the most famous person in Denmark other than the queen, and they're all doing it in English for my benefit and only for my benefit. They would all desperately prefer to do it in Danish. And it all of a sudden hit me. Think how the world has changed. Can you imagine putting 350 American business executives in one room in the United States and having them all speak Danish because some kooky academic from Denmark came and talked?

Q. What do you think it means?

A. What that experience signified to me was that the world is a common place now, and we Americans happen to be the enormous beneficiaries of the language that the world speaks. Everybody in that room spoke English.

Q. In all your travels, do you ever deal with translators anymore?

A. Never. Everything is in English. When I talk to the European Economic Community, even the French will finally bend and speak English.

So I'm not surprised anymore by the global labor market that my own little company intersects with. You begin to realize very quickly that we are only 5% of the world's population. You know, we're a tiny, rinky-dink country. For the longest while, we sort of focused on ourselves. And we can't anymore. On our own, we're just a very small game.

Q. Do you see concrete examples of that?

A. All the time. I was talking to somebody in Shanghai a couple of weeks ago. She was looking out her window. And she said, "David, you're not going to believe this, but I see 60 cranes outside." There are probably only 60 cranes working in the whole United States today. The United States is growing at 1% to 2% a year. China is growing at 12% a year--maybe 10%. You know, there were a few cranes in Dallas, where I was yesterday. If we don't change our immigration policy and education policy, we're not going to have a single crane in the United States.

The vacancy rate for office space in downtown Dallas is 33%, about to go to 43%. Boston, I suspect, might well be in a similar position in a couple of years, when the stock market gets back to where it belongs; we're solely depending on mutual funds.

We're grinding to a zero-growth economy here. And there are other economies in the world that are growing at 10%, 12%, and 14% a year. Not only are we rinky-dink, we're stagnant rinky-dink. And the notion that somehow we're important enough to keep to ourselves is a fatal notion in the business world.


Resources

COGNETICS, David Birch, 100 CambridgePark Dr., Cambridge, MA 02140; 617-661-0300; www.cogonline.com 34

Last updated: May 15, 1997




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