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McNair Center Startup Ecosystems

Silicon Valley: A Powerhouse for Innovation

Silicon Valley’s economy is a powerhouse. Representing 14% of U.S. Gross Domestic Product, if California were a country, it would have the sixth biggest economy in the world. Although it has remained successful for decades, California was not always the leader that it is today. What about California led it to become a high-tech phenomena?

The Growth of Silicon Valley

Semiconductor Expertise

Although Silicon Valley is well-known among the American public today, this area was not always known for its tech development. In the first half of the twentieth century, San Francisco began to become a hub for the radio and telegraph industries. The first steps towards becoming modern-day “Silicon Valley” occurred in the 1940s, with the founding of Hewlett-Packard and Bell Labs. Engineers at HP made oscilloscopes, radar and artillery technology to aid the US in World War II. The first ever transistor was also invented at Bell Labs during this time period. The transistor later went on to become the computer processor, and its inventor created Shockley Semiconductor Labs, the first company to create transistors out of silicon.

In the ‘50-60s, employees with knowledge of semiconductors at Shockley Semiconductor Labs left and started their own enterprises. From there, the area became a hub for technology, known for expertise in semiconductors.

University Collaboration

Another milestone, occurring simultaneously with the region’s growth in semiconductor production, was the creation of the Stanford Research Park (SRP) in the early 1950s. Stanford University’s Dean of Engineering developed SRP as a hub for entrepreneurs and researchers to collaborate. Soon after SRP’s creation, the city of Palo Alto annexed SRP’s lands to generate tax revenue; this created a mutually beneficial relationship between Palo Alto’s residents and the researchers at SRP.

In 1951, Stanford Research Park’s first company, Varian Associates, broke ground. Varian went on to develop the microwave tube, which served as underlying technology for satellites technology and particle accelerators. Since then, SRP has been the home to many technological breakthroughs, from developing components of the international space station to being the home to Facebook as it was in its earlier stages of growth.

University presence in the area gave Silicon Valley the advantage of having a steady stream of innovators. Lawrence Livermore Labs‘ establishment at the University of California at Berkeley in 1952 also brought a wave of innovators to the area. Their development of breakthrough defense technology began many years of innovations. Their work in collaboration with Los Alamos National Laboratory later enabled the launch of the Human Genome Initiative in the 1980s.

Over the following decades, more companies located themselves in the area. The 1970s brought Apple, Atari, and Oracle. The location of these large companies in the area brought talent and prestige.

Two decades later, after the area was well-established as the leader for the computer industry, companies like eBay, Yahoo, and Google all joined the ranks of Silicon Valley’s residents.

High Tech High Growth Enterprises and Changes Over Time

Graphic 1: Bay Area Startup Firms, 1980-2016

Graphic 1 shows changes in the amount of high tech high growth enterprises since 1986 in the Bay Area. We can draw a few insights from this information. First, the Bay Area’s concentration of these types of enterprises has clearly grown. The cities of San Francisco and San Mateo also became significantly more crowded than 30 years ago. However, concentration is not the only thing that has increased. Enterprises span the entire bay perimeter, whereas they used to mostly exist in small clusters.

A small cluster of enterprises has been growing to the East of the Bay Area, in Pleasanton. This could be a sign of even further sprawl in future years as the more popular areas become overcrowded.

Home to Venture Capitalism

Silicon Valley also houses the street that features some of the most prominent VC firms in the world: Sand Hill Road. Sand Hill Road, a 5.6-mile strip in Menlo Park, is famous for its high concentration of VC firms. The biggest names in tech – like Microsoft, Amazon, Facebook, and Twitter – all received funding from Sand Hill firms.

Although the success has been relatively steady, many sources are hypothesizing that Sand Hill Road’s reign may not last much longer. Tech Crunch attributes Sand Hill Road’s potential demise to VC firms’ desire to be closer to entrepreneurs along with the understanding that location isn’t as important as it used to be due to increased technology and on-site visits to founders. Sand Hill also has some of the highest space rental prices in the United States, which doesn’t incentivize firms to stay. Nonetheless, even as firms leave Sand Hill Road, they tend to stay in the Silicon Valley area. This means that Silicon Valley’s reputation as a VC leader is not truly in danger.

Broadening Success to California

With the success of Silicon Valley in Northern California and the long-standing success of Southern California as a center for pop culture and media, it is no surprise that the state experiences economic prosperity.

The Milken Institute cites the diversity of high-tech firms as what allows Silicon Valley and the rest of California to thrive. This diversity serves as a protection in the event that a specific tech industry crashes. Through sharing of resources and ideas, new firms are frequently popping up as well.

Nonetheless, California’s success is not unstoppable. According to the Milken Institute, California’s human capital capacity has been decreasing. Its rank in the Human Capital Investment Composite has dropped from second in 2002 to seventeenth in 2014. With this, California must recruit human capital from other states and countries in order to satisfy demand. If this human capital pipeline ever stutters, it could create issues for California’s continued growth. California is also only mid-tier when it comes to per capita academic R&D investment; this may not bode well for maintaining innovative competitiveness in the future.

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Government and Policy McNair Center Small Business Startup Ecosystems

Capitalizing on Competencies: Augusta, GA’s Innovation Path

Cities around the country constantly aim to increase their innovative competitiveness. The city of Augusta, Georgia, continues to emphasize this goal to boost the local economy. After thorough research, the McNair Center generated suggestions to help Augusta’s leaders drive this growth.

The Ideal Situation for Growth

Although there are more than 28 million firms in the U.S., economic growth comes disproportionately from only a tiny fraction. More than half of growth in the American economy comes from these “High-Growth, High-Tech” (HGHT) enterprises. HGHT firms grow from nothing to IPO in a very short period, about 5-6 years.

HGHT firms desire areas with abundant funding. This includes venture capital (VC) funding, angel investors and crowd funding, government grants and contracts, and research and development (R&D) opportunities.

To support HGHT firms, certain systems and mechanisms must also be in place. Factors like accelerators, incubators and collaboration hubs all attract firms by creating innovation communities.

Evaluation of Current Situation

Augusta does not have a strong entrepreneurship record. With only one VC deal in the last few decades, it seems clear that entrepreneurs are not flocking to Augusta. The city’s lack of resident corporations with big R&D expenditure also indicates that innovation culture isn’t strong.

In terms of mentorship and support, there are no accelerators in Augusta, and only one incubator. The lone incubator, The Clubhou.se, was founded in 2012. They have 80 members, and boast that they “have helped 60 entrepreneurs grow 32 companies that create 90 jobs and a $7,000,000 annual economic impact in our community.” The Clubhou.se is yet to have a venture-backed success.

New or higher performing accelerators and incubators are necessary to attract large amounts of innovative firms. Right now, some of Augusta’s strongest innovation advocates are spearheading another entrepreneurship resource, the Augusta Innovation Zone. The Innovation Zone hopes to act as a physical hub for Augusta’s entrepreneurs.

Government grants and contracts, however, have a relatively strong presence in Augusta. With over 1,000 contracts and 200 grants from agencies like the Department of Defense and Department of Health and Human Services in the last ten years, Augusta has a clear ability to attract government work and win government grants.

Local Competition

Atlanta, the closest large city to Augusta, is currently ranked 26th for HGHT entrepreneurship among U.S. cities. Boasting $117 million VC invested, 6 new deals and 100 active startups in 2016, Atlanta is performing well. However, this is not performance that labels it as a leader in innovation. Atlanta’s ranking for startup density has dropped nine places relative to its rank in 2015. Although Atlanta is not a top performer, Augusta can expect a difficult relationship with Atlanta. Entrepreneurs tend to prefer strong entrepreneurship ecosystems, and Atlanta will be stronger than Augusta for the foreseeable future.

The Path Forward

The upcoming relocation of U.S. Cyber Command to Augusta, and the existing partnerships with local Fort Gordon, offer strong opportunities for growth in Augusta.

Perhaps the clearest path forward will be for Augusta to build off its current competency in receiving government contracts and grants. It could put together resources to make it easier for startups to apply for grants and provide government contract work. This strategy should attract new startups.

Working with the government often requires security clearances. In Augusta, this may create issues for startups who cannot obtain clearances. But there are many established firms whose employees already have clearances – Booz Allen for example has a large presence in Augusta. If these firms had incentives to partner with startups to jointly win grants and contracts, then an accelerator or an  incubator could act as a hubs to bring everyone together. Some famous ecosystem institutions elsewhere, like 1776 in Washington, D.C., owe much of their success to their roles as middlemen, running competitions, brokering joint contracts and enabling startup research.

Cooperation is Key

For this all to work, everyone – Augusta University, US Cyber Command, local government, established firms, ecosystem organizations and the startups themselves – all need to be in close proximity. The startups will also need help to allow them to focus on exclusively on fast-paced development.

Augusta’ Broad Street is their hub of business and tourism.

McNair Center Director Ed Egan sees potential in the future developments of Augusta. A new $60 million building named the Hull McKnight Georgia Cyber Innovation and Training Center (GCITC), built in partnership with the State of Georgia, Augusta University, and others, is currently under construction. It is located on the waterfront, just blocks away from the Broad Street strip. Egan posits that this is the best location for Augusta to try to create a startup scene.

Egan explains, “The GCITC could house much more than just cyber-related innovation. It could be the home to The Clubhou.se and The Innovation Zone, host drop-in offices for incumbents like Booz Allen, and be a place for U.S. Cyber Command and government agencies like the National Security Agency to host competitions and workshops.” Augusta has its own unique challenges, but, with the right approach and leveraging the GCITC, it could build its own unique ecosystem.

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McNair Center Startup Ecosystems

Houston’s Next Step: The Role of Funds of Funds in Venture Capital

Recently, Houston Exponential announced plans to create a venture capital Fund of Funds (VC FOF) to support the local entrepreneurship ecosystem. This strategy has been used by other cities and regions, such as Michigan and Cincinnati, to spur local startup growth. Private firms also offer VC Fund of Funds. What does this type of fund look like, and how has it played out in other locations?

The Basics

FOFs are funds that invest in multiple smaller funds. The increased diversification that they offer investors makes them attractive. However, there is a risk of overlap with FOFs; the many funds that make up the FOF may invest in the same entities. FOFs also may carry additional fees over a traditional fund because the the investor also has to pay the fees for the funds that constitute the larger FOF.

A VC FOF specifically invests in multiple venture capital funds. These venture capital funds then invest in local startups, entrepreneurs, and small businesses investment. FOFs diversify investors’ portfolios by ensuring investment in a wide variety of companies. Many venture capital funds make up VC FOFs,  so their success depends on what investments the constituent VC funds make. In the private sector, the advertised appeal of  VC FOFs is diversification, early liquidity, and enhanced fund returns.

FOFs can also exist through firms that typically invest in mature companies and buy all of each company’s equity, known as “Buyout FOFs.” The Chicago Booth Review claims that VC FOFs offer more diversification than Buyout FOFs, with an average of 7 more individual funds in each VC FOF. The research also indicates that VC FOFs are “more likely, through fund selection and/or access, to overcome their additional layer of fees” than buyout FOFs. This suggests that VC FOFs may bring investors higher value than buyout FOFs.

Impact on Cities

The trend towards creating VC FOFs to boost local innovation began about a decade ago. In 2008, Michigan created the Renaissance Venture Capital Fund. The premise behind the fund was simple: “Venture capital is important for economic growth and [Michigan is] underserved in the amount of venture capital available to fund exciting new ideas and technologies.” By investing specifically in VC funds that are active in Michigan, the Renaissance VC Fund provides the necessary capital for Michigan startups to grow and thrive.

Currently, the fund claims to receive a 21:1 return on every dollar they invest. With this success, they have grown; the fund has offices in both Ann Arbor and Detroit. Figure 1 shows the spike in investment and deals following the introduction of the Renaissance Fund. However, investment and deals seemed to have tapered off in recent years. Nonetheless, the new plateau does seem to be slightly higher than the average values before the fund was introduced.

Figure 1: Michigan saw large increases in investment in 2010 and 2011. Deals then peaked in 2013. Michigan introduced the Renaissance Fund in 2008.

In 2012, Cincinnati created a fund modeled on Michigan’s Renaissance Fund. Cincinnati-based corporations, like Kroger and Proctor & Gamble, created the Cintrifuse Early Stage Capital Fund I, LLC, which exclusively makes seed and early-stage investments in local startups.

According to Cintrifuse, the fund has resulted in a net increase of $24 million in value to the city. Figure 2 shows the spike in deals in both 2012 and 2014. Investment also peaked in 2014, relatively soon after the fund’s introduction. Nonetheless, the introduction of this program seemed to have no noticeable impact on Cincinnati’s overall GDP in 2012 and afterwards. The number of deals and amount invested have also declined substantially since 2014.

Figure 2: Cincinnati’s VC deals spiked in 2012 and 2014. The city created Centrifuse in 2012.

What Will This Mean for Houston?

VC Fund of Funds seem to carry benefits for both investors and local VC/startup culture. However, no plan to boost growth is a guaranteed success. Michigan and Cincinnati have demonstrated that it is difficult to maintain momentum with these funds. These cities’ experiences teach us that the fund needs to place a sustained emphasis on providing capital to the local region. McNair Center research indicates there are about 50 VC firms in Houston. This means that there are firms for which the FOF can provide capital. These VC firms can then disburse funds to local businesses.

On the other side of the equation, Houston will need local entrepreneurs and startups in which VC can invest. According to McNair Center research, there are approximately 20 startups active within the 610 loop. However, looking outside the loop to the greater Houston area, there is an abundance of startups. Nonetheless, the industries in which these startups focus may not be as desirable for investors as others. Houston’s startups do not tend to focus on one specific industry, although medicine and energy are popular. Since tech is one of the most desirable fields for investment right now, Houston’s tech startup scene may need to develop further if a VC FOF is to succeed.

Both sides of this equation need to be present in order for VC FOF to successfully boost the city’s innovation scene. If this is the case, there is hope that a VC FOF could provide a welcome boost to Houston’s ecosystem.

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McNair Center Startup Ecosystems

Development of Research Parks and Innovation Districts in Houston

On May 4, Houston Mayor Sylvester Turner stated his support for building a data science center. The next day, he endorsed plans for an Innovation District. How would these types of development promote entrepreneurship, innovation and economic growth in Houston?

The Basics

What are Research Parks, like the proposed data science center, and Innovation Districts?

Research Parks promote research, technological development and commercialization by creating a high density of universities and research institutions within a small area. By placing many innovative researchers and developers in close proximity, Research Parks encourage growth of new companies and collaboration across fields, driving technology-based economic development.

The Brookings Institution defines Innovation Districts as dense areas that bring together research institutions, high-growth firms and startups through thoughtfully designed and resource-rich commercial and residential spaces.

Research Parks and Innovation Districts slightly differ in their implementation, but both spaces aim to accomplish similar goals; they want to create physical hubs for innovation and entrepreneurial development. Typically, developers build Research Parks on new land, cultivating previously undeveloped space. Innovation Districts, however, use old land. This land was previously developed but is no longer in use.

Attribution: ShareAlike 2.0 Generic (CC BY-SA 2.0)
Silicon Valley is a well-known Innovation District.

Both Research Parks and Innovation Districts are generative and can be helpful in stimulating local economies. Stanford Research Park in Palo Alto and Research Triangle Park in Raleigh-Durham are some of the most well-known examples in the United States. Research Triangle Park is the largest in the country and one of the largest in the world. Stanford Research Park played a key role in the creation of Silicon Valley.

Successful Innovation Districts include Kendall Square in Cambridge, Massachusetts, South Lake Union in Seattle and Over-the-Rhine in Cincinnati.

What Makes These Areas Special?

Research Parks and Innovation Districts are highly productive areas. Innovation leads to new ideas and job creation. According to the Association of University Research Parks, each job in a Research Park generates approximately 2.57 additional jobs. Thus, the more than 300,000 Research Park employees in the United States lead to 700,000 additional jobs.

Innovation Districts can also produce strong results. By placing many innovators in close proximity to one another, they facilitate collaborative interactions. As Innovation Districts vary greatly in size and productivity, an accurate estimate for job creation is unavailable.

Key Factors: The Capital Stack

Layered financial tools known as a “capital stack” are necessary to promote the development Research Parks and Innovation Districts. For a capital stack that attracts investors, an area must have access to multiple types of equity, incentives and debt to provide flexibility to developers and innovators.

Developers may be able to secure planning grants through the U.S. Economic Development Administration to create the Research Park or Innovation District. These are “designed to leverage existing regional assets and support the implementation of economic development strategies that advance new ideas and creative approaches to advance economic prosperity in distressed communities.” Even though Innovation Districts are built on previously developed land, the government still issues planning grants because they “advance new ideas and creative approaches to advance economic prosperity in distressed communities.”

Tax credit bonds are also common debt instruments. Instead of taking on loans, municipal governments sell bonds, which provide tax credits in lieu of interest payments. Some examples are Build America Bonds, Recovery Zone Economic Bonds and Clean Renewable Energy Bonds.

Equity is also an important necessity. Investment can be incentivized from a variety of sources, like New Market Tax Credits. These give tax credits to investors who make equity investments in Community Development Entities in developing and low-income communities. Housing and Urban Development community development grants and state or federal tax relief programs can also incentivize investment.

Key Factors: Social Factors

The final piece of the puzzle to create a Research Park or Innovation District is social organization. In order to facilitate collaboration and innovation, physical, intellectual and social resources need to be readily accessible.

Networking assets—“the relationships between actors—such as individuals, firms and institutions—that have the potential to generate, sharpen and accelerate the advancement of ideas”—are essential for the development of Innovation Districts. The lines of communication between developers, researchers and sources of funding must be open and easily accessible. This synergy is enhanced in Innovation Districts through the close proximity of ecosystem participants and access to shared meeting and collaboration spaces.

The Potential for Research Parks and Innovation Districts in Houston

Many cities have developed Innovation Districts in effort to grow local entrepreneurship and innovation. Turner’s announcement of the planned Innovation District earlier this month mentioned the 40,000 jobs created by Chicago’s efforts to spur innovation. Turner noted, “It is now time for us to be more competitive, to further diversify and expand our economy. What Chicago can do, Houston can do better.”

In 2015, the University of Texas bought 332 acres of land in southwest Houston with the hopes of developing it into a small Research Park. However, in March 2017, UT Chancellor William McRaven canceled the site’s plans for development. The Houston Chronicle cites timing and lack of transparency as the main causes for the cancellation.

However, there may still be potential for a Research Park in Houston. Mayor Turner also expressed support for the proposed data science center, urging the University of Houston to take the lead. The Chairman of the University of Houston Board of Regents, Tilman Fertitta, has spoken positively about this idea, mentioning excitement about the prospect of collaborating with Rice University, Texas Southern University, Texas A&M University and the University of Texas through the development of a data hub.

Bill Gropp, the acting director of the National Center for Supercomputing Applications, recently stated that there is far more demand for Research Parks than there is supply. It is clear that the development of a Research Park or Innovation District would stimulate the economy and create jobs. If Houston wants to take advantage of these opportunities, the time to act is now.

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Government and Policy McNair Center

The Carried Interest Debate

In the 2016 election, carried interest and its taxation was a hot topic. Often explained as a “loophole” that allows the rich to exploit tax codes, carried interest is not a political issue that clearly fits within party lines. Lobbying by the financial sector occurs on both sides of the political aisle, and there are opponents and supporters within both parties. What are the dynamics of this debate, and what are the arguments for whether carried interest should be taxed differently?

Private Investment Funds

In the 2016 election, both Donald Trump and Hillary Clinton rallied against “hedge-funds” for paying so little tax. However, these comments were misleading. Clinton and Trump were actually talking about a tax rule that applies to a range of private investment funds.

A private investment fund invests capital with the goal of making returns for its investors. But within this description there is a lot of variety in the types of funds. Funds vary in their sources of capital, the targets of their investments and the roles they play in the economy.

https://commons.wikimedia.org/wiki/File:Fund_Structure.pngPrivate investment funds are typically set up as limited partnerships, rather than limited liability companies (LLCs). They organize themselves as general partners and limited partners. The general partners are the funds’ managers, which may be structured as a managing firm. Managing firms are often incorporated as an LLC. The limited partners are the funds’ investors. They are called limited partners because they are required to have limited involvement in the funds day-to-day activities. These investors are usually financial institutions, pension funds, insurance companies and wealthy individuals.

Rewarding General Partners

General partners invest in their own funds (typically contributing less than 5 percent of the capital) to make money. However, their compensation comes through management fees and carried interest. Usually around 2 percent of a fund’s raised capital goes to management fees.  Management fees are paid regardless of the fund’s performance and are there to cover operating costs and base salaries.

When a firm is set up it negotiates how excess returns – those paid after invested capital has been repaid – are shared. An 80/20 split between investors and managers is typical. Managers with strong track records can and do negotiate for more, sometime even offering to forgo management fees.  This 20 or so percent that goes to the managers is called “the carry” or, formally, the carried interest.

Types of Private Investment Funds

Common types of private investment funds include private equity funds, venture capital funds, hedge-funds and mutual funds.

Private equity funds generally invest in large companies with the intent to restructure and sell the firms for a gain. These investments usually mean acquiring controlling interests in public companies through stock purchases. The fund will then take the company private. Private companies can then be sold to another buyer or back to the public with a new initial public offering. However, private equity firms do also sometimes acquire private companies.

Venture capital funds invest in high-tech startup companies with high-growth potential. Once the fund purchases a stake in the company, it also provides coaching and other services to the company in order to increase its chances of success. Venture capital funds sell their positions at initial public offerings or when their portfolio companies get sold to incumbents or private equity firms.

Hedge funds focus on achieving high returns through risky investments. They differ from mutual funds in the diversity of their strategies and their underlying assets. Mutual funds typically only take long positions in stocks and bonds. Hedge funds can invest in anything. Their underlying assets include stocks, bonds, commodities, derivatives, warrants, futures, options, currencies, land, real-estate and much else besides. Hedge funds will often simultaneously take both long and short leveraged positions.

Tax Treatment

The carried interest controversy stems from its tax treatment. Carried interest is subject to a maximum capital gains tax rate of 20 percent (the long-term capital gains rate). This is compared to the maximum ordinary income tax rate of 39.6 percent, which is also the maximum short-term capital gains rate.

Those in favor of the current system believe that a higher rate would reduce the incentive for general partners to take risks. They sometimes specifically claim that greater taxes on carried interest could discourage innovation and efficiency in markets.

Those opposed to a reduced tax rate for carried interest frequently argue that carried interest is performance-based compensation.  Comparing it to a bonus, they say that it should be subject to the ordinary income rate.

The controversy surrounding carried interest has faced increasing media scrutiny since the 2012 election. Former Presidential Candidate Mitt Romney paid taxes of just $1.9 million on $13.69 million in income in 2011, an effective rate of 14.1 percent  Perhaps in response to the media and public uproar, the American Taxpayer Relief Act of 2012 raised what was then the long-term capital gains tax rate of 15 percent to 20 percent. President Obama signed this change into law on January 2, 2013.

The Economics

To economists the key question is one of efficiency: Would free markets achieve the efficient outcome without the additional incentive that carried interest provides? The answer probably depends on the type of private investment firm.

Venture capitalists face enormous information problems when trying to assess their potential investments. And many of their portfolio firms create value for outsiders who aren’t investors and who don’t use the firm’s products themselves. Each of these reasons leads to inefficient under-investment, which carried interest could help address.

Hedge-funds may make markets more complete by allowing investors to place capital into a wider range of underlying assets. Private equity firms may provide a “market for management” that disciplines publicly-traded firms. It is possible that without these types of investment vehicle there would be market failure, but it is unclear that they need additional incentives to address it.

Because mutual funds just aggregate and manage stock and bond portfolios – a job done by brokers and investors themselves – it is hard to see why they need subsidizing.

Looking to the Future

The House Republicans’ 2016 Tax Reform Proposal includes no explicit mention of carried interest. However, it does advocate for “reduced but progressive” capital gains taxes. If the administration chooses to adopt this plan, carried interest tax breaks could become even larger.

However, it is difficult to predict the fate of carried interest tax breaks, especially given President Trump’s past statements. During his campaign, Trump was highly critical of these tax breaks. He claimed that fund managers were “getting away with murder” by taking advantage of the rule. However, since taking office, Trump Administration has made no mention of its plans to address this tax code provision. The administration plans to reform U.S. tax law in the coming year, so carried interest is definitely a topic to look out for.

See the McNair Center’s wiki page on Carried Interest for further explanation of the dynamics of carried interest.

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Government and Policy McNair Center

Global Policy Uncertainty and U.S. Stock Trends

The Financial Times has predicted that “the rise of Donald Trump may already be casting a shadow over the global economy.”

When it comes to the Trump Administration, the world is unsure what policies to expect. Trump’s positions on international trade and tendency toward nationalist policies are a concern for the rest of the world. However, the U.S. stock market is performing at record-breaking highs. Economic research has linked policy uncertainty to stock market slowdowns. If this is so, why is the American stock market responding so positively?

Policy Uncertainty

With President Trump’s unprecedented actions and unpredictable behavior, policy uncertainty seems like the only thing that is certain. With unbroken ties to his family businesses, casual use of Twitter, and frequent attacks on the media, President Trump is shaping up to be different than any president that America has seen before.

When it comes to policy, much of the Trump administration’s plans are unclear. Throughout his campaign, Trump took many different positions on major issues. For example, Trump claimed in multiple campaign speeches that the wealthy should pay higher taxes, saying “Right now they are paying very little tax and I think it’s outrageous.” However, in Trump’s August 2016 tax plan, the top 20 percent of earners would receive 67 percent of the overall individual tax cuts.

Whitehouse.gov also contains pages on high-priority goals for the Trump administration, such as the military, jobs and growth, and energy. However, it offers minimal details as to how the administration plans to accomplish these goals.

Uncertainty and Investment

Typically, we expect policy uncertainty to affect investment, reflected through stock markets and other economic measures. Moody’s Analytics explains that uncertainty theoretically raises the cost of capital, postpones consumer spending and creates an incentive for employers to slow hiring and investing.

Economists Lubos Pastor and Pietro Veronesi of the University of Chicago Booth School of Business developed an economic model that directly related policy uncertainty and stock prices. The model predicts that stock prices respond negatively to policy uncertainty; when uncertainty is large, the reaction is largely negative.

A study by Scott Baker of Northwestern University, Nick Bloom of Stanford University and Steven Davis of the University of Chicago found that policy uncertainty also negatively affects firm employment and investment. “Firms with greater exposure to government purchases experience greater stock price volatility when policy uncertainty is high and reduced investment rates and employment growth when policy uncertainty rises,” the authors explain. Citing household hesitations in spending, finance cost increases, and risk aversive behavior, and market rigidities/frictions as factors, the researchers claim that uncertainty can deeply impact decisions at a microeconomic level.

Nonetheless, scholars still do not completely understand the true effects of policy uncertainty on the economy. Moody’s Analytics found that “a sudden spike [in uncertainty] can have economic costs, but it can also be used as an excuse for weakness in the economy when there could be other clear causes;” this is especially true during presidential elections. The study asserted that policy uncertainty will likely remain high as the Trump Administration enacts new policies; however, the economic costs attributed directly to policy uncertainty will likely remain minimal.

Current Uncertainty and Economic Trends

Quantitatively, it is clear that global policy uncertainty is reaching unforeseen levels. In January 2017, the month of Trump’s inauguration, the Global Economic Policy Uncertainty Index reached the highest levels observed since the index began in the late 1990s.

The World Bank cites policy uncertainty as a cause for economic slowdowns in 2016-2017. Emerging market economies and world trade performance are both weaker now than in previous years.

When we focus in on United States, however, the narrative is different. The U.S. stock market has been

https://commons.wikimedia.org/wiki/File:Trump_address_to_joint_session_of_Congress_2.jpg
On March 1, the President Trump addressed a joint session of congress and the Dow closed at over 21,000 points for the first time.

performing relatively well since Trump’s election. Following an initial negative reaction on the morning of November 9, stock markets have reached new heights since November. On the first day of March, the Dow broke records by closing above 21,000 points for the first time, and in mid-March, the Nasdaq composite hit an all-time high.

Why has the U.S. Economy Responded this Way?

There are many potential reasons why the U.S. stock market has responded so positively in the face of high global policy uncertainty.

“Major international institutions such as the IMF, the OECD and World Bank have recently upgraded their forecasts of global economic growth largely due to expectations that tax cuts, rising infrastructure spending and a wave of deregulation will boost the US economy under the new president,” the Financial Times claims. All three of these proposals are good signs for the stock market. Trump’s intended timeline for these policies is unclear, but stock markets may be betting that they will be implemented eventually.

The stock market’s strong performance could also be linked to Trump’s approval ratings. A study by Ned Davis Research found that a low presidential approval rating corresponds with gains in the stock market. According to Gallup, Trump’s approval are ratings lower than any other president that they have tracked in 72 years. The NDR research only specified that there is a correlation between these two factors, but not causation. If there is any deeper causal connection between presidential approval ratings and stocks, then Trump’s low approval rating could explain recent trends.

Will it Last?

There is also a possibility that this boom is only temporary. Economist Larry Summers believes that this is the case. He cites future nationalist policies and increasing insider sales, among other factors, as the potential downfall of U.S. stocks. Along with this, Foreign Policy argues that the Trump Administration is taking the wrong approach to boosting the economy; most of the benefits will be enjoyed by the wealthy. Research shows that fiscal spending that focuses on helping low-income individuals/families has a more positive long-run economic impact. However, the Trump Administration is not placing much emphasis on these types of programs. Further, Trump has even suggested cutting large portions of programs meant to help low-income Americans.

Conclusion

It is too early to predict what the next four years will mean for the economy. Although news outlets and social media may make it feel as though unprecedented amounts of uncertainty to the United States, the economy does not seem to be responding to this uncertainty negatively, at least for now. In the short term, we can view this as a positive trend; nonetheless, we must be wary of any potential downturns in the future.
The author would like to acknowledge Dr. Russell Green at Rice University’s Baker Institute for providing the idea and framework for this post.

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Government and Policy McNair Center Small Business

Crowdfunding

What is crowdfunding?

Crowdfunding is constantly evolving and hard to define. Elizabeth M. Gerber at Northwestern University defines crowdfunding as “an open call over the Internet for financial resources in the form of a monetary donation, sometimes in exchange for a future product, service or reward.” Due to the ease and availability of crowdfunding sites, crowdfunding has changed the way entrepreneurs source funds.

A typical modern crowdfunding campaign begins with a page on a crowdfunding website. The page describes the concept of the project, the fundraising goal and the rewards for backers. Videos, sketches and graphics demonstrate the potential of the idea. From there, backers can donate money in exchange for tiered rewards, usually depending on the amount of money contributed.

History

The first popular online crowdfunding platform, AristShare, launched in 2003 as a way for musicians to receive funds to produce new music. Artists could offer incentives to investors, like exclusive access to content or previews. This reward-based structure made the deal appealing to both artists and contributors.http://i.vimeocdn.com/video/590376642_1280x720.jpg

After the success of smaller, niche-based crowdfunding sites like AristShare, larger and broader sites took hold of the crowdfunding scene. Two of the most successful, Indiegogo and Kickstarter, were founded in 2008 and 2009, respectively. Kickstarter boasts that since their founding, more than 12 million people have contributed funds to entrepreneurs, pledging more than $2.9 billion. Indiegogo is similarly successful, raising more than $1 billion from 11 million backers.

A crowdfunding project meeting its goal does not always mean that the project will be successful in the long run. Crowdfunding campaigns can be successful if their product seems exciting to backers, but if their business plan is not sound, then it is hard to maintain success beyond the initial crowdfunding. For example, one of Indiegogo’s most popular campaigns, a high-tech smartphone concept called the Ubuntu Edge, was unable to go into production due to financial issues even though the project had raised the second highest amount of money in Indiegogo’s history.

In 2015, Crowd Expert estimated that the crowdfunding industry was worth approximately $17.25 billion. In comparison, Venture Capital in 2015 was estimated at $58.8 billion.

Successes and Failures

The most basic measure of success for crowdfunding campaigns is whether the project reaches its goal. Research from Ethan Mollick at the Wharton School of the University of Pennsylvania indicates that being successful in a crowdfunding campaign requires strategic planning. “Crowdfunding projects mostly succeed by narrow margins, or else fail by large amounts,” Mollick asserts. Kickstarter’s records back up this claim. Kickstarter’s success rate is only 35.72 percent, meaning that only about one third of projects reach their goals.

Researchers at Northwestern attempted to understand the dynamics of successful crowdfunding campaigns. Using data from previous Kickstarter projects, they used machine learning to try to predict the success of projects. Their algorithm analyzed different factors of project pages, considering aspects like number of sentences in project description, length of campaign, goal of project and number of rewards available, among others. The accuracy rate for this research was 67 percent. This research shows that although some factors can success in some cases, there is no exact recipe for a successful campaign. The researchers explained, “There is a possibility of the existence of a hidden variable that would help us classify better.”

Nonetheless, certain crowdfunding projects receive immense support and go on to experience long-term success through being acquired, undergoing an IPO or surviving as an independent business. The most successful Kickstarter campaign of all time, a smartwatch called Pebble Time, was able to raise over $20 million even though the initial goal was only $500,000. Pebble produced and shipped over 2 million watches before shutting down operations in December 2016, selling its key assets and intellectual property to Fitbit. Indiegogo has also seen projects that turned into profitable businesses, like the Flow Hive and the SONDORS Electric Bike. Both of these startups have grown since their campaigns and expanded their product lines.

Economic Implications

Crowdfunding might be an effective way to use private action to stimulate the economy and help small businesses and startups. For individuals who have difficulty initially accessing angel investment, venture capital or bank loans, crowdfunding can provide an alternative. A successful crowdfunding campaign can enable small businesses to access these more traditional types of funding later in their lifetimes.

A study in 2015 in the Thunderbird International Business Review qualified crowdfunding as a Fast-Expanding Market. FEMs are characterized by youth, rapid growth and highly lucrative results. Crowdfunding encourages virtual “formation of clusters of expertise and capability,” encouraging collaboration across the world. Adding to the “efficiency and productivity in the community value chain,” researchers also speculate that crowdfunding has the potential to bring Small and Medium-sized Enterprises (SMEs) out of sluggish growth rates.

Crowdfunding Policy

Equity crowdfunding allows investors to purchase a small equity or bond-like share in a business.

In 2011 and 2012, mainstream media brought attention to the Facebook Problem. Facebook filed complaints regarding the threshold on private investors that a company could have without registering with the Securities and Exchange Commission. Facebook considered the threshold, 500, far too low. In response, the SEC’s JOBS act in 2012 raised this threshold to 2000. Although this policy change initially intended mainly to help companies like Facebook, it inadvertently affected equity crowdfunding positively. The regulations allowed more investors per equity crowdfunding campaign.

In May 2016, another SEC regulation update gave equity crowdfunding sellers and investors even more leniency. The new policy exempted small crowdfunding operations from certain SEC regulations on investing. To qualify for exemption, issuers may only raise up to $1 million in crowdfunding per year; investors can only contribute a certain percentage of their income per year. The SEC also regulates the extent to which crowdfunding portals can involve themselves in users’ crowdfunding transactions. Although equity crowdfunding may help small businesses get initial capital, it may affect the firm’s ability to raise follow-on funds later in the process.

Nonetheless, there are still other crowdfunding policy issues that the SEC may need to address. The updated regulations place a financial burden on portals, holding them liable in certain cases of issuers not keeping promises. They may also pay too little attention to the size of businesses/individuals that use crowdfunding to raise funds.

Conclusion

Crowdfunding has potential to shake the dynamics of investment in the coming decades. We need to ensure that the regulations surrounding this market are desirable for investors, issuers and crowdfunding portals.

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Government and Policy McNair Center Women

The Right to Entrepreneurship

Entrepreneurship and human rights are not frequently mentioned in the same conversation in the United States. However, in international policy, human rights and entrepreneurship are linked by many common policy goals, including enforcing the rule of law, improving infrastructure and fighting corruption. Rights necessary to pursue entrepreneurial endeavors–like the right to participate in the economy, the rights to education and information and access to credit–are considered crucial for the world’s poor. By pursuing these goals, human rights activists and entrepreneurship advocates can work together for the good of all.

https://upload.wikimedia.org/wikipedia/commons/d/de/UN_Geneva_Human_Rights_and_Alliance_of_Civilizations_Room.jpg The UN Human Rights Council meets here.
The UN Human Rights Council meets in Alliance of Civilizations room in Geneva.

Human Rights

Human rights are defined by the UN Office of the High Commissioner for Human Rights as “rights inherent to all human beings, whatever our nationality, place of residence, sex, national or ethnic origin, colour, religion, language or any other status.” Since the 1948 UN Universal Declaration of Human Rights, criteria has changed. Nonetheless, human rights continue to be a top priority in international law. According to the Department of State, the U.S. places an emphasis on human rights while pursuing foreign policy goals:  “A central goal of U.S. foreign policy has been the promotion of respect for human rights, as embodied in the Universal Declaration of Human Rights.”

A Mutually Beneficial Relationship

Human rights and entrepreneurship have the ability to reinforce one another. Hrishikesh D. Vinod of Fordham University examined the policy and advocacy goals of entrepreneurship and human rights, looking for areas for collaboration. He identified five key areas where the goals of entrepreneurs and rights advocates align: promotion of fair competition, creating infrastructure, protecting migration rights, exposing government corruption and preservation of the rule of law. Vinod describes entrepreneurship and human rights as natural allies. He notes that “their cooperation is likely to become a potent force for a worldwide progressive change.”

A study done by the Pontifical Catholic University of Peru helps to demonstrate Vinod’s argument in action. In this study, implementation of a human rights awareness and training campaign in Central Asia by a nongovernmental group increased new micro-businesses by five percent. The researchers who conducted this study urged that “the time is now ripe for acceptance of human rights approach to development of entrepreneurship as the human rights and entrepreneurship share a preoccupation not only with necessary outcomes for improving the lives of the people but also with better processes.”

The Right to Entrepreneurship

The United Nations Development Programme asserts that the rights that allow someone to start a business or become self-employed are “essential for the livelihoods of the poor.” The UNDP stresses that micro-entrepreneurship and self-employment are often the only option for the poor to generate money. Protection of these rights can impact many lives.

The right to entrepreneurship, along with other economic rights, can lead to the promotion of other social and political rights. A study commissioned by the World Bank explains the nature of the relationship: “The importance of participation in economic decision-making demonstrates how civil and political rights and socio-economic rights are mutually supportive, and why human rights recognize them to be interrelated, indivisible and interdependent.” For example, micro-credit and micro-entrepreneurship can increase economic, social and political empowerment of the poor, especially poor women. The Benazir Income Support Program offers small loans to women in Pakistan to pay for expenses and pursue entrepreneurship opportunities. However, this program did more than just bolster these women’s rights to entrepreneurship; the program also resulted in previously “unregistered” women becoming “registered,” giving them access to other social and political rights.

A 2010 study on women in rural Bangladesh also noticed a connection between entrepreneurship and other rights. Bangladeshi women often don’t have the opportunity to become formally involved in the economy. In this study, small bank loans gave them capital to start micro-businesses and increase their economic empowerment. With the ability to participate in trade, women can use their newfound security to pursue other rights as well.

In 2008, the Harvard Human Rights Journal pushed for the promotion of entrepreneurial rights of the poor. In their recommendation for the U.S. Human Rights agenda going forward, they suggested that the U.S. increase micro-entrepreneurship funding for other countries “because we know it works.” They added that it is “up to us to focus our resources on building a new generation of small entrepreneurs in the developing world.”

How Can This Impact Policy Decisions?

Knowing that entrepreneurship and human rights have the power to reinforce one another, we can create policy that accelerates both. When we protect human rights, individuals can feel empowered and safe to explore entrepreneurial endeavors. The trend works in the opposite direction as well; possessing the right to entrepreneurship can empower individuals to pursue the protection of their other rights. Economic power can allow vulnerable individuals to fight more effectively for the promotion of their rights.

This relationship demonstrates an important point for advocates of any cause: it is important think about collaboration whenever possible. There is always potential to find compromises that benefit all, and we have more in common than we expect.

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Government and Policy McNair Center

Bureaucracy and Public Sector Innovation

The public benefits greatly when there are innovations in how our government approaches policymaking and regulation. However, sometimes barriers created by bureaucratic structures can slow implementation. When regulation and rigidity are holding us back, leaders are responsible for ensuring that our government institutions are allowing for change when our old ways of approaching challenges become antiquated.

Innovation in the Public Sector

Our traditional idea of innovation tends to point science and technology developments, like the iPhone or social media. Innovation within the public sector takes many forms. Journalist Alex Howard broadly defined public sector innovation as any government-created “new idea, technology or methodology that challenges and improves upon existing processes and systems, thereby improving the lives of citizens or the function of the society that they live within.” For example, the introduction of speeding cameras in the late 1980s in the U.S. is a public sector innovation that allowed local police to improve public safety by catching speeders more efficiently.

In the U.S., innovation in public policy takes place in many levels of government. For example, the Rebuild by Design program, launched in response to Superstorm Sandy, created a competition for innovators to develop creative solutions to problems posed by natural disasters. In Boston, this program created Climate Ready Boston (CRB). CRB works with the Boston city government to ensure that infrastructure is created to withstand the impacts of climate change, like rising sea levels and extreme temperatures. Another public sector innovation, the Citizen Archivist Initiative, uses online tools and crowdsourcing to make public records more easily accessible to the public.

United States Efforts to Encourage Public Sector Innovation

Within the last 30 years, federal executive and legislative action have also encouraged innovation within the public sector. For example, the Small Business Research and Development Enhancement Act of 1992 gave the Small Business Administration the ability to conduct the Small Business Innovation Research Program to better serve small businesses. Later, President Bill Clinton’s Executive Order 13103 placed an emphasis on increasing government awareness of computer vulnerabilities, demonstrating that the government would be adapting to new technologies.

President Barack Obama emphasized this as well. In 2009, his administration released the Strategy for American Innovation to increase efforts to support American innovators. In 2015, they released an updated strategy that placed importance on public sector innovation. The new strategy includes “new efforts to make the Federal government more innovative to improve performance and create a better environment for innovation by the private sector and civil society.”

Public Sector Innovation Around the World

Public sector innovation is not unique to the United States. The Organization for Economic Cooperation and Development’s Observatory of Public Sector Innovation tracks these innovations for each member country.  In Iceland, the Reykjavik Metropolitan Police Department began using social media to connect with citizens. In the United Kingdom, policy innovation took place through the creation of the What Works Network, an evidence-collection initiative to inform policy decisions.

Although there are success stories, innovation in the public sector can be difficult. Government agencies tend to be deeply entrenched in the rigidity of bureaucracy, a structure that can hinder creativity.

How Can We Boost Innovation within Government Agencies

We should want to encourage policy innovation. However, this is easier said than done. The hierarchical layout of many government agencies can be beneficial for clarity and accountability, but it can also inhibit creativity, thereby stifling innovation. Bureaucratic structures can prevent change and creativity. How can we overcome these obstacles?

University of Connecticut and Georgia Tech researchers found that workplace environment can enhance or curtail creativity. Encouraging creativity is essential for innovation. Employees must have the time, physical resources and supportive peers to implement innovative solutions. Within a government agency, these factors could manifest in many forms: Collaborative and open work spaces, efficient technologies like portable laptops and tablets and smart deadlines that are both challenging and realistic can all be effective.

The Importance of Leadership

The barriers to change in the government bureaucracies can make innovation difficult. Leadership plays a large role in whether bureaucratic organizations successfully overcome the obstacles that accompany bureaucracies. Leaders must actively prioritize innovation. The Harvard Business Review suggests, “Leaders of big bureaucracies need to get — and keep — everyone enthused, create and communicate a future vision, assure support during the transition, insist on excellence, create demands on managers and convince everyone of top management’s conviction and commitment to change.”

Simply articulating creativity as a goal can improve creativity of groups. When leaders direct groups to develop creative solutions, their groups generate more creative results than groups who are not given this instruction. If leaders want to see creativity amongst their employees, they should communicate that creativity is a goal for every project.

Hierarchies can often be complex and make it difficult for senior leadership to stay in touch with employees on the lower end of the hierarchy. To combat this, leaders need to make themselves available to employees. Open communication between leaders and lower-level employees can promote development of new ideas.

Further Applications

Any business that is looking to transform their culture to encourage creativity and innovation can use these lessons. Change requires sustained efforts on the part of leadership. With continuing organizational support, the benefits can be great.

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McNair Center Women

Women in Top Tech Companies

In 2014, many of the top tech companies released information on their employee diversity demographics for the first time, bringing attention to the low representation of women in top tech companies. This post looks beyond these numbers. How are tech companies responding to this gender imbalance?

The top five tech companies by market cap are, in order: Apple, Alphabet (Google), Microsoft, Amazon, and Facebook. The gender balance of each company’s workforce is in the table below:

women-workforce-table
Sources are linked for Apple, Alphabet, Microsoft, Amazon, and  Facebook. Data on national averages can be found here and here.

All of these companies are seeking to improve their gender balance and support current women employees. Resource groups, family benefits and smart hiring practices are some of the most common solutions. Even when these efforts are made, the male-dominated work environments can be far from ideal for women at these companies.

Women Employee Experiences

Resource Groups

Resource groups can serve as valuable support networks for women employees. Each of the top tech five has at least one employee resource group for women (Apple: Women@Apple; Google: Women@Google, Google Women in Engineering; Microsoft: Women@Microsoft; Facebook: Women@Facebook, Amazon: Women@Amazon, Amazon Women in Engineering, Women in Finance Initiative). All of these groups share similar goals: empowering women in their workforce and providing networking opportunities.

Many of these resource groups also participate in community outreach, engaging young girls and women and creating programs to foster their interests in technology. (See Women in STEM: Closing the Gap for more information on how community outreach can help change the culture around women in STEM in the United States.)  After recognizing that underrepresentation of women in tech is related to the lack of educational STEM exposure and encouragement for women, Facebook created Computer Science and Engineering Lean-In Circles to support women in college who are interested in CS.

Conferences

Sponsoring women’s tech conferences, like the Grace Hopper Celebration of Women in Computing or the Women in Real Life (WiRL) Conference, is also common among these resource groups. Amazon even holds its own conference: Every year, the women’s resource groups at Amazon also team up to host AmazeCon, a diversity conference that focuses on the achievements due to diverse teams at Amazon. The conference draws thousands of experts and leaders to discuss the importance of diversity in creativity and accomplishments.

Microsoft has taken an extra step by creating an innovative program for women, Women Think Next. WTN is a “worldwide community for professional women,” bringing together women from varying fields and backgrounds to network and support one another.

The program is not limited to Microsoft employees. WTN encouraged any and all professional women around the world to join. Women Think Next holds an annual networking conference and provides resources for women throughout the year. The conference also serves as a recruitment event for Microsoft to hire women with strong skills.

Employee Complaints

Everything isn’t always as it seems on paper, though. The male-dominated work environments at these companies can be isolating for female workers. In 2015, Microsoft faced a lawsuit accusing the company of gender-discriminatory policies in employee reviews. In May 2016, a former Facebook contractor published a piece on the sexism she experienced while working on a project team. During September 2016, Apple received criticism in the media for a series of leaked emails that revealed the company’s unresponsiveness to concerns of women employees. Through these emails, women employees described the company’s atmosphere as “toxic,” including workplace harassment and gender discrimination.

It is important to note that these are all anecdotal experiences. Each company responded by emphasizing that they take complaints like these seriously. The sensitive nature of the companies’ investigations of these claims prevents more information from being public.

Work-Life Balance

In American society, women often face conflict between the gender norms surrounding women’s family responsibilities and a desire to pursue a career. Maternity and family leave benefits can be an important factor in a woman’s decision to stay with a company in the long run, especially after she has started a family.

Of all of the Organization of Economic Cooperation and Development member countries, the United States is the only one that does not mandate paid maternity leave. According to the most recent statistics, only 12% of Americans receive this benefit.

However, within the tech top five, they seem to go far and beyond this requirement. Below is a summary of the family leave benefits for the tech top five.

maternity-leave-chart
Sources are linked for Apple here and hereAlphabet, Microsoft here, here and here, AmazonFacebook, and National Standard

It is not surprising that these companies give generous benefits. Named the best place to work in the U.S. in 2015 by both Forbes and Glassdoor, Google is known for its employee perks. One of Google’s greatest strengths lies in its emphasis on self-study to determine workforce problems and find solutions. In 2007, Google’s People Operations (AKA Human Resources) department noticed that new mothers left Google at twice the average departure rate. In response, the company decided to lengthen paid maternity leave from 12 to 18 weeks. After this change, Google’s departure rate for new mothers dropped by 50 percent.

Controversial Benefits

In 2014, both Apple and Facebook received media attention for their announcements that they would pay to freeze U.S.-based employees’ eggs. Apple announced it as a new dimension to their support for infertility treatments. The move was met with mixed reviews by the media. NBC News praised it as a “game-changing perk,” but The Guardian denounced it as “unreasonable and illogical.” Supporters of the policy argue that it gives female employees more flexibility in their decision to have children. Critics claim that the policy sends the wrong message, implying that if female employees want to succeed at work, they need to delay motherhood.

Parental Equality

It is important to look not only at a company’s maternity leave policies, but at their parental and family leave policies as well. Studies of maternity and motherhood-related policies in other countries, like a mandated child care law in Chile and a reduced hours law in Spain, have shown that offering parental benefits only to women can lead to a decrease in salary and promotion rates of all women at a company, even those who don’t take advantage of them. One approach to combating these negative effects could be making these policies gender-neutral. This would allow for men to take advantage of these policies and reduce gender-discriminatory practices.

Hiring, Promotions and Pay

Facebook has received attention for its hiring point system. Facebook’s recruiters receive points for new hires, but based on the new recruits’ diversity, it can earn recruiters more points. White or Asian males only count for one point, whereas black, Hispanic, or female new hires count for two points. Higher point totals can lead to good performance reviews and bonuses for recruiters. This system incentivizes the creation of a more diverse workforce.

At Google, employee studies showed that women were less likely than men to submit their names for promotions. After Google brought this information to the attention of women employees, this discrepancy disappeared. Google now prides itself in the fact that they promote women and men at the same rates.

In August 2016, Apple announced plans to increase hiring of women and minorities. During the same announcement, they celebrated their official elimination of all gender pay gaps within the company. To maintain this, they have pledged to analyze and correct any gaps as they may arise in the future.

Amazon has also addressed its pay gap. Amazon boasts that women earn 99.9 percent of men’s salaries, explaining that the percentage fluctuates annually, so that it may not always reach a perfect 100 percent. However, Amazon has received criticism on its diversity reports for not including statistics on the percentage of women who make up their tech workforce. This discrepancy has led media to question whether Amazon has something to hide. Until Amazon releases more information, there is no way to know the state of female representation in their tech workforce.

What Does This Mean?

When compared to national averages, women are not as well-represented in the top tech companies. However, these companies provide benefits and services to their women and employees that are above and beyond the norm. Nonetheless, as the anecdotal experiences of the women at Apple, Facebook, and Microsoft have shown, a company can offer great benefits while still tolerating a discriminatory workplace environment.

Regardless, these companies need to develop new strategies  to address low women’s representation. Only time will tell how future policy, research, and incentives will impact women’s employment in the tech workforce.