…on the Entrepreneurial State

With the next Canadian federal election less than a year away – and undesirables like Wayne Gretzky soon to be purged from the voter lists – I’ve been getting a lot more fundraising emails lately. As of mid-December I’d received nineteen in eighteen days. It was like a Christmas advent calendar, but in my email inbox! (Like a beleaguered Silician storekeeper, I paid my “protection money” and now they’re leaving me alone. :) )

Politicians are often derided for their short-term thinking, which is probably a fair criticism. If you ballpark an election cycle at roughly four years, newly-elected officials might take a year to learn the ropes, a couple years trying to be effective, and then a year trying to get re-elected. Judging by how successful those old Soviet and Chinese Five-Year Plans typically were, that might not be quite enough time…

The kind of decade-scale industrial policy used so effectively over the past half-century by Japan and South Korea (and Singapore… and Taiwan… and to an extent in Norway) typically occurred when these countries were dominated by one political party. This political stability may have allowed government and industry to set effective long-term plans without fear that a few years on, a new Prime Minister would reverse course on everything.

Of course, one-party dominance is no guarantee of long-term economic success – as evidenced by Mexico, parts of both the American South and South America, and … Alberta. As recent history shows, our neighbours would rather stay a Saudi prince’s whim away from economic catastrophe, than raise sales and income taxes to build up a treasury to buffer themselves from the ravages of the resource cycle. It’s as if they’d read Aesop’s Fable about the ant and the grasshopper, and concluded the grasshopper was the role model!

This attitude puzzles me partly because I lean left politically, causing me to generally value communal health over individual wealth. (To use an evolutionary analogy, the former is a group selection strategy, while the latter is one of individual selection.)

There’s also my tendency to forgo gratification in favour of saving for a rainy decade – as if I’d inherited the outlook of a beleaguered Russian farmer who’d lived long enough to see his land overrun by Bolsheviks, the Kaiser, Communists, Nazis, and then Communists again. And wow, has that ever been the wrong lesson to have brought to the Vancouver housing market…!!

The myopic business sector…

Unfortunately, the pressure of “making the quarterly numbers” causes a lot of publicly-traded companies to compress their decision-making into three-month windows, which is like planning to run a marathon as a series of 100 metre sprints.

I’ll choose Tesla Motors as my example, because it’s riding a wave of (well-deserved) success, and it’s too easy to take pot-shots at companies which have already stumbled. Besides, that’s the signature technique of best-selling business book authors. :)

Tesla has clearly done a lot of things right; they’ve enjoyed phenomenal success, and good on them for it. But if I was to predict something that would trip them up – ripe in the knowledge that I don’t follow the company and that I’d probably be wrong – this is the chart I’d use, which admittedly comes from a Tesla-unfriendly source.


It shows worldwide Tesla vehicle registrations as reported by countries’ governments, which is essentially identical to sales. For the past five quarters, Tesla has sold a lot more cars in month 3, than in either month 1 or 2. This suggests that the company is indeed playing “make the numbers”, and it’s as hard to see how this could help the company, as it is to see how easily this could hurt them.

For example, if salespeople are pressured to make sales at quarter end, they might offer discounts, which would hurt Tesla’s image: luxury brands should almost never go on sale, that’s the point. (Discounts were offered on showroom vehicles in September, but that was after the super-duper dual-motor Tesla Model S was offered, so that might be justifiable in that the company would want top-of-the-line vehicles in their showrooms.)

Quality engineers under pressure to help manufacturing make their production numbers might allow defective parts through in September on a “deviation”, that they’d’ve sent back to vendors if it was July. And so on.

Even if we account for the fact that Tesla builds its overseas vehicles in months 1 and 2 (so they arrive in month 3, inflating that month’s numbers), the company’s fans and investors should be hoping that it starts to level things out. Sending smaller shipments to Europe or Asia each month, instead of large shipments once per quarter, should make those customers happier, make life simpler for Tesla’s operations personnel, and make it easier to contain mistakes. (Tesla recently offered to replace faulty components in 1,100 cars in Norway, presumably part of the 1,493 Model S’s it sold there in March. If it had spread those shipments out, it would have had a better chance to catch the flaw sooner.)

The stock could both do perfectly well for years to come, but if and when the company hits turbulence, I suspect the “making the numbers” attitude underpinning these registration numbers, will have a prominent role. At least, that’ll be my preconceived bias. :)

…and the entrepreneurial state

A lot of the making-the-numbers mentality comes from a desire to please shareholders, which is funny because shareholders as a whole don’t generally stick with particular stocks very long. In 2012 the average publicly traded company’s holding period was 6 months (see page 2). And the average holding period of one of the major ETF’s tracking the S&P 500 index, was five days. With stock option-based executive bonuses disproportionately riding on the madness of such fickle crowds, it’s no wonder most companies ignore long-term research in favour of short-term development. (Only about four percent of US corporate R&D funds go to basic research.)

This creates a “market failure” which governments can solve – and many do exactly this, resulting in the phenomenon of The Entrepreneurial State. The book of that name is near the top of my New Year’s reading list. The basic argument is that in funding research programs, governments actually behave in an entrepreneurial fashion. Sure, they’re terrible at commercializing technology, but that doesn’t matter when they focus on discovering technologies and maturing them until businesses are ready for the hand-off.

By helping to create a pipeline of almost-ready technologies for home-grown companies to license, commercialize, and generate taxable income from, proactive governments can reasonably expect to harvest future tax revenue… one set of obsessed-over quarterly results at a time. :)

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  • Bruce Lin  On January 1, 2015 at 7:28 am

    Great post

    I read that daily kanban article. Interesting points. That guy’s tagline about his wife being a late model Japanese import was rather offensive though

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