Is there going to be a change in the EU economic situation?

While this blog has been silent for a long time, many changes have occurred in the outside world.
The latest event that I wish to discuss here is the recent government change in Spain.
This specific change has followed closely on the footsteps of two other government shifts in Greece and Italy.
While it is clear that the governments ousted have failed to help the economy in their states recover, the big question mark over all three changes is weather the new government can succeed in such cases.
In 2009 I participated in an economic seminar in Warsaw where the keynote presentation by Richard Koo referred to the crisis. It seemed that his idea, as I understood it, is that in order to prevent a crisis slowdown in the economy the government had to see to it that the GDP did not diminish. The way he offered to do it was by increasing eh government expenditure based on loans from the banking sector. His ideas were based on the actions taken in Japan during the 1990’s crisis, where a change in the activity of the firms was observed. The firms have changed from profit seeking entities into a balance sheet cleaning entities. Investment in development and other areas went down, as the DGP was in danger of diminishing.
The government took loans from the private sector, and used it to turn the wheels of the economy, by purchasing. This allowed the firms to clean their balance sheets and once their activity was back to normal (the indicator was the rise in loan interest) the government could start cleaning its own “balance sheet”.
With the euro zone, the ability of governments to increase their spending is limited. The government cannot easily print more money (disregarding inflation and other consequences) and borrowing from the private sector, unlike increasing taxation, will allow more economic action. Under such conditions the big question would remain, where and how should the government spend its money. Should it invest in infrastructure? In human resources? In technology development and support to the business sectors?
When seeking answers to such a question one should consider several aspects:
· The conditions in the neighbouring countries (with which you do most of your trade)
· The general economic condition in the world
· The basic parameters (strengths and weaknesses) of your own country
This article will not present the new government of Spain with the answer to all these questions. However, it is important to remember regarding the above mentioned parameters that by investing in roads, water, electricity systems the state will improve its future ability to attract investments and to initiate and support growth, but it will not make it easier to turn that investment into growth if the close trading partners and the general economic situation are bad. It will have a positive effect in the medium to long term, but not in the near future – except for those employed in the work. However, investment in the infrastructure, combined with investment in the human resources of the country, will help the country come back from the financial crisis, stronger than it was before, more competitive, and will help attract not just investment, but also more HR that would be beneficial for it.After all HR are the best natural resource any country can have!!!!!!

Renewable energies and other myths

While there is an on-going debate about climate change, there is one fact that faces no argument – that fossil fuel is limited by quantity and that we are nearing the end of the reservoirs. Coal will still be available probably up to the end of the century, but it cannot supply all the demand, so if only for this reason, there is a place for renewable energies.
However there are some myths that seem to be a bit misleading and that we should avoid them, when making decisions. Please have a look at the hypothetical example below (if you think that you have seen this somewhere in the world – think again).
A company introduces a novel idea into the market, an electric car, with a special business model. Instead of charging the batteries, the driver will enter a refueling station and replace the batteries when they run down. The station will recharge them at leisure and sell them to the next customer that comes in. The company claims that this will reduce air pollution and especially the carbon emissions. The company sets on a huge public campaign claiming environmental protection as its main purpose, and manages to convince public bodies and ministries to endorse it. Seems like a good idea no?
Not so fast. Where does the charging electricity come from?
It comes from the grid. That is the key point for understanding the relevance of the scheme to the environment. If the electricity produced in the example country is mostly clean and low on carbon emission such as: hydro-power, geothermal-power or even nuclear (is that really environmentally friendly?) powered, than it would seem that the move from fossil fuel driven cars to electricity cars is smart. Since these technologies for power production are also relatively cheap (on the fuel side at least) it will also help keep the electricity cost down, it will reduce the fossil fuel import, and probably have in addition to the environment, a positive impact on the economy.
But what if the power produced is from renewable sources? If that is so, than it will probably reduce the emissions and the fuel import, but as the power production from renewable sources (solar, wind) is more expansive, it may drive the price of electricity to the general public up, and this may complicate the economic impact analysis.
There is one more problematic possibility, that the power supplied to the grid is almost entirely based on fossil fuel (including coal). Here we probably get a negative impact of the project. Due to efficiency issues it is more efficient (less fuel consumed per Km) to burn the fuel in the car than burn it to produce electricity (one set of efficiency losses) and then convert the electricity into movement (second set of efficiency losses). In fact, in such a situation we may be burning MORE fuel than originally – MORE pollution, MORE emissions.
There is little data about the situation in the sample above, but the fact that the company has not claimed in its publications, adds and other media that there will be a reduction in fuel import, one could tend to believe that we are dealing with the third case.

A heaven for Angels

Under the new fiscal law for 2011-2012 the Israeli parliament approve measures to encourage Angels to invest in High-Tech companies. The law basically recognizes an investment in a High-Tech as an expense over three years.
That law would appear to be a wonderful solution to the need to get more funds invested in High-Tech companies, especially for starting companies in that sector. The law actually holds more than meet the eye at first glance. In this post I will try and point out some interesting side effects that the law holds.
In the first place since the benefit recognizes the investment as an expense it allows a capital investment to be deducted from income in the annual personal profit and loss statement. The idea behind the benefit is that in many cases the angel’s investment is either turned into a loss after a few years (as most start-ups requiring angels to invest do), or that it bears some profit in the long term, and at that time the profit is deducted from the original investment.
High-Tech investment has been reduced since the 2008 global financial crisis. The need for investment in the High-Tech start-up section, is evident (IVA data) . By the benefit offered this investment has advantage (at least in postponing the tax) over other financial investment even for people not considering Angel Investment on regular basis. The law places some restrictions on the investment and the management of the firm in order for the benefit to be acknowledged:
• The firm must use at least 75% of the sum invested by the single investor for R&D purposes,
• 75% of the investment is spent in Israel.
• The year of investment and the following year the firm income cannot be more than 50% on the firm’s R&D expenses.
• Until the year in which the firm’s R&D expanses reached 75% of the investment the R&D expanses should be at least 70% of the total firm expanses.
The law discusses a personal investment of up to 5 million NIS. If we want to have a look at the first point above, we can see that the way it is phrased in the law makes it advantageous to have the investment in the firm done by several angels and not a single one. This requires an example;
A firm requires an investment of 1 million. It finds an angel to invest the whole sum. That means that according to the regulations above, the firm now needs to spend at least 750,000 on R&D, most of it in Israel, and until that is done the R&D expanses should make at least70% of the total firm expenses.
Alternatively 10 angels invest the 1 million paying 100,000 each. Meaning that the firm now has to spend at least 75,000 in R&D and only until they do that they other obligation regarding the firm expenses is in place. Of course these conditions are easier to meet.
Based on the example above it would seem that there are two major changes to the way Angels investments were regarded in the past. Angel’s clubs have an advantage under the law as they reduce the risk of an investment losing its eligibility during the benefit time since the more angels there are the easier it is for the firm to meet the terms.
More than that, if in the past once an entrepreneur found his Angel he would not like to share, but under the law, sharing would actually have a benefit for the entrepreneurs and the angels. So if you have an angel and you friend have another it would be best for them to invest each half in each of you. Everyone gains.
The law would be more interesting if the limit on income being no more than 50% of overall R&D expenses would not pose a most difficult restriction. The restriction exists for the first two years on investment. However, if the firm should have a marketing breakthrough and generate revenues more than 50% of its R&D expenses the benefit would be lost. This creates a conflict of interest between the Angels and the Firm’s directors. The angels want the revues for the first two years to be low and the directors have an obligation to increase the revenues and thus the firm’s value.
The point is further complicated as the law states that the tax reduction should be the main motive for investment, that is a bit complicated to explain when coming to ask for the tax exemption- recognition of the investment as expense.
Will the angels be able to overcome the difficulties and benefit from the advantage? Will former non-angels decide to make such investments due to the attractive benefit? And most important, will the law help increase the overall investment in High-tech companies in spite of the current financial situation?

Portugal Bail-out request from the EU

The Portuguese Government has asked for the EU for assistance when it realized that borrowing was becoming unsustainable (NYTimes). That Portugal needs to be bailed out is evident, and in fact that step has been anticipated for some time now. Earlier in the year there were some hopes that China may be able to help Portugal, but it would seem that this was not enough. Portugal of course is not alone in its current crisis. Last May 80 Billion Euros were approved for Greece by the EU with additional 30 Billion Euro from the international monetary fund. In November Ireland had 85 billion approved for its own bailout. The exact amount to bailout Portugal is estimated between 75 billion Euros and 110 billion Euros – with 80 Billion Euros approved for three years. The crisis in Portugal is complex in the fact that the prime minister resigned last week (country going to general election in June after an election in January this year), a record high rate of un-employment and an economy that according to the national bank is going to contract this year. In Ireland the interest was kept high for the bailout as the government refused to raise its corporate tax percentage. What will be the price for this help in Portugal? This request for help constitutes a clear admittance of failure to navigate the national economy towards a safe haven. For those who had hopes that the government will save them, find them work, protect their interests and make the economy grow, that dream is over. It is now up to the Council of finance ministries to show that the eurozone can protect the unified monetary unit. As some experts argue the bailout deal offered by the EU is a heavy burden for many years and assures low economic growth rates and slow recovery. It is claimed that the poor are helping bailout the assisting banks – paying in future taxes and reduced economic growth to save the banks (external banks mostly) from losses at this point. There are two questions that are normally asked in such events: 1. How did this happen (sometimes phrased as "who is to blame?") 2. What can now be done to get out of this mess As an outsider, the first question holds no interest whatsoever, and therefore I would rather focus on the second question. This can be viewed as Portugal's finest hour. This is the time for the individuals in the country to get up and take action. It is well that the EU will probably assist in bailing out, but it is up to the people – more than the government, to see that the situation turns out for the good in the end. This should not be a narrow escape, but rather a step towards a much brighter future. When asked on several occasions: What is the secret behind Israeli Innovation? I used to answer: "the background of No-Alternative". The Portuguese people need to realize that one cannot expect others to bail it out, and that it is up to them to find ways, each one in his / her small way. This is the time to come up and: 1. On individual level take responsibility for one owns economic situation, without expecting others to provide for you. If you do not have a job thinks of ways to create jobs. Start your own business; cooperate with others who may be able to help and to be helped. 2. On national level – use the funds that will be coming in once the debt are being paid, and divert as much as can be towards the creation of tools that will allow anyone following number 1 above to do so. Use this opportunity to foster innovation and entrepreneurship. To create opportunities for small businesses to survive and grow. Create monetary tools, legal environment and general attitude that encourage such actions – via education, approach etc. 3. On international level – assure that the work the local citizens do, is not wasted on paying back loans at extortionist rates with internal prices of increased taxation leading to reduced growth. Demand to see the threatening inflation that requires higher interest rates – you are foreseeing a retracting economy, where is the inflation? To all that think that these are just slogans, or that this cannot be done, please look at Israel as an example. Insolated on the other side of the Mediterranean Sea, Israel managed to create opportunities for venture capital, for start-ups and technology parks, to increase the rate of technology transfer to industry and more. In the late 1980's Israel was not much different than Portugal (except for the crisis) is today. It was much worse, it had just come out from a huge inflation, had problems exporting its goods (mainly agro production) and had no venture capital, no technology incubators no start-up support mechanisms. It did have a good education system – and no other choice. Today, Portugal can benefit from its EU connection and learn from other EU best practices per each tool it chooses to develop. In a way the relative small size of Portugal is its main advantage. It is easier to make big changes in a smaller country than in a big one. It is up to its people, its real treasure, to show their true metal.

Digital Books – where are they going?

Recently it has been published that McGraw-Hill a major publisher of academic textbooks has invested in Inkling intending to use the platform for sale of its own publications.
The deal itself is not the issue of this post, but rather a small announcement regarding the way that inkling operates. They publish interactive text books that incorporate audio and video with the written text.
In my view this is the real meaning of electronic or digital books. The multi-media approach to publishing. This way finally the medium will allow the full use of its capacities for writers, to express themselves, and for learners in the case of textbooks to enjoy the full potential it carries in their studies. If you study music you no longer have to listen to it on one device and read the analysis separately, but you can do it at the same time, and the book (text) can refer to the piece while it is being played. If you study physics you can have a video explaining a specific action with motion while relating to the text of the book. Add the ability to add notes and markings and you have the perfect teaching tool.
Two weeks ago I received notice from my publisher that my book will be rendered by them in electronic format as they see the electronic format as complementing the hard copy. If I had known when I started writing my book that what Inkling is offering would be possible – I would have written a different book.
How will this affect fiction writing?????

Secondary effects of Middle East revolutions

I do not intend to analyze the political or "justice" side of Middle East revolutions going on now in the region. The questions such as: Was this the right time to do them? Will the new regimes be better first to the people who helped raise them, and second for the rest of the world? Are in my opinion best left for History to answer.
But we cannot ignore the fact that these events happen in the worlds richest in oil regions and that while up until now the revenues and the flow regimes of the oil operated in a known and relatively predictable way.
Whether the new regimes (political and profit distribution) will stop the flow of oil, or just raise the prices, the deviation from the known methods and systems will cause uncertainty. In the short term that will lead to increased costs, but in the long term to the creation of emergency reservoirs, and therefore for a long term (if smaller) increase in prices.
The increased cost of this precious resource will not stop at increased travel costs in the developed economies. Worse than that, the secondary effect will be an increase in food prices (oil is important resource in food production and transportation) in all economies and especially in the less developed ones. As food riots (see Jordan five years ago) as a result of food prices increase, can lead to further impoverishment of these economies, combined with a tendency of revolution we may see that phenomena spreading to other regions in the world. In the movie "Under Siege" the terrorist leading the attack speaks of the term revolution as a process not a step. It continuously revolves. We may witness the embodiment of that statement.

Nokia Downsizing

Nokia and Microsoft coming together worry the Finnish unions as well as the government. The relatively large impact of Nokia in the Finnish economy and the potential negative impact any policy change in the company may have on the economy has worried the government for several years. The downsizing expected (size not known yet-introduce link here) of even 10% only of the 20,000 employees the firm has in Finland could mean 2,000 new job seekers on the market at one go. For a relatively small country to absorb such a rush of people would take time and some effort.
In Israel there have been talks that the economy needs some international local giants. However it is important to remember that once such giants are created, any strategic change, whether in response to market changes, technology shift, emergence of new markets, mergers and Acquisitions, could lead to massive lay-offs and thus to economic and social crisis.
Medium size companies "well entrenched" in the local economy with a view towards export would seem to have a better chance of stabilizing the economy. They can increase production, or retract with marginal over-all effect on the economy. Even if purchased or merged into others they will lay-off smaller numbers of employees that the sectors will absorb faster than large numbers. If such firms are dispersed over diversified sectors they will also reduce the national economy sensitivity to international market changes.
A variety of firms with 50-200 Million $ in sales will enable a stable economy that can deal with changes in international markets, provide employment on reliable basis and one that is less sensitive to the changes in any single firm.
Finland has been trying for several years to encourage the growth mechanisms of small companies so that they could grow into medium size players- so far with limited success. The change in Nokia will create a crisis in the Finnish economy, hopefully not too sever. It could also be the break that Finland needs from the decisive role Nokia plays in its economy. Unfortunately due to the trouble it is having with its southern parts the EU will probably be able to assist Finland only in a limited way.

National Innovation infrastructure

Last week I spent some time at the University of Algarve in Faro (Portugal). It was a Conference on Sustainable Innovation, and the presentations were most interesting. It was my first visit to Portugal in over five years, and I was most interested in two aspects – the current economic situation; and the Innovation atmosphere in the country.
One of the presentation dealt with the spin-off activity of the university research results. It was most interesting to compare the roles of the Technology Transfer unit in Portugal with that of a Technology Transfer Company in Israel. The unit in Portugal has to run a competition in order to stimulate ideas and to find ideas or technologies to be commercialized. It than trains the entrepreneurs and helps them raise the funds, hosts them (for a fee) and when ready lunches them into the world. The unit does not hold equity in the firms. Of course such close mentoring means that the number of firms that can be taken care off is limited.
The Israeli TTC gets the ideas reported by the scientists in the university, it has to filter them, if ready for spinning, than it recruits a team leader, let him raise the funds or helps the team get into a technology incubator. The TTC will hold equity, an if possible also license the technology to the firm it span-off. Theoretically the TTC can Spin-off as many firms as there are ideas.
Why do the two entities follow different models? The obvious answer has two parts: on the one hand the natural tendency to seek commercialization of research results or of ideas is probably higher in Israel; on the other hand the infrastructure is more diversified, the technology incubators, the VC sector and other assisting tools are more prevalent in Israel allowing the TTC to focus on its main function.
The natural tendency is misleading, it is only partly natural. A major part of it lies in the local culture and education. Encouraging individualism, free thinking and non conservative solutions has been dominant in Israeli culture. Admiring the ability to improvise rather than plan, to give all you have to reach a goal is a basic characteristic of the culture. Portugal has stressed conformism and order, accuracy and planning.
If one goes back in time to the late 1980's, Israel was not much different. Small number of entrepreneurs, little supportive infrastructure etc., that means that the transformation of the Portuguese current situation to one more resembling Israel's can be achieved. How?
I would suggest the following:
It is important to recall that creating an infrastructure requires enough potential projects in the pipeline otherwise a sense of misfit is felt, which could lead to negative results. If you create a 100 venture capital funds that will not have enough projects, the failure to return the investment would assure that it would take a long time for the venture capital market to recover. Therefore there is no need to copy entire systems but rather let them evolve. First create the demand, educate for innovation, encourage project creation, than invite the assistive "tools" or build them according to demand.
What type of education? How can it be done?
For that in the next post…….

Wikipedia and the moral issue

At the beginning of 2011 Wikipedia published (thank you letter) the results of its annual public fundraising (16 million US$). Unlike other internet service rendering - entities raising funds from public or private organizations via equity issue, Wikipedia raised funds from DONATIONS from the public. The only return the public received was the continued function of Wikipedia without commercials, or other forms of commercialization.
This may not seem innovative. Many non for profit organizations, operating for public benefit raise funds from donations (e.g. Rotary Bat-Hefer) at Gala events, active fund raising from donations, second hand sales raffles or even a direct approach for donations (anti cancer and similar).
However, a closer examination will revel some differences. The other organizations mentioned above and their donations are normally raised on a local or maximum national level per event, by active if not personal and evident physical approach. Furthermore they are targeted towards a specific local target community with specific interest. Wikipedia approached the entire world, raised its funds entirely on the web without physical approach, and allowed the whole world to join in. This is global fund raising on the net.
While so far we compared Wikipedia to non-for profit local organizations, another approach would be to compare it to other web-based service providers. As such Wikipedia could collect some payment for its services. True, as it also feeds on the input of its users the business model would need to take it into account. Potentially giving credit for writing as well as charging for getting information from it, even creating a scaled model based on the uploaded content extent and quality. Another possibility would have been to get funding by allowing commercials on its pages. This option would have allowed Wikipedia to generate real income that is not based on the good will of the public, rather it is based on the usage of the service. This would have made the founders of Wikipedia rich – see what is happening to successful social networks owners.
Social networks also use content provided by the users, the connections made by the users' sub-groups and classifications. The networks provide a public service, but unlike Wikipedia it comes with a price tag – the commercials, and other commercialization sections (e.g. paid games). This commercial activity gave the networks their market value and allowed its owners/operators to get rich.
Do we see an ethical dilemma between the two models of operation? It would seem that there should not be any problem by giving a free service to the public, and fund the infrastructure and operation by commercials (this has been going on in commercial TV for years). Do we consider a non-for –profit organization raising funds by donations from the public as more ethical than an organization not charging for the service but getting funded by commercials?
Is our response based on the vast economic value of the social networks? The power they exert over our live? Do we fear that just by being business oriented and representing vast capital and power that they may be open to abuse?
Are non-for-profit public donation fund raising organizations more moral? Can we be more trusting regarding their intentions?
We live in a capitalist world, driven by economic considerations, feeling confident that the "market forces" can assure proper service, long term quality. Do we not feel that there is a contradiction between that trust and questioning the morality of profit oriented bodies while feeling confident regarding the morals of non-for-profit organizations?
As mentioned in the opening to this blog the purpose here is to raise questions – answering them is another matter entirely.