M5-Strategy-S3 - The macro environment

• Regulation and deregulation can increase or decrease barriers to entry and therefore the profits that firms can make:
  • By issuing a limited number of taxicab licenses, for example, a city is creating industry barriers to the taxicab market and how much cab owners can make

Some environments are more conducive to innovation than others. Four attributes of such environments are:

1. A system that provides financial support and rewards for innovation
   1. IPO are an excellent incentive to start a business
   2. The availability of venture capital
2. A culture that tolerates failure
   1. Many start-up firms never get to the payoff at an IPO, or they fail right after it.
   2. For several reasons, such failures stop neither the entrepreneurs nor the venture capitalists who finance the innovations from founding other start-ups.
      1. First, those who fail learn in the process and that can improve their chances of doing well the next time around. They acquire competencies that can be used to tackle another innovation. Even if all they learn is what not to do next time, that can be useful too.
      2. Second, venture capital firms have seen many failures before and have found ways to reduce their risk, for example, by offering management expertise to ventures. Moreover, some of the venture capital comes from entrepreneurs who had succeeded only after having failed earlier.
   3. During their stints in Silicon Valley, the authors do not remember seeing anyone point a finger at a person and say, “That’s an entrepreneur who failed."
   4. Whereas in Europe bankruptcy laws are harsh and entrepreneurs who fail are stigmatized,
3. the presence of related industries, universities, and other research institutions
   1. The presence of related industries and being close to suppliers or complementary innovators increases a firm’s chances of picking up useful ideas
      1. Amazon.com’s founder Jeff Bezos went west where he could find a large number of computer software developers and be located close to book distributors.
   2. The proximity of universities or other research institutions helps innovation in two ways.
   3. First, these institutions train personnel who can go on to work for firms or found their own firms.
   4. Second, scientific publications from the basic research often act as a catalyst for investment by firms in applied research.
4. Government policies
   1. Governments play a critical role—direct or indirect—in creating environments conducive to innovation:
   2. The direct role may be in:
      1. Sponsoring research at the National Institutes of Health or the Defense Department. The Internet itself traces its roots to the Defense Department’s DARPA project. More important, the U.S. government sponsored research in computer science and communication networks while training hundreds of thousands of people in electrical engineering and computer science who now fill Internet business jobs.
   3. The indirect role is in regulation and taxation.
      1. Lower capital gains taxes or other regulations that allow firms to keep more of what they learn allow them to spend more on innovation.
      2. Taxing e-commerce can have a huge impact on the Internet.
      3. Government laws on intellectual property protection also influence the

effectiveness of block strategies