The Taiwan Banker

Suppose you had US$ 1 million to invest. Besides the stock market, would you rather put that money in a fledgling new business concept or buy a new apartment? Real estate is an option which every angel investor has probably considered, and rejected. Angels want more upside potential than a typical commodity investment can offer. On a more subjective level, they also want the opportunity to help shape the future of industry, both through their selection of investment target and the subsequent guidance they have to offer. What could be done to ensure that more people make this choice? Many factors at every level have been shown to influence innovation, from education to start-up assistance to market power of industry incumbents. A great deal depends on the overall environment for investment and scientific research, which is difficult to change in the shorter term. The most prominent among the factors that could be reasonably influenced within a period of several years might in fact be the alternative investment: real estate. Taiwan has avoided the ‘financialization’ that characterizes Western economies, particularly the US, but booming asset markets could create the same non-productive effect through a back-door channel. Taiwan’s stability has earned it a good reputation in capital markets, but it also needs to be careful about too much of a good thing. A successful entrepreneur is an impeccable optimist. The mindset required for a capable individual to leave a comfortable office job and endure repeated failures doesn’t arise out of broad pessimism about the future, but rather from a sense of security. Beyond flexibility in capital funding, therefore, the role of the financial sector in promoting innovation must be extended to broader economic conditions, particularly for those who don’t already have personal wealth. Scalable finance The longstanding strength of the US, the source of the largest multinational tech giants, has been is its smooth pipeline for startups all the way to the public company stage. The viability of subsequent IPO prospect is a key consideration for investment, even if the early stages. Angels and VCs are investors don’t last long as investors if they don’t consider how to cash out of their positions. This strength also distinguishes the US somewhat from Europe, which has focused more on government programs as a way to spur entrepreneurship. A variety of initiatives across the continent provide help for start-ups in the form of training, networking, and on the financing side, grants or subsidized lending. This way, countries can target selected industries and demographic groups, particularly young entrepreneurs, and the financial assistance also integrates well with other resources such as accelerators. This granular approach however doesn’t directly address scaling potential. In the IT world, cloud services have been developed specifically to handle the scenario in which services must grow quickly by orders of magnitude when small businesses become successful. The same pain point is present for the financing aspect as well. Meanwhile, financial flexibility can also encourage experimentation with business models, in addition to pure technologies, so it’s important to have financing support both in the early and the mid-to-late stages. These models can be contrasted with the Asian model, in which the government is more deeply involved in the technological aspects of innovation. Taiwan’s greatest strength, for example, is its base of mid-level engineering talent, positioned between the research leadership of the US and China’s large pool of engineering generalists. Like other East Asian developmental states, it has taken a successful geographic approach to innovation, driven by science parks, and pursued excellence in its specialty of semiconductors. Negative capitalization These environmental and institutional factors are mostly fixed, resulting from the history and legal systems in these respective regions. There is, however, a worrying trend in the US and Europe which merits close attention: entrepreneurship has been on a steady decline, particularly since around the 2008 financial crisis. US census statistics compiled by the Kaufmann Foundation show that the percentage of firms with employees aged 2 years or less among the total dropped from 11% in 2006 to 7% in 2016. At the same time, founders are gradually growing older; the portion of founders aged 20-30 decreased from 35% in 1996 to 18% in 2014. Around the time of the crisis, student debt started becoming an urgent issue for new US college graduates. The reasons for that timing have to do with the politics of recovery stimulus. The Obama administration recognized the need for a large package, but with strong political polarization, the state governments didn’t receive additional funds, and were forced to pull back on education subsidies. Quantitative easing eventually pushed up asset prices, reducing the sense of urgency among the middle class who own housing assets and stocks, while the younger population, mostly lacking political advocates, was left out. Today, the statistics are stark. Almost 50 million graduates hold an average of $37,584 in debt, making educational lending bigger than credit card debt. 60% of loans since 2009 exceed their original balance, and debtors expect to be paying their loans off until their 40s. This is not an environment conducive to risk-seeking. The research end of the US university system does contribute to its innovative ability, but the instructional side is in clear need of reform. The situation in Europe is slightly different, but there too, after years of ill-advised austerity policies, youth unemployment remained elevated from 2007 levels for about ten years. The lesson for Taiwan is clear: don’t let the younger generation wither. Fortunately, Taiwan’s educational system has managed to control its costs, but there may still be some further lessons to be learned. The country should ask itself to what extent a buoyant housing market serves as a de facto substitute for more aggressive ways to provide people without assets, especially youth, with a sense of optimism about the future. This is a particularly urgent task as Taiwan’s aging demographics cause its political center of gravity to become older. Housing price appreciation creates a “wealth effect,” so that homeowners are more confident to spend money or invest elsewhere. Nevertheless, it’s entirely paper wealth, which is only realized if the owner sells the property in order to find alternative, less expensive housing arrangements. In the meantime, it can divert funds from other, more meaningful investments. In a collective sense, housing should be properly accounted as an expense, rather than an asset. Business model innovation To be sure, the US is working to potentially innovate itself out of the crisis it created for itself. New business models, such as coding bootcamps, may offer a more straightforward path to entrepreneurship than university. The Lambda School, for instance, offers an equity-like arrangement called income share agreements in which graduates owe 17% of their income over $50,000 for two years of employment. Lambda’s CEO Austen Allred says that income share agreements are “our way of doing our best to align the incentives of the school with the incentives of the students. We feel like if you don't get a job, and if Lambda School isn't a successful thing for you, then we shouldn't get paid. That's only fair.” The equity model remains controversial, but might find further applications. Another way forward comes primarily from Europe. Open banking is intended as a way to give start-ups the opportunity to join in the same ecosystem as banks, without competing directly, so that large incumbents don’t snuff out emerging competition. The UK, EU, and Australia are considered to be leaders in open banking. The idea parallels ongoing discussions about regulating the tech sector, particularly in the US, but the use of application programming interfaces (APIs) is a somewhat different concept than regulation per se, because the regulator (which may be the government or industry association) is acting in a creative, rather than a restrictive role. This area probably counts as a strength of Europe over the US. Taiwan is moving ahead with its open banking plans, aiming to broaden its fintech ecosystem. On January 11, its Financial Securities Commission granted approval to seven banks to enter the second stage of the process, involving customers to access private account information. Taiwan is well-positioned overall to build on its previous successes, mainly in hardware. Its prevention of an uncontrolled domestic pandemic has undoubtedly created knock-on effects for political and economic stability. Its national security orientation also tends to prevent interest groups from becoming powerful enough to block needed reforms. All of this puts it in a good position to apply both the positive and negative lessons from other countries to its fintech sector, and other emerging verticals. It can think about ways to open up its financial sector which don’t compromise the integrity of the entire system. More broadly, it must remember that the well-being of its youth is equivalent to the long-term well-being of the country as a whole.