SSTI Digest

The federal Community Development Financial Institutions (CDFI) Fund released a new report profiling certified CDFIs in FY 2019. Notably, 14 active CDFIs are certified as venture funds, an increase from just four in FY 2017. Between the periods covered by these reports, the CDFI Fund updated their certification process and received encouragement from SSTI and members to be more open to equity financial structures. The results suggest that this change has taken place. An overview of the CDFI program with insights from members who have recently received funding follows.

For many innovators, entrepreneurs, investors, and corporations, American capitalism has been a boon. But there is another side to the story. A recent report published by McKinsey & Company questions whether the American model of capitalism is on the brink of change. The report details the unequal and disparate economic outcomes of the current model of capitalism in the U.S., which has been compounded by the effects of the COVID-19 pandemic. Current challenges to capitalism include the potential for market disruption triggered by climate change and the rise of countries with other economic systems like China.

Stemming from a collaboration between the Census Bureau and the National Center for Science and Engineering Statistics (NCSES) within the National Science Foundation (NSF), a new data set aims to untangle the dynamics of research and development (R&D) performed by private companies. Specifically, the new Annual Business Survey incorporates previously experimental data on the R&D performance by microenterprises — businesses which employ between one and nine people. SSTI’s analysis of this new data shows the total R&D performed by microenterprises in each state, and the portion of that R&D which the companies paid for themselves.

Disruptive technology, or innovations that radically alter the way consumers, industry, or businesses operate, have long been thought to be the primary way emerging small firms can leapfrog competition and compete against large industry titans. Through innovations such as internal IT systems or logistical improvements, small firms can acquire a decisive competitive advantage over their rivals. Or so the traditional theory holds. In a new paper out of Boston University School of Law, Bessen et al. argue that the way we think about industry disruption and displacement may no longer be an accurate assessment of what is truly going on with significant changes since 2000. Unknown policy implications from their findings relate to possible long-term impacts on regional innovation strategies and American competitiveness.

Investing in a college education comes with expectations of good returns on the investment. A recent analysis by Georgetown University’s Center on Education and the Workforce (CEW) found that first-year earnings for the same degree and major can vary by as much as $80,000 at different colleges. And while graduates from more famous, selective colleges have higher earnings in many instances, such is not always the case.

In Buyer Beware: First-Year Earnings and Debt for 37,000 College Majors at 4,400 Institutions, the CEW uses data from the College Scorecard to demonstrate the vastly different outcomes in expected earnings and debt payments for graduates. Analyzing data from the College Scorecard, the CEW found stark differences in earnings by graduates of different colleges with the same degree in the same field of study. There was a nearly $80,000 difference for students with a bachelor’s degree in business administration from Mitchell College who earned $20,9000 compared to those with the same degree graduating from Bismarck State College who earned $100,5000.

While economic development tends to be nonpartisan at the state level, many states are limited in their ability to fund innovative programs. In order to fund efforts that may serve as part of a national development strategy, Congress should use the bipartisan support of state efforts to establish and expand federal-state development partnerships and a strategy focused on countering China’s rise in advanced industries. That is the sentiment behind a recent roadmap from the Information Technology & Innovation Foundation (ITIF) that proposes four things Congress should do to align state efforts to an overall mission of outcompeting China.

Key findings from two independent research projects reveal the pandemic’s corrosive effect on the nation’s innovation commercialization capacity. The projects separately explored how two related innovation financing components — angel investment and venture capital — were reacting to the coronavirus-caused slowdown. Individually, the results might appear simply as yet more interesting curiosities about the pandemic. Considered together, however, and one begins to see the potential unraveling of the broader U.S. innovation tapestry required to support long-term economic prosperity. The impact is likely to be felt most strongly in those states and metropolitan areas with fragile regional innovation systems.

In addition to decreasing enrollment numbers at both two- and four-year institutions of higher education, detailed in an earlier SSTI Digest story, higher ed is facing other threats from looming state budget cuts. While enrollment numbers are still in flux, many universities are already making drastic budget reductions, and that pain will ultimately land on students, which could impact educational attainment and student debt for years.

Personal income levels throughout the country received a boost in the second quarter of 2020 through assistance programs from the federal government designed to combat the economic difficulties brought on by the COVID-19 pandemic. In their recently published report, Pew Charitable Trusts explains that “the surge in federal assistance more than offset record losses in earnings, which counts wages from work and extra compensation such as employer-sponsored health benefits, as well as business profits.” Earnings reflected the largest losses on record, falling by about $860 billion from the prior quarter and $670 billion from a year ago.

After two years of research on technology and jobs, MIT’s Task Force on the Work of the Future has issued its final report, and the news is hopeful: with better policies in place, more people could enjoy good careers even as new technology transforms workplaces.

The report, “The Work of the Future: Building Better Jobs in an Age of Intelligent Machines,” argues that as technology takes jobs away, new opportunities open. The real issue is improving the quality of jobs and ensuring a greater shared prosperity, especially among middle- and lower-wage workers.

Contradictory to the prevailing theory that fintech companies — utilizing cutting-edge algorithms and incorporating data beyond the standard credit reports — have better insights into borrower risk profiles than traditional lenders, new research indicates that fintech borrowers are more likely to default on their loans than their counterparts who utilize traditional banks. In their forthcoming article in The Review of Financial Studies, Marco Di Maggio and Vincent Yao find that fintech companies are actually more reliant on “hard information” than traditional banks and typically acquire market share by first lending to higher-risk borrowers and then to safer borrowers. Although their analysis is based entirely on the personal loans market, the research raises another flag, adding to a growing list of fintech issues ripe for regulation.

Criticism of the federal Opportunity Zone program has been directed at individual examples of questionable tracts for inclusion, the process for selecting tracts in each state, and the merits of some of the development projects underway. For example, some question inclusion of lowlands subject to flooding as sea levels rise with climate change and subsidence, while others raise eyebrows at inclusion of greenfield freeway interchanges or tracts already undergoing gentrification in fast growing cities. Complaints have been raised about projects where the end use (e.g. a hotel) will offer low-wage, part-time jobs without benefits for worker or a chance of raising them out of poverty.  Still others question if a decade of forgone public revenues from real estate projects that would have happened anyway is good policy. A new report from the U.S. Government Accountability Office recommends Congress pass legislation granting the Treasury Department the authority to actually evaluate the program to determine if all of the concern is justified.