By Peter Cohan
August 2, 2010

Thomas L. Friedman, The New York Times’s op-editorialist extraordinaire, penned a column in April about a topic that could affect the future of the US economy. But while his overall point is on target — he misses the mark in a key way.

Why should anyone in the Philippines care? After all, the Philippines has done a good job of making itself less dependent on the state of the US economy. And after much better-than-expected 7.3% GDP growth in the first quarter of 2010, Standard Chartered Bank raised its 2010 GDP growth forecast for the Philippines from 3.3% to 5.9%.

At that rate of growth, it seems that the Philippines has nothing to worry about when it comes to the US But without the problems in the US, that figure would have been even higher. The World Bank estimates that developing country growth is slower – between 0.2 and 0.7 percentage points — than it would have been were it not for the economic slowdown resulting from the developing world’s financial crisis that began in 2008.

But not only does the US present an economic threat to growth in the Philippines, it also presents opportunities for startups.

In that context, it is worth pointing out that I agree with Friedman on the main point — that a recovery in the US depends on small companies creating jobs. However, his prescription — increasing the number of what he calls “high-IQ risk-takers” in the US — won’t do the trick. Instead, jobs will result when entrepreneurs can get the capital they need to start and build successful ventures. And getting that money takes more than just smart people.

Friedman’s argument springs from what appears to be an interview with Craig Mundie, the chief research and strategy officer of Microsoft. Although Microsoft has been a relative laggard technologically for at least the last decade, Friedman appears to be swept away by Mundie’s viewpoint.

The Microsoft exec suggests that the problem with the US economy is that so-called high-IQ risk-takers in business and government are being discouraged by “cutbacks in higher education, restrictions on immigration and a toxic public space that dissuades talented people from going into government.” Moreover, Mundie argues that the common element that explains the “above-average returns as a country” for Singapore, Israel and America has been those high-IQ risk-takers.

AN IMPORTANT FLAW

I find it quite plausible when Friedman cites research from The Kauffman Foundation to conclude that most jobs come from small businesses. Kauffman’s Robert Litan argues to Friedman that, “Between 1980 and 2005, virtually all net new jobs created in the US were created by firms that were 5 years old or less. That is about 40 million jobs. That means the established firms created no new net jobs during that period.”

With 8.4 million people out of work since the Great Recession began in December 2007, anyone looking for a job surely cares deeply about the source of new jobs. Why does it matter if Friedman is right or wrong? Friedman’s effort to attribute small business jobs to high-IQ risk-takers is flawed. And that flaw is important because if policymakers follow the prescriptions that flow from his analysis, they won’t create the new jobs that people want.

Friedman’s analysis is offbase for three reasons: Failure to define key terms or to explain how they create jobs The success of Singapore and Israel come from very different sources It excludes factors that are critical to entrepreneurial activity

In considering what the US must do to encourage more start-up activity, Friedman’s prescription of letting more smart immigrants into the US seems fine. But many US companies have found ways of tapping potential immigrants’ talents by partnering with them in their home countries without them being US citizens. To the extent that Friedman’s focus on human capital has merit, it doesn’t go nearly far enough.

OPPORTUNITIES FOR THE PHILIPPINES

Our research found that when it comes to human capital, the Philippines has significant advantages over many of its Asian neighbors. And US companies, particularly professional services firms such as those in law and accounting, perceive many advantages in outsourcing research work to the Philippines. Specifically, these US firms hire workers in the Philippines because many of them speak English well, have a deep appreciation of American culture, and accept relatively low pay.

As US firms look to lower their fixed costs while preparing to handle growth in demand as the US economy recovers, there will be growing demand for Philippine ventures that can hire, train and deploy its citizens to deliver high quality service cost-effectively to US firms.

And those firms in the Philippines should tap into financial markets in the US and elsewhere to fund those startups. Seeking faster growth, $709 billion in capital is expected to flow to emerging markets in 2010. And if they can bring together US and other developed country customers with their skilled workers, Philippine entrepreneurs ought to get a share of those global capital flows.

That’s why human capital offers a strong base from which to build Philippine startups.

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