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Why is the US No Longer Innovating?

Innovation is the key to getting out economy growing again.  Unfortunately, since 2000 we have passed a number of laws and regulations that are killing innovation in the US.   The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital.  All three of the pillars have been under attack since 2000.  Our patent laws have been weakened reducing the value of intellectual capital.  Sarbanes Oxley has made it impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital to start-ups.  The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation , explains these problems in more detail.

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Dale B. Halling is a patent attorney and deals with technology start-up companies everyday.  In the 90s, the clients who came into his office were working on revolutionary or disruptive technologies.  They were planning on building large businesses and going public.  Since 2000 his clients are working on evolutionary technologies, they are going to build small companies and sell out to a larger company.  These experiences motivated Mr. Halling to examine the reasons for these changes.

Those countries with the strongest patent laws have the fastest rates of innovation and diffusion of innovation.  Those countries with weak or non-existent patent laws have the weakest patent laws.  Before patent laws became widespread in the western world, the rate of innovation was slow enough that the per capita income of the west had not changed in centuries.  Note that many of the other conditions of a free market, such as low taxes, property rights, etc existed for centuries before per capita income started to increase in Europe.

Sarbox has failed to achieve any of its goals and is killing US innovation.  In 1996 the US had 60% of the worldwide IPOs in 2005 we had only 20%.  When SOX was passed it was estimated that it would cost companies $91 thousand per year to comply.  The actual cost is closer to $4 million.  Sarbanes Oxley has severely damaged the technology start-up market and the financial industry in the U.S.  Sarbox is very expensive: including enormous direct and indirect costs to our economy and to innovation.  It has not met its goals of improving the quality of auditing or preventing fraud.  The effects of this law include fewer public companies, fewer companies going public, more companies choosing to go public in foreign markets, absurdly high auditing expenses and a significant decrease in risk capital.

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