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April 5, 2007 

 Q&A: Federal Reserve Bankís William Testa on Cautionary, Hopeful Prospects 5/3/2005
The mission of Going Global, which appears on ePrairie on most Tuesdays, is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

CHICAGO Ė William Testa is vice president and director of regional programs in the research department at the Federal Reserve Bank of Chicago. In part three of a three-part Q&A, Testa sat down with international expert Michael Muth to discuss cautionary but hopeful prospects for Chicago.

Michael Muth: Why do you think Chicago is only a respectable middle of the pack in terms of VC investment?
William Testa: There have been a lot of reasons proposed. Being more conservative and mature creates a risk-averse culture. The fundamental paradigm is it takes a long time to build up a VC culture. You have to have many start-ups that grow up with VCs. It helps to have some huge successes to spur venture capital.

Beyond that, itís difficult to pin down. VCís have to look at a lot of deals if they are to be active in a given city or region. Thatís a geographic phenomenon.

In addition to numbers, you also need density. Chicago could perhaps become a center for that because of its large size and because of its central position in the Midwest. Chicago could become a center for the review of the regionís innovative start-ups. For example, Warsaw, Ind. is the world leader in prosthetics and nearby Madison, Wis. is active in biotech start-ups.

MM: Does Max Palevsky (the son of Polish immigrants from the northwest side of Chicago who moved to California and founded Scientific Data Systems and eventually Intel) ever get back to town and contribute much to the local tech community?
WT: I donít know how much we see of him. I ran across his story because he made a large contribution to the University of Chicago. He has certainly helped our economy and its prospects in that regard.

MM: Is there some way to transfer Chicagoís historical manufacturing strength to high-tech industries?
WT: Itís a question of balance between old and new. Do you create new industries such as IT and biotech or do you build off your existing base? We havenít built off our existing base enough. There was a nanotech conference held here at the bank.

We brought in big local companies such as Caterpillar and BP to meet with emerging nanotech scientists and identify future technical needs of Midwest companies so our scientists might try to meet them.

MM commentary: Looking at this issue differently could be huge. Maybe we do focus too much on all the new and sexy technologies. Perhaps we would do better by building more off our existing base. Iím not sure what the specifics would be, but in terms of focus, the change could be great. While weíve been doing more of this since Y2K and the bursting of the Internet bubble, it still needs to be emphasized again.

MM: Even though Chicago is a leader in business services, are Chicago companies at risk as takeover targets from more internationally oriented New York or California firms?
WT: Itís always difficult to interpret and answer the takeover target question. Many develop themselves so as to be acquired and so is success. They never do attain or aspire to have the capacity to market and sell what they develop. On the other hand, when youíre taken over because of weakness, you cut your losses and you are a failure.

I donít see a trend one way or another in Chicago. Advertising is an example of an industry having some problems in this regard. Marketing campaigns are increasingly global and consistent throughout the world, which has resulted in some consolidation in the very largest global cities (specifically New York).

MM: How big an advantage is it to have the second-highest concentration of management consultants (behind Atlanta) if theyíre not here four days of the workweek?
WT: Itís generally lucrative to produce goods and services and send them out in trade. We produce the tools here in Illinois (such as construction and farm equipment). While it would be nice if we did construction machinery building in Peoria, Ill., itís nothing to wring your hands about.

We get the same misconception with ďbrain drainĒ. Having great colleges is a capital goods industry. Educating people generates healthy incomes for those of us here who do so. Similarly, consultants have great ideas and needed technology. Theyíre highly skilled and well paid. They regenerate their own business.

Thereís an interesting history of consulting in Chicago. A new book called ďThe Encyclopedia of ChicagoĒ has histories of industries here. The management consulting industry was born here. It emerged from professors at the University of Chicago and Northwestern. The financial center of the U.S. was New York City early in the 19th century.

Those New York companies didnít want to place their own people here to monitor our heavy industrial companies and local accounting professors began to take outsourced business. They then started their own industry advising those same companies in the 1920s.

MM commentary: While you can certainly have brainier discussions at social occasions on the weekends when the consultants are at home in Chicago, I question how much we gain from their being based here if theyíre not implementing their strategies and technologies locally.

MM: Is M.B.A. brain drain a threat to Chicagoís talent pool?
WT: I think just the opposite. Having the No. 1 and No. 2 business schools means we expose them to our rich business environment. We then have a better chance to recruit them to work for local companies and start their business here. If not, we have a thriving capital goods industry. They generate income.

Itís also a boon to our working executives here. They can go to school at night and learn from the worldís greatest professors. Meanwhile, we get a good crack at out-of-state and foreign students who might not otherwise see Chicago at all. They can also spread the gospel of Chicago wherever they go.

MM commentary: During the tech boom, the word was that the top M.B.A. graduates were heading for the coasts. Now that the boom has gone bust, are we keeping them here? I havenít seen the latest data.

MM: What percentage of Chicagoans do you think know about exchange rate derivatives and do you think they realize their global impact?
WT: I think itís a small percentage and that is a shame. Itís important for every place and person to understand their own economy.

You canít successfully chase your neighborís economy. Itís important not to squash your own vitality through unintelligent or exploitive regulation and taxation. Itís also important to support the local business base with complementary public services (such as education, training and infrastructure).

Itís referred to as a good business climate. While business associations can help in this, sometimes they pursue the needs of only a subset of local businesses. Itís also critical for governments to do this. There has to be a voice of active dialogue between what industry needs and what government provides. Itís an important part of continued growth.

Part of the art is also to borrow what might be helpful from other regions without getting caught up in what Ned Hill calls ďrubeaphobia,Ē which is faddishly chasing the economy of your neighbors as your ill-fated dream. You can never know another place as well as you know your own. In coveting thy neighborís, itís sometimes difficult to separate fact from fiction.

MM commentary: Exchange rate derivatives add liquidity to international financial markets, & therefore their impact is immense. Chicago plays this role in a number of other financial markets & its impact, I think, is little recognized by local business people.

MM: Any final thoughts on Chicago as a global city?
WT: I express a cautionary but hopeful tale. My impression is that Chicago can do it. We have a great legacy of assets with a wonderful quality of life and entrepreneurial and ambitious people. We can pull up ourselves and the surrounding region along with it.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at mike@intlalliances.com.
Click here for Muthís full biography.

Previous Columns:
Q&A: Federal Reserve Bankís William Testa on Chicago Business (4/26/2005)
Q&A: Federal Reserve Bankís William Testa on Headquarters, Exports (4/19/2005)
Q&A: Lisle Technology Partners CEO Adarsh Arora on Keys to Outsourcing (4/5/2005)
Q&A: Lisle Technology Partners CEO Adarsh Arora on Outsourcing in India (3/22/2005)
Q&A: Lisle Technology Partners CEO Adarsh Arora on Offshore Outsourcing (3/15/2005)
Q&A: CECís David Weinstein, Kapil Chaudhary on International Experience (3/1/2005)
Q&A: CECís David Weinstein, Kapil Chaudhary on Internationalization (2/22/2005)
Q&A: Brian Briggs of Acclaro on Whether to Outsource Localization (2/8/2005)
Q&A: Brian Briggs of Acclaro on the Complexities of Localization (2/1/2005)
Q&A: Brian Briggs of Acclaro on International Localization Services (1/25/2005)
Q&A: RPXís Robert Okabe, IECís John Janowiak on Global Events (1/11/2005)
Q&As: FastRootís Terry Howerton, Doug Cogswell of ADVIZOR Solutions (1/4/2005)
Q&A: Opportunity Internationalís John Kamperschroer on Partnerships (12/21/2004)
Q&A: Opportunity Internationalís John Kamperschroer on Technology (12/14/2004)
Q&A: Opportunity Internationalís John Kamperschroer on Innovative Financing (12/7/2004)
Q&A: IEC Senior Director John Janowiak on Trade Show Realities (11/16/2004)
Q&A: International Engineering Consortium Senior Director John Janowiak (11/9/2004)
Q&A: Founder John Lee of Chicagoís Hostway on Web Site Localization (11/2/2004)
Q&A: Founder John Lee of Chicagoís Hostway on Growing Globally (10/26/2004)
International M.B.A. Guide to Moore School of Business, Thunderbird (10/12/2004)
Your International M.B.A. Guide to Northwestern, Loyola University (10/5/2004)
Entrepreneurís Guide to International M.B.A. Programs in Chicago (9/28/2004)
Q&A: Prairie Angels Founder Bob Okabe on Diction, International Cities (9/7/2004)
Q&A: Prairie Angels Founder Bob Okabe on International Adaptation (9/1/2004)
Q&A: Prairie Angels Founder Bob Okabe on Managing U.S. Subsidiaries (8/24/2004)
Q&A: Origin Ventures Founder Steven Miller on Investments, Angels (8/17/2004)
Q&A: Origin Ventures Founder Steven Miller on the Canadian Way (8/9/2004)
Q&A: CPCP Founder David Baeckelandt on Multilingual Importance, Mentoring (8/3/2004)
Q&A: CPCP Founder David Baeckelandt on Japanese Disclosure, Due Diligence (7/27/2004)
Q&A: Chicago Pacific Capital Founder David Baeckelandt on Overseas Funding (7/20/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on the Art of Partnering (7/13/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on BP, AstraZeneca Wins (7/6/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on Global Software (6/29/2004)
Q&A: CEO Terry Howerton on Why Chicago, Ukraine Made FastRoot (6/22/2004)
Q&A: FastRoot CEO Terry Howerton on Blended Chicago Approach (6/15/2004)

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