NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, July 30, 2015

Innovation means creating something that makes a process or product more efficient. The result can be a price reduction passed on to consumers in the short run, or an increase in the speed at which a business operates. Ultimately, innovation serves as the backbone to overall economic and societal growth and can elevate standards of living. Today, equity crowdfunding is a one of these innovations.

A global problem identified and uncontested by a majority of economists is the gap between rich and poor both nationally, and even more starkly, globally. Unfortunately, the expansion of technology may actually magnify this gap. Large populations around the globe reside in under-developed economies where approximately 3 billion people live in poverty. Struggling economies are finding it more onerous to compete in the age of globalization because of the lack of infrastructure and know-how to keep pace with technology improvements. Two factors for the income disparity are the lack of knowledge transfer from trade coupled with an uneducated populace. While these aren’t the sole reasons, they do highlight the barriers to entry experienced by local as well as national economies and the limited prevalence and adoption of new technological innovations.

In the United States, the middle class is not achieving quality income growth. According to a New York Times article and statistics from the Bureau of Economic Analysis, the United States has experienced an overall decline in the median annual income of middle class households since 1967. In the 1960’s, 50% of U.S. households were classified as middle class, meaning they earned between $35,000 and $100,000. Now only 43% are part of this group. While many households have moved up the ladder to the upper-class designation, the gap between the growth trajectories of both income classes has increased.

In an interview with John Gosier, an investor, data-scientist, and serial tech entrepreneur, from Wired.com, the future of equity crowdfunding and its potential global impact is discussed in bold relief. Crowdfunding allows individuals to pledge capital to virtually anything, whether it be to support a social cause like bringing food to the less fortunate or funding a company that creates technology that improves energy efficiency in the United States or in countries with depressed economies. Mr. Gosier touches on the fact that while the global economy has grown tremendously since the beginning of the computer age, the boon in technology innovation has contributed to wealth gaps between the richest and poorest countries. Crowdfunding can be a new powerful tool to help the less fortunate and help expand the quality of life globally.

Mr. Gosier argues that a tech underclass is developing in which certain technologies only reach certain income levels and countries. This means countries and individuals must find ways to expand innovation to provide technological tools across borders so everyone can benefit from the prospect of innovation. In countries such as the United States, New Zealand, South Korea, and Canada, along with the European Union, equity crowdfunding has begun to gain traction as an alternative investment tool along with donation based crowdfunding. Crowdfunding could spur waves of investment into emerging countries through social causes and start-ups, which in turn creates an ethos of welcoming innovation.