Intro: While Bharatiya government continues to encourage manufacturing by foreign and domestic industries under its “Make in India” programme, it must also give equal attention to nurturing the nascent culture of technology-based startups in Bharat.
On 29 November 1947, just three months after Bharat celebrated its Independence, the United Nations General Assembly recommended the adoption and implementation of the Partition Plan for Mandatory Palestine to create the state of Israel. Since its inception, Israel faced acute security and economic challenges, starting with the 1948 Arab-Israeli war and the massive influx of Jewish refugees from around the world.
For a country born in such trying circumstances, Israel today has done remarkably well for itself. It ranks 19th among 187 nations on the UN’s Human Development Index, which places it in the category of “Very Highly Developed” nations. According to International Monetary Fund (IMF), Israel ranks 24th in the list of countries by GDP per capita and in 2010 it was unanimously invited to join Organisation for Economic Co-operation and Development (OECD), an exclusive club of the world’s richest countries. Although Bharat is a very different country from Israel, for starters, Bangalore has more people than Israel. There is something to be learned from the remarkable success story of a country with such limited natural resources and surrounded on all sides by hostile nations.
The key to Israel’s success has been its ability to develop itself as an innovation hub and encourage a culture of high-technology entrepreneurship to thrive in the country. Today, the largest chunk of Israel exports constitutes cutting-edge technologies in software, communications and the life sciences. It has the second-largest number of startup companies in the world after USA and the largest number of NASDAQ-listed companies outside North America.
The policymakers of Israel and USA realised intuitively what economists like the Nobel laureate Robert Solow have proven empirically technological innovation is the only sustainable source of economic growth and entrepreneurship the only guarantee of sustainable competitive advantage for nations. This is why during the 1980s and 1990s, state and local governments across the United States abandoned their previous focus on attracting large manufacturing firms as the centerpiece of economic development policy and instead shifted their focus to promoting entrepreneurship. And that effort has borne fruit because most of the net employment gains in USA between 1980 and 2005 came from firms younger than 5 years old.
We have all the right raw materials to create the next generation of high technology companies—a large pool of young population that looks favourably upon entrepreneurship and a large domestic market to cater to.
The budget earlier this year was a good beginning as it announced several new schemes to encourage innovation and startups like Atal Innovation Mission (AIM) as a “promotion platform to spur scientific research and R&D in the country”, Self- Employment and Talent Utilisation (SETU) mechanism which isa “techno-financial, incubation and facilitation programme to support all aspects of start-up businesses” and finally the MUDRA bank to provide loan facilities to small businesses in Bharat. Meanwhile SEBI is also carving out an easier set of rules for startups to raise funds and list themselves on stock exchanges.
However, a lot still remains to be done. Across countries, most government programmes to promote startups have generally failed because they work under the assumption that as long as government provides budding entrepreneurs access to capital, they will work their magic and create the next Facebook and Google.
However, as economist Russell Sobel explains: “…capital is more mobile than labour, and funding naturally flows to those areas where creative and potentially profitable ideas are being generated. This means that promoting individual entrepreneurs is more important for economic development policy than attracting venture capital at the initial stages. While funding can increase the odds of new business survival, it does not create
new ideas. Funding follows ideas, not vice versa.”
The principle that funding follows good ideas is evidenced by the fact that global interest in Bharat’s technology startups is peaking as more young entrepreneurs bite the startup bullet, especially in the field of mobile technology. Venture capital investors funnelled $ 2.46 billion into Bharat’s startups this year till June, as compared to
$ 2.34 billion in entire 2014. The message is clear: If our system can generate good ideas, money will be available to fund them.
The public policy interventions that really work are ones that promote economic freedom and establish credible institutions that support business activity. Bharat’s rank of 142 on the World Bank’s Ease of Doing Business index hurts the small entrepreneur much more than the large companies. Further, in the annual Global Innovation Index survey for 2014 which measures a country’s innovation capabilities across 81 indicators, Bharat slid 10 places from 2013 to be ranked 76th in the list of 143 economies around the world. Notably, it was the worst performer among all BRICS nations with all other member countries improving its position from the last year. These are the systemic problems that our government must be looking to solve, in its quest to
The NITI Aayog has set up an Expert Committee to lay down the detailed contours of AIM and SETU. While they will surely have several recommendations on removing regulatory roadblocks and improving the access to funding for startups, one hopes that they also suggest ways in which we can promote and celebrate a culture of risk taking and entrepreneurship so that more people are encouraged to try out new ideas. A good beginning would be to revisit some of the recommendations in the draft National Entrepreneurship Policy that was prepared by the Entrepreneurship Development Institute of Bharat, Ahmedabad. Also helpful would be to study how countries like Israel, Singapore and Silicon Valley in USA have nurtured innovation hubs. One possible reason for the success of these countries might be that they are amongst the largest spenders on R&D as a proportion of their GDP, in fact Israel is at the top of the list with 3.93 per cent. Bharat meanwhile, spends less than one per cent.
Finally, as a society one needs to become more tolerant of failures. Despite our best efforts, Bharat will not remain immune to the high rate of failure of startups and most companies that the government and private incubators support will not make it big. Research suggests that failed entrepreneurs are far more likely to be successful in their second go-around, provided they try again. And even entrepreneurs that fail, still keep the existing players under pressure and stimulate innovation. We need to change our mindset and realise that it is okay to fail as long as you constructively use that experience to build a better company. Only then will investors and incubators feel comfortable investing in a failed entrepreneur.
The process of converting our youngsters from job-seekers to job-creators is a complex, long-drawn process involving coordinated action from several public and private stakeholders. At first glance, it might not be attractive to our policymakers looking for quick wins to present before the public. But if we persevere, the payoffs for our country will be huge.
Apurv Kumar Mishra (The writer is a Young India Fellow (2013-2014) at Ashoka University.)