Less than a fortnight before the government’s “Startup India” programme was formally launched, Reserve Bank of India governor Raghuram Rajan wrote a strongly-worded letter to all 17,000 RBI employees urging them to work towards a more efficient and less bureaucratic functioning. He claimed that the RBI in its current form is acting far from its mandate and is thus unfair to its patrons. To improve the current state of the institution, he put forth novel ideas such as seeking external expert advice from those with regulatory know-how. This message brought relief and a renewed sense of hope for many who share Rajan’s ideals on how institutions should function.
Unfortunately, the same cannot be said for those heading the central government in the face of how their flagship “Startup India” mission is structured.
Entrepreneurship is no doubt key to sustained economic growth – some even call it a new wave of the industrial revolution. Governments across the globe are seeking to foster the entrepreneurial spirit. In contrast with the model of subsidies and tax breaks, this creates conditions that encourage individual innovation and Schumpeterian principles of creative destruction. This in turn insulates political fortunes from boom-and-bust economic cycles.
Reproduction or Innovation?
Innovation is strongly co-related with the entrepreneurship that the Startup India programme is aiming to usher. Innovation, however, is often misrepresented as building upon pre-existent successful “prototypes”. E-commerce and payment wallets are a good example of this, as they were originally pioneered abroad and simply rebranded and launched in the domestic Indian market. While these are examples of structural innovations, they do not represent pioneering ideas by Indian entrepreneurs.
So what then does “Startup India” aim to achieve? The reproduction of prototypes and the creation of new, original paradigms each require a different set of policy efforts and actions. Intuitively, it seems that the intention of the programme is replication rather than creation, given the fact that the government is still acting along the lines of incentives – such as financing, new tax codes, tax holidays, etc.
This makes the Startup India project quite similar to any rozgar yojna (employment scheme) of the past, bound to fall short of desired results. Its actually more government and less governance, directly in contrast to Prime Minister Modi’s election campaign slogan of “minimum government, maximum governance”. With such policy action, the government also wrongly defines what constitutes a “start-up”, therefore exposing itself to chances of a regulatory mess and various litigations, particularly when tax inspectors begin the process of attesting start-up ventures. The definitional ambiguities of “start-ups” will soon be a cover for imaginative Indian businesses that have long exploited such systemic loopholes. This also leads to another critical question – who needs incentives? It may be more apt if the fate of businesses is left to market vagaries.
Creating successful entrepreneurial ecosystems requires a lot of work at the governmental and bureaucratic level. This is reflected in what Raghuram Rajan envisioned in his address to RBI staff: an agile, responsive and accountable governance machinery.
Lessons from the US and Europe
Looking through the process of how two successful entrepreneurial and innovative ecosystems emerged – one in the United States and the other in Europe – helps us understand what is required.
First and foremost, most successful innovative clusters around the world are the unintended consequence of actor behaviour, and only tangentially result from government interventions (if any). Second, the lead anchors in this process have always been universities or other technical entities, and an enterprise (or spin off enterprises). Both complement each other in successive years to innovate and create more successful spin-offs. Without either one of these two agents, it’s hard to find a successful innovation cluster anywhere in the world.
In the case of Silicon Valley, for instance, it was the foundation of Stanford University in 1891 and Lee de Forest’s founding of the Federal Telegraph Company in 1909 (the company which later invented the vacuum tube amplifier in Palo Alto) that triggered the birth of an innovation and ‘startup’ ecosystem. Both worked in tandem to lay strong foundations in electronics research, and what followed were newer entrepreneurs and startups in the area, beginning with Hewlett-Packard (1938). By 1950, the list included Lockheed (missile and space), Shockley Semiconductors, Ampex (video and audio recording equipment) and the Xerox Palo Alto Research Center in 1970.
Another successful example is the story of Eindhoven in the Netherlands, home to Philips. When Philips struggled in the early 1990s in the face of the onslaught of Korean electronics, the hi-tech electronic campus and universities in the Eindhoven region came to its rescue. They not only helped Philips diversify, but also led to other spin-offs coming up in the fields of semiconductors and hi-tech electronics (such as printing machinery and precision machinery). Today, the Eindhoven cluster is responsible for four patents per day – more than half (55%) of the total number of patents registered in the entire country. More recently, successive investments in R&D and infrastructure in the region have had positive results. Tilburg (approximately 35 km from Eindhoven), for example, became the obvious choice for the Tesla Motors assembly and production line in order to fulfill its European demand. Such examples can also be found in the Skäne region of Sweden and Dublin in the Republic of Ireland.
In India, on the contrary, it is disheartening to see that none of the IITs or NITs, most of which are located in small towns to fulfill Nehru’s socialist vision of institution-led regional development, replicated any near similar entrepreneurial ecosystem.
The examples of Silicon Valley and Eindhoven are reflective of how easy financing and a good business climate come after a strategic idea, and not the other way around. The Modi government is, therefore, looking at the process from the wrong end. Startups are not market place entities but a key constituent of an entrepreneurial ecosystem.
The only role the state has had in these successful clusters (or those elsewhere) was in becoming the “creative first user” for newly delivered technologies. It was the US Department of Defense and NASA in the early 1900s that first used semiconductors. These agencies play a similar role even today, such as in being the “creative first user” for experimental space launch vehicles created by Elon Musk’s Space X.
How “startup India” seeks to push cutting-edge R&D still needs to be spelt out by the government. For the sake of comparison, the 2011 share of GDP on R&D spending was a mere 0.82% for India, while for China it was at 1.79% and the US at 2.77%, according to World Bank data. The success of Bangalore, Hyderabad and Pune as IT, BPO and off-shore hubs is due to private ventures (Infosys, Patni, Wipro, TCS, etc.) founded in the early 1990s, as well as the availability of skilled engineering graduates. However, in all these places, the entrepreneurial or innovative ecosystem is far from perfect. The automation challenges from leaner organization elsewhere (mostly in Europe and the US) have now posed existential threats to Indian IT behemoths.
The moral of the story, then, is that policy thinking needs to be reflective and inclusive rather than simply being a spectacle for publicity. It needs more partners in design to avoid the blunders that will probably be the fate of Startup India, considering the lack of imaginative thinking in the Modi government.
Capacity building amounting to increasing sops and entitlements won’t yield the desired results. Latest data suggests a 32% increase in US-bound students between 2014 and 2015, 75% of whom are headed for graduate studies. Amongst these students, 81% are enrolled in STEM subjects (science, technology, engineering, and math). Since these are probably the best students in the class, it isn’t hard to figure that the probability of innovation travels with them.
The bottom line for what the government can do is this: It should invest in universities, incentivise higher education, embrace the role of a “creative first user” and incentivise innovation. These sustained measures, rather than sops unveiled at a high-profile event is what will catalyse entrepreneurship and innovation in India.
Purushottam Kesar specialises in regional innovation policy studies, and is based in the Netherlands. He can be reached at [email protected]. The author thanks Prof. Nilsson, Jan-Evert, BTH Sweden for his classroom notes.