Role of Entrepreneurship
THE ROLE OF ENTREPRENEURSHIP IN INDIA’S
FUTURE ECONOMIC DEVELOPMENT
The progress of Indian economic development from 1947 to the present provides further evidence that individuals do respond to incentives in their pursuit of self-survival and accumulation of wealth. Further, the nature of this response depends on the economic climate, particularly the role of the government. India’s economy struggled as long as it was based in a system of government regulation with little interaction with economic forces outside the country. The economic reforms of the early 1990s set the stage for substantial improvements in the Indian economy. As was stated earlier, India’s economy grew at an average of 6.3 per cent from 1992-1993 to 2000-2001 (Acharya, 2001). Further, its rate of inflation and fiscal deficit both decreased substantially (Bhalla, 2000). Improved exchange rate management led to improved financing of the current account deficit and higher foreign exchange reserves. Finally, India’s GDP and per capita income both increased substantially from 1990-1991 to 1998-1999.
India can do more, however, to further advance its economic development.
Indeed, one of the more recent microeconomic approaches to economic growth is the promotion of entrepreneurial activities. Entrepreneurial efforts have been found to generate a wide range of economic benefits, including new businesses, new jobs, innovative products and services, and increased wealth for future community investment (Kayne, 1999). The following narrative explains in considerable depth how entrepreneurial activities have succeeded in several countries and how it can now be used to further India’s economic development
Following an extensive study of entrepreneurship in 21 countries, Reynolds,
Hay, Bygrave, Camp and Autio (2000) concluded that successful entrepreneurial activity is strongly associated with economic growth. Their research was subsumed under the “Global Entrepreneurship Monitor” (GEM), a joint research initiative conducted by Babson College and London Business School and supported by the
Kauffman Center for Entrepreneurial Leadership. Their findings, based on surveys of the adult population of each country, in-depth interviews of experts on entrepreneurship in each country, and the use of standardized national data, supported their conceptual model depicting the role of the entrepreneurial process in a country’s economic development (see figure 2).
DIGRAM TO BE DRAWN
The GEM Conceptual Model suggests that the social-cultural-political context within a country must foster certain “General National Framework
Conditions,” which can generate not only the opportunities for entrepreneurship but also the capacity for entrepreneurship – in particular, the skills and motivation necessary to succeed. Together, the entrepreneurship opportunities, on the one hand, and the skills and motivation, on the other, lead to business dynamics that yield creative destruction, a process in which new firms are created and older, less efficient firms are destroyed. The overall result for a country is economic growth.
Of the eight “General National Framework Conditions” listed in figure 2, the three that Reynolds, et al. (2000) highlighted as especially important are the availability of financing for new entrepreneurs, the need for government policies which are supportive of entrepreneurial efforts, and the opportunities for education and training in entrepreneurship.
Given India’s economic progress in recent years, the country may now be ready for the implementation of microeconomic policies that will foster entrepreneurial activities. Fortunately, in addition to the macroeconomic reforms mentioned earlier, India has taken other steps to lay the foundation for the type of economic growth that can be fostered only by entrepreneurial activities and appropriate economic policies that reflect individual rights and responsibilities. For example, in recent years India has made several important structural changes, including the construction of telecommunications networks and the implementation of a nationwide road-construction programme (Solomon, 2003). Further, several thousand “new economy” businesses – the types of businesses especially suited for entrepreneurship efforts-were started in 2000 alone.
However, more than just opportunities should lead India to consider entrepreneurial activities as a way to economic growth. At least one major threat, a growing population, also should motivate it to consider entrepreneurial effort as an economic policy. Specifically, the country’s population is expected to increase by 110 to 130 million people over the next 10 years, with approximately 80 to 100 million of those new citizens seeking jobs that do not currently exist (Gupta, 2001).
Entrepreneurial efforts can help to provide those jobs.
Recent research on entrepreneurship around the world indicates that the cultural characteristics that can foster successful entrepreneurial activities and its related economic benefits are a strong education base, the necessary financial support, opportunities for networking among entrepreneurs, and a well-defined, minimal role for the government. In the case of India specifically, an emphasis upon entrepreneurial activities in the information technology sector also seems relevant. Consider first the need for a strong education base. The study of 21 nations by Reynolds, et al. (2000) found that providing opportunities for education in entrepreneurship was critical to success in new entrepreneurship efforts. For example, experts interviewed in the 21 nations felt strongly that new entrepreneurs needed training in the skills needed to convert a market opportunity into a commercial enterprise. Gupta (2001) says that India now has an extraordinary talent pool suited to entrepreneurship. However, he also says that the government must ensure that new entrepreneurs have access to both the functional and entrepreneurial skills needed for success in business startups. He sees both sets of skills as still somewhat lacking in India. The functional skills include abilities in such areas as marketing, finance and product development. The entrepreneurial skills include managing risk, building an effective team and raising funds. Gupta says that India’s educational institutions can play a major role in the development of these skills. For example, the Indian School of Business (ISB) at Hyderabad has already produced a curriculum suited to the development of entrepreneurial leaders. It will soon have a new Entrepreneurship Centre that will be founded, led and managed by several leading Silicon Valley entrepreneurs.
Lall (2001) says that the structure of a country’s exports affects its prospects for economic growth. He claims that a technology-intensive structure is desirable for a country that has a substantial industrial base. Although India has such an industrial base, its export structure is still dominated by low-technology products.
Lall says that a low-technology export structure is based in such products as textiles, garments, simple metal and plastics products, and furniture. However, these types of products are produced by low-skilled labour and are undifferentiated, so they do not yield the competitive advantages necessary for broad economic growth. A high-technology export structure, on the other hand, relies upon such products as complex electronic machinery, precision instruments and fine chemicals.
This type of structure, based in complex skills and fast-changing technologies, generally does yield competitive advantages and export-based economic development. Given India’s extraordinary talent pool (Gupta, 2001), it would seem that the country is poised to take advantage of a high-technology export structure.
Consider next the financial support required to produce successful entrepreneurial efforts. On the one hand, as Solomon (2003) indicates, foreign capital has been pouring into India recently, with one of its aims being to tap the country’s emergence as a center for software development and information technology services. However, much remains to be done, and the government can play a major role in this area. Among other things, India must ensure that its new entrepreneurs will have access to venture capital. Gupta (2001) suggests the establishment of a global support network of venture capitalists and other funding sources (also known as “angels”) who would be willing to support the new entrepreneurs. He also says that India must create “areas of excellence” breeding grounds where ideas grow into new businesses similar to those created in Silicon
Valley in the United States. They can attract the ideas, the venture capital, and the management talent often found to succeed in other entrepreneurial efforts around the world. India can begin to create these areas of excellence by drawing upon the resources of its universities and other educational institutions, including the
Indian Institutes of Technology.
Providing opportunities for networking among entrepreneurs themselves also can help new businesses get started on the right foot. In particular, Gupta
(2001) says that India needs to foster networking and exchange among both new and established entrepreneurs. The obvious reason is that entrepreneurs can learn not only through their own experience but also through that of others. An effective approach to encouraging this type of networking might be to follow the academic model and begin to schedule conferences throughout India at which these individuals could interact. At these conferences, experienced entrepreneurs could present their ideas on what has worked for them (and what has not). Entrepreneurs just getting started could describe what they hope to achieve in their new businesses and get feedback on their plans from other entrepreneurs present. Obviously, newer entrepreneurs will want to be careful not to divulge important company secrets. The Indian government might have to provide small grants to subsidize the travel and lodging expenses of individuals lacking the resources to attend such conferences. However, just as in the academic setting, those grants could be awarded based on the merits of an individual’s ideas for a startup business.
The role that the government can play in the encouragement of entrepreneurial efforts has already been noted in the above narrative. Clearly, the government can develop policies concerning educational and financial support.
Government policies on taxing and regulation of business also are relevant here, given that such policies can either promote or hamper entrepreneurial efforts. And the government can certainly help to provide networking opportunities among new and experienced entrepreneurs.
Kayne (1999) identifies additional actions that the Indian government can take to provide a solid foundation for entrepreneurial efforts. He says that, in any country, the advocates of an entrepreneurial economy must promote and communicate policies that will provide a clear link between entrepreneurial efforts and overall economic prosperity. That is, voters and taxpayers must understand the reasons why their government is investing in anything as new as entrepreneurship. Rodrik (1996) also addressed this issue by concluding that reforms will be resisted if they are seen as being primarily redistributive (i.e., zerosum) in nature. He further says that, while most economists prefer speedy economic reforms administered from above (i.e. the state), the best approach might be a gradual approach that considers the political economy of the situation (and involves relevant powerful groups). Panagariya (1994) further addressed this issue when he said that, especially in a democratic society like India, the government must mobilize public opinion in favour of new economic policies. He says that one reason for the relative success of the economic reforms beginning in 1991 was that the Rao government moved quickly to announce major economic reforms.
Finally, Reynolds, et al. (2000) also found that the perceived social legitimacy of entrepreneurship can be a critical factor in its success. Specifically, they found that respect for individuals starting new firms was an important cultural factor for countries with high levels of entrepreneurial activities. In short, uncertainty within the culture can lead to resistance.
However, as Reynolds et al. (2000) concluded, the role of government beyond laying the foundation for entrepreneurship through tax and regulatory policies, support for education in entrepreneurship, and so forth should be minimized. Specifically, they found that a reduced government role in the economy including a low tax burden on both firms and individuals could yield substantially higher levels of entrepreneurial activity. They also found that, in India, excessive government regulations and related bureaucratic complexities did indeed handicap entrepreneurs. As was reported extensively earlier in this paper, India has for decades been saddled with a government that is far too involved in its economy.
FUTURE ECONOMIC DEVELOPMENT
The progress of Indian economic development from 1947 to the present provides further evidence that individuals do respond to incentives in their pursuit of self-survival and accumulation of wealth. Further, the nature of this response depends on the economic climate, particularly the role of the government. India’s economy struggled as long as it was based in a system of government regulation with little interaction with economic forces outside the country. The economic reforms of the early 1990s set the stage for substantial improvements in the Indian economy. As was stated earlier, India’s economy grew at an average of 6.3 per cent from 1992-1993 to 2000-2001 (Acharya, 2001). Further, its rate of inflation and fiscal deficit both decreased substantially (Bhalla, 2000). Improved exchange rate management led to improved financing of the current account deficit and higher foreign exchange reserves. Finally, India’s GDP and per capita income both increased substantially from 1990-1991 to 1998-1999.
India can do more, however, to further advance its economic development.
Indeed, one of the more recent microeconomic approaches to economic growth is the promotion of entrepreneurial activities. Entrepreneurial efforts have been found to generate a wide range of economic benefits, including new businesses, new jobs, innovative products and services, and increased wealth for future community investment (Kayne, 1999). The following narrative explains in considerable depth how entrepreneurial activities have succeeded in several countries and how it can now be used to further India’s economic development
Following an extensive study of entrepreneurship in 21 countries, Reynolds,
Hay, Bygrave, Camp and Autio (2000) concluded that successful entrepreneurial activity is strongly associated with economic growth. Their research was subsumed under the “Global Entrepreneurship Monitor” (GEM), a joint research initiative conducted by Babson College and London Business School and supported by the
Kauffman Center for Entrepreneurial Leadership. Their findings, based on surveys of the adult population of each country, in-depth interviews of experts on entrepreneurship in each country, and the use of standardized national data, supported their conceptual model depicting the role of the entrepreneurial process in a country’s economic development (see figure 2).
DIGRAM TO BE DRAWN
The GEM Conceptual Model suggests that the social-cultural-political context within a country must foster certain “General National Framework
Conditions,” which can generate not only the opportunities for entrepreneurship but also the capacity for entrepreneurship – in particular, the skills and motivation necessary to succeed. Together, the entrepreneurship opportunities, on the one hand, and the skills and motivation, on the other, lead to business dynamics that yield creative destruction, a process in which new firms are created and older, less efficient firms are destroyed. The overall result for a country is economic growth.
Of the eight “General National Framework Conditions” listed in figure 2, the three that Reynolds, et al. (2000) highlighted as especially important are the availability of financing for new entrepreneurs, the need for government policies which are supportive of entrepreneurial efforts, and the opportunities for education and training in entrepreneurship.
Given India’s economic progress in recent years, the country may now be ready for the implementation of microeconomic policies that will foster entrepreneurial activities. Fortunately, in addition to the macroeconomic reforms mentioned earlier, India has taken other steps to lay the foundation for the type of economic growth that can be fostered only by entrepreneurial activities and appropriate economic policies that reflect individual rights and responsibilities. For example, in recent years India has made several important structural changes, including the construction of telecommunications networks and the implementation of a nationwide road-construction programme (Solomon, 2003). Further, several thousand “new economy” businesses – the types of businesses especially suited for entrepreneurship efforts-were started in 2000 alone.
However, more than just opportunities should lead India to consider entrepreneurial activities as a way to economic growth. At least one major threat, a growing population, also should motivate it to consider entrepreneurial effort as an economic policy. Specifically, the country’s population is expected to increase by 110 to 130 million people over the next 10 years, with approximately 80 to 100 million of those new citizens seeking jobs that do not currently exist (Gupta, 2001).
Entrepreneurial efforts can help to provide those jobs.
Recent research on entrepreneurship around the world indicates that the cultural characteristics that can foster successful entrepreneurial activities and its related economic benefits are a strong education base, the necessary financial support, opportunities for networking among entrepreneurs, and a well-defined, minimal role for the government. In the case of India specifically, an emphasis upon entrepreneurial activities in the information technology sector also seems relevant. Consider first the need for a strong education base. The study of 21 nations by Reynolds, et al. (2000) found that providing opportunities for education in entrepreneurship was critical to success in new entrepreneurship efforts. For example, experts interviewed in the 21 nations felt strongly that new entrepreneurs needed training in the skills needed to convert a market opportunity into a commercial enterprise. Gupta (2001) says that India now has an extraordinary talent pool suited to entrepreneurship. However, he also says that the government must ensure that new entrepreneurs have access to both the functional and entrepreneurial skills needed for success in business startups. He sees both sets of skills as still somewhat lacking in India. The functional skills include abilities in such areas as marketing, finance and product development. The entrepreneurial skills include managing risk, building an effective team and raising funds. Gupta says that India’s educational institutions can play a major role in the development of these skills. For example, the Indian School of Business (ISB) at Hyderabad has already produced a curriculum suited to the development of entrepreneurial leaders. It will soon have a new Entrepreneurship Centre that will be founded, led and managed by several leading Silicon Valley entrepreneurs.
Lall (2001) says that the structure of a country’s exports affects its prospects for economic growth. He claims that a technology-intensive structure is desirable for a country that has a substantial industrial base. Although India has such an industrial base, its export structure is still dominated by low-technology products.
Lall says that a low-technology export structure is based in such products as textiles, garments, simple metal and plastics products, and furniture. However, these types of products are produced by low-skilled labour and are undifferentiated, so they do not yield the competitive advantages necessary for broad economic growth. A high-technology export structure, on the other hand, relies upon such products as complex electronic machinery, precision instruments and fine chemicals.
This type of structure, based in complex skills and fast-changing technologies, generally does yield competitive advantages and export-based economic development. Given India’s extraordinary talent pool (Gupta, 2001), it would seem that the country is poised to take advantage of a high-technology export structure.
Consider next the financial support required to produce successful entrepreneurial efforts. On the one hand, as Solomon (2003) indicates, foreign capital has been pouring into India recently, with one of its aims being to tap the country’s emergence as a center for software development and information technology services. However, much remains to be done, and the government can play a major role in this area. Among other things, India must ensure that its new entrepreneurs will have access to venture capital. Gupta (2001) suggests the establishment of a global support network of venture capitalists and other funding sources (also known as “angels”) who would be willing to support the new entrepreneurs. He also says that India must create “areas of excellence” breeding grounds where ideas grow into new businesses similar to those created in Silicon
Valley in the United States. They can attract the ideas, the venture capital, and the management talent often found to succeed in other entrepreneurial efforts around the world. India can begin to create these areas of excellence by drawing upon the resources of its universities and other educational institutions, including the
Indian Institutes of Technology.
Providing opportunities for networking among entrepreneurs themselves also can help new businesses get started on the right foot. In particular, Gupta
(2001) says that India needs to foster networking and exchange among both new and established entrepreneurs. The obvious reason is that entrepreneurs can learn not only through their own experience but also through that of others. An effective approach to encouraging this type of networking might be to follow the academic model and begin to schedule conferences throughout India at which these individuals could interact. At these conferences, experienced entrepreneurs could present their ideas on what has worked for them (and what has not). Entrepreneurs just getting started could describe what they hope to achieve in their new businesses and get feedback on their plans from other entrepreneurs present. Obviously, newer entrepreneurs will want to be careful not to divulge important company secrets. The Indian government might have to provide small grants to subsidize the travel and lodging expenses of individuals lacking the resources to attend such conferences. However, just as in the academic setting, those grants could be awarded based on the merits of an individual’s ideas for a startup business.
The role that the government can play in the encouragement of entrepreneurial efforts has already been noted in the above narrative. Clearly, the government can develop policies concerning educational and financial support.
Government policies on taxing and regulation of business also are relevant here, given that such policies can either promote or hamper entrepreneurial efforts. And the government can certainly help to provide networking opportunities among new and experienced entrepreneurs.
Kayne (1999) identifies additional actions that the Indian government can take to provide a solid foundation for entrepreneurial efforts. He says that, in any country, the advocates of an entrepreneurial economy must promote and communicate policies that will provide a clear link between entrepreneurial efforts and overall economic prosperity. That is, voters and taxpayers must understand the reasons why their government is investing in anything as new as entrepreneurship. Rodrik (1996) also addressed this issue by concluding that reforms will be resisted if they are seen as being primarily redistributive (i.e., zerosum) in nature. He further says that, while most economists prefer speedy economic reforms administered from above (i.e. the state), the best approach might be a gradual approach that considers the political economy of the situation (and involves relevant powerful groups). Panagariya (1994) further addressed this issue when he said that, especially in a democratic society like India, the government must mobilize public opinion in favour of new economic policies. He says that one reason for the relative success of the economic reforms beginning in 1991 was that the Rao government moved quickly to announce major economic reforms.
Finally, Reynolds, et al. (2000) also found that the perceived social legitimacy of entrepreneurship can be a critical factor in its success. Specifically, they found that respect for individuals starting new firms was an important cultural factor for countries with high levels of entrepreneurial activities. In short, uncertainty within the culture can lead to resistance.
However, as Reynolds et al. (2000) concluded, the role of government beyond laying the foundation for entrepreneurship through tax and regulatory policies, support for education in entrepreneurship, and so forth should be minimized. Specifically, they found that a reduced government role in the economy including a low tax burden on both firms and individuals could yield substantially higher levels of entrepreneurial activity. They also found that, in India, excessive government regulations and related bureaucratic complexities did indeed handicap entrepreneurs. As was reported extensively earlier in this paper, India has for decades been saddled with a government that is far too involved in its economy.