Entrepreneurship and Innovation in Emerging Economies

Entrepreneurship in India

Being part of the BRICs group of nations, and with an average growth rate of 8 percent per annum, India is one of the fastest growing emerging economies in the world. From the time when economic reforms were started in the early 1990s, the country is growing at a rapid pace. Many of the sectors like Telecom, Insurance, and Airlines, which were exclusively reserved for the public sector companies were thrown open to private players. The opening of various sectors of the economy to private players gave lots of opportunities to the new entrepreneurs who wanted to start their own businesses. The licensing system which was prevalent in the pre reform period was also abolished when the economic reforms were initiated. Many entrepreneurs like Sunil Bharti Mittal of the Bharti Groups took the opportunities made available by the economic reforms and built their business empires. The high demographic dividend enjoyed by India is another reason for the growth of entrepreneurship culture in the 21^st century India. But despite the liberalization policies adopted by the government and the facilities made available to businesses, entrepreneurs in India still face a lot of difficulties in starting and running a business successfully. Problems like poor infrastructure, high political interference, dominance of well-established business families, etc. hinder the growth new entrepreneurial firms in the country. For the year 2014, India ranked at 134^th position in the ease of doing business report published by the World Bank every year (World Bank 2013). This essay focuses on the support and problems the entrepreneurs enjoy India.

FACTORS STIFLING THE GROWTH OF ENTREPRENEURSHIP IN INDIA

Infrastructural Facilities

Infrastructure is the backbone of any industry in the world. It forms an important part of the external economic environment of business enterprises due to the support to the growth of entrepreneurship in any economy. Some of the major infrastructural which are commonly needed by any business enterprise is latest technology, well laid roads, sophisticated ports, international quality airports, communication facilities, etc. Of all these infrastructural facilities needed, the ones Indian entrepreneurs find it more difficult to access freely are land for setting up of the plant/office and continuous supply of power. India, despite being a fast growing developing economy faces severe shortage of electricity (Overview of power sector in India 2005). India faces acute power shortages due to a number of reasons like widespread theft of power, inefficient power transmission system, bad government policies related to power, and less reliance on nuclear energy for power generation. Entrepreneurs also find it difficult to procure the required land for the setting up their businesses. Some of the major industrial projects by both well-established and budding entrepreneurs got stuck in red tape or faced severe opposition from the public and hence could not see the light of the day.

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Oligarchic Patriotism

The Indian business environment is dominated by well-established business families who hold major sway on the economy. The 10 business families in India control more than 80 percent of the share capital in the country’s biggest corporations (Malhotra 2009). Most of the biggest family businesses in India win some of the biggest government contracts, have exclusive access to the country’s natural resources, and have nexus with all the major political parties in the country. This kind of oligarchic capitalist culture in India allows a small group of people to have a vice like grip over the country’s economy, polity, and even the society.

According to Petras (2008), most of the Indian billionaires have built their wealth by using their economic power and political contacts to secure neo-liberal policies. Oligarchic patriotism, by concentrating all the sources of entrepreneurial success in the hands of a few people, make it difficult for new and budding entrepreneurs to start their own businesses successfully. New entrepreneurs find it difficult to get the licenses, permits, and land needed for starting their businesses and hence can’t compete effectively with the well-established business families. The impact of culture on the attitude towards budding entrepreneurs is also glaring. India also scores very high on one of Hofstede’s key dimensions of national culture – Power Distance (Hofstede Centre 2014). India, with a high score of 71 on this crucial dimension, gives more emphasis on top-down structure in society and organizations, appreciates hierarchy, and accepts un-equal rights between the privileged classes and those who are lower in the pecking order. This cultural aspect makes big business houses to consider themselves to be a privileged lot and eligible for benefits over its competitors.

R&D and Technology Related Factors

The investments made in the Research and Development (R&D) for developing new technologies is comparatively lesser than developed and even some emerging economies like China. The country’s adoption of information and communication technology had also been relatively poorer when compared with other countries. According to the findings of a study commissioned Google, only 2 million out of an estimated 35 small and medium businesses (SMEs) in India were connected to the Internet one way or the other (Narsimhan 2011). Globally, one of the important sources of ideas for budding entrepreneurs is the R&D labs at universities and government departments. The lack of appropriate investment in research in India deprives the Indian entrepreneurs from brilliant ideas for starting a new business. Poor access to the latest technology and Internet also means that entrepreneurs can’t communicate with their customers, other business organizations, and the government.

Lack of Training and Financial Support

Even though the economic reforms initiated in the 1990s had led to the economy growing at an average of 8 percent per annum, progress made on improving the entrepreneurial culture had been modest. Many first generation entrepreneurs lack the skills that are required for successfully starting a business. Governments world over provide lot of training and guidance for budding entrepreneurs for entrepreneurs in their country. But many Indian entrepreneurs are not guided well in the initial days of starting their business and hence end up failing in their endeavours. Government and non-government institutes which can provide skill training and guidance to entrepreneurs are still very less in India when compared to other emerging economies like China. Many new entrepreneurs who want to start their businesses find it difficult to get the required capital. It is difficult for entrepreneurs to get funding from banks and NBFC’s as they can’t offer the required collateral. The venture capital industry in India is also still highly underdeveloped to meet the requirements of entrepreneurs. Most of the initial funding for new firms has to come from the personal savings or family resources of entrepreneurs which acts as a major barrier for many aspiring entrepreneurs.

Corruption

Like many other emerging economies, India too suffers from endemic corruption in all the government departments. According to a report by Transparency International, India ranked 94^th on the global perception index which covered 177 countries (Economic Times 2013). Most of the other emerging economies in the world like Russia, China, Brazil, and South Africa rank ahead of India in terms of corruption. Despite the abolition of the licensing system in the early 1990s, businesses need a lot of permissions for launching and running their operations. The country was battered by some big scams in the booming sectors of the economy like the 2G scam which involved leading politicians, senior bureaucrats, and major business tycoons in the country. There were even allegations regarding new entrepreneurs being arm twisted to sell their stake to other major business houses which had good relationships with politicians in the country. Government departments related to taxation, legal matters, power, and irrigation are deeply mired in corruption (Quah 2009). The fact that some key infrastructure sources like power are still in the hands of government, with private players playing a minor role, further accentuates the problem. Some businesses even pay bribes on their own in order to fast track the approval process for their businesses. The high levels of corruption prevalent in the country severely affects the prospects of new entrepreneurs who find it difficult to pay the bribes or lack access to the right people in the government machinery. The highly popular anti-corruption movement which erupted in the year 2012 and pressure from MNCs operating in the country made the government to come up with an anti-corruption legislation.

Administrative Bottlenecks

Indian entrepreneurs need to undergo lot of administrative headaches for starting a business (Wade 1985).  The number of permits of need for starting a new business in India are 35 which is very high when compared with 25 in China (World Bank 2013) (Refer to Table- I for the overview of Indian Economy and Table- II for the summary of doing business indicators for India and China). There are a number of business laws which are in force in India like the laws related to the development of an enterprise, laws regulating foreign exchange, laws related to procurement of land, taxation laws, etc. Compliance with the laws and getting all the required permits on time is very crucial for the running of a business. But gaining adequate knowledge of these laws is difficult to be acquired for a new entrepreneur. As a result, many entrepreneurs end up facing a lot of difficulties in the initial days of the founding of the firm. To solve this problem, governments of some stated like Andhra Pradesh and Orissa have started a single window approval system for entrepreneurs which makes it possible for entrepreneurs to get all the required licenses from a single government office (Roy 2011).

Table- I

Overview of Indian Economy

Region	South Asia
Income Category	Lower Middle Income
Population	1,236,686,732
GDP	US$ 1.842 trillion
GNI per capita (US$)	1,530
Ease of Doing of Business Rank (2014)	134
Ease of Doing of Business Rank (2013)	131
Change in Rank	-3
GDP Growth Rate for the Fiscal Year 2014	4.7 percent

Source: Doing Business 2014, Economy Profile: India, World Bank.

Table- II

Summary of Doing Business Indicators in India and China for the Year 2014

Indicator	India	China
Starting a Business (rank)	179	158
Procedures (number)	12	13
Time (days)	27	33
Cost (% of income per capita)	47.3	2.0
Paid-in Min. Capital (% of income per capita)	124.4	78.2
Dealing with Construction Permits (rank	182	185
Procedures (number)	35	25
Time (days)	168	270

Source: Doing Business 2014, Economy Profile: India, World Bank.

 

Functioning of Formal Institutions

The functioning of formal institutions in India too is bloated with many of them being influenced by politicians directly. According to the index of economic freedom, 2014 released by The Heritage Foundation, India had always enjoyed a relatively high level of economic freedom when compared with other emerging economies. However, this freedom becomes insignificant in the face of lower business freedom and bad regulatory efficiency. One the same index for economic freedom, India’s score on business freedom stands at 37.7 which is 171 of the total countries in the world and score on trade freedom stands at 65.6 which is 142 of the total countries in the world (Heritage Foundation 2013). Lack for independence for formal institutions means that established business houses can bend the government policies in their favour. Small entrepreneurs and businesses in not so lucrative industries can’t lobby effectively to change the regulatory policies in their favour. Weaker formal institutions of the society also means that protection for intellectual property rights is very weak and copyrighted materials is highly prevalent in the economy. This makes new innovations and discoveries made by aspiring entrepreneurs prone to theft or imitation.

 

References

1. Heritage Foundation 2013, India: Economic Freedom Score, Available from: < http://www.heritage.org/index/pdf/2014/countries/india.pdf>. [21 February 2014].
2. International Finance Corporation, World Bank Group 2013, Doing Business 2014, Economy Profile: India, World Bank, Available from: < http://www.doingbusiness.org/data/exploreeconomies/india/~/media/giawb/doing%20business/documents/profiles/country/IND.pdf?ver=2>. [17 February 2014].
3. Malhotra, HB 2009, Oligarchic capitalism may take hold in India. Available from: <http://www.theepochtimes.com/n2/content/view/22829/>. [16 February 2014].
4. Narasimhan, T E 2011, 57% of SMEs use internet as sales channel, finds survey. Available from: <http://www.business-standard.com/india/news/57smes-use-internet-as-sales-channel-findssurvey/439821/>. [16 February 2014].
5. Overview of power sector in India 2005, India Core Publishing, New Delhi.
6. Petras, J 2008, ‘Global ruling class: Billionaires and how they “make it”’, Journal of Contemporary Asia, 38, no. 2, pp.319-329.
7. Quah, JST 2008, ‘Curbing corruption in India: An impossible dream?’, Asian Journal of Political Science, vol. 16, no. 3, pp. 240-259.
8. Roy, R 2011, Entrepreneurship, Oxford University Press, New Delhi.
9. The Economic Times, India Ranks 49^th on Global Perception Index, 2013. Available from: < http://articles.economictimes.indiatimes.com/2013-12-04/news/44757314_1_corrupt-countries-graft-watchdog-transparency-international-index>. [21 February 2014].
10. Wade, R (1985), ‘The market for public office: Why the Indian state is not better at development’, World Development, vol. 13, no. 4, pp. 467-497.