What can India teach us about start-ups?

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Context:

  • Empirical evidence has shown that there is a very strong link between start-ups, especially small enterprises, and job growth in India.
  • There is a strong upward relationship between employment growth and the number of start-ups.

The rate of new start-ups in India is too low:

  • Evidence also suggests that the rate of new start-ups in India is too low, given the youth bulge, and its stage of development.
  • A comparison of the new business registration density in India with the rest of the world confirms that the number of start-ups in India is low, although it is trended upwards and has improved.
  • Demographic dividend and youth bulge in India has increased the need for a rapid increase in the number of start-ups to create more jobs.
  • Nearly 1 million new workers will join the labour force every month for the next two decades.
  • This is equivalent to the entire population of Sweden joining the labour force every year. So, the rate of start-ups need to increase to cope with India’s demographic trends.
  • Entrepreneurship and the rate of start-ups are more fluid in India compared to an advanced economy such as the US.
  • The two key factors that predict the start-up rate are local education levels and the quality of local physical infrastructure. These patterns are true for both manufacturing and services.

Importance of Human capital:

  • Human capital, especially education, is more important for start-ups. Technology penetration, as measured by the number of internet users, is also strongly associated with more start-ups in services. Education improves skill and spreads ideas faster and wider. 
  • Physical infrastructure is more important for manufacturing than services. It is essential for supporting a modern economy. 

India’s employment growth in the manufacturing sector has displayed two under-appreciated facts:

  • First, much of the employment growth has come in the form of small enterprises, accounting for over 80% of jobs in the manufacturing sector. Second, the rate of start-ups in the small and medium enterprises (SMEs) sector has increased in the tradable sector, but contracted in the non-tradable sector (see ‘Informal Tradable and Employment Growth of Indian Manufacturing’—Ghani, Kerr, Segura, World Bank). 
  • While it may not be surprising that manufacturing employment growth has followed from improved connectivity and trade reforms, the degree of imbalance towards SMEs is too strong to ignore. Globalization has promoted the rise of SMEs.

What about women-headed new enterprises?

  • Despite its recent economic advances, India’s gender balance in entrepreneurship and start-ups remains among the lowest in the world.
  • Empirical results suggest that inadequate infrastructure affects women entrepreneurs more than men, because women are often responsible for a larger share of and, often, more time-consuming activities.

Way Ahead:

  • There are several policy levers that can be used to increase the number of start-ups in India. Instead of being preoccupied with firm-chasing and attracting large mature firms from other locations, think small. Small enterprises are India’s strength, not its weakness, as they create more jobs, and the large number of SMEs has positioned India well to cope with potential twists and turns in globalization, rising inequality and disruptive technology. Job growth is predicted by higher concentrations of small and young establishments.

Source: Livemint