What Rôle for Entrepreneurship in India

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1. OPTIMAL ROLE
A system of entrepreneurship has evolved in the U. S. that has been quite successful and
that may have considerable applicability to some other technologically advanced
countries, such as Germany and Japan, which appear to need more economic dynamism.
The system needs modification however, for underdeveloped economies like India’s. In
particular, I believe that the optimal role for individual entrepreneurs – and the public
policies necessary to support this role – are somewhat different in India than in an
advanced economy.
In advanced countries, most resources are already in or near their highest-valued use.
Any increase in their productivity requires new technologies (broadly defined). Without
new technologies, economic growth winds down and business life stagnates.


2. FAILURES TO PLAY OPTIMAL ROLES
My on-going field research suggests that in Bangalore – supposedly the Silicon Valley of
India – individual entrepreneurs (and large companies too) are not pushing the
technological envelope. That according to the analysis above is no bad thing. (In
contrast, the state-financed scientific establishment does attempt cutting-edge research,
though with questionable results.) Unfortunately, as I will discuss next, entrepreneurs
also do not seem to play a role appropriate to a catch-up economy either.
Earlier, in 1990, I had interviewed about 100 founders of companies that made it onto the
list in Inc. magazine of the 500 fastest growing private companies in the U.S. Only a
handful competed against Fortune 500 companies; the great majority competed against
other small companies or startups. In contrast, a great many of the businesses in
Bangalore competed against much larger businesses. Moreover the competition is
apparently head-on: The Bangalore entrepreneurs did not even claim to focus on
different customer segments, provide more customized products and services or rely on
different kinds of inputs.



POSSIBLE EXPLANATIONS FOR THE FAILURES
Why do Bangalore entrepreneurs operate small units in domains that in the developed
world would be dominated by large companies? Historically, the government reserved
certain sectors for small units. Today however, many of these reservations have been
removed. But, several other factors continue to encourage entrepreneurs to start subscale
units and to avoid growth.
The tax system appears to play a major role. From colonial times, indirect taxes (such as
excise duties and sales taxes) have been a major source of the government’s revenues.
Today such indirect taxes account from about 20 to 40 percent of final prices. The tax
regime exempts small businesses from paying some of these taxes; small units apparently
can also evade indirect taxes more easily than large businesses through off the books
transactions. These tax effects can more than offset the disadvantages of operating below
technologically efficient scale.