Can the state spur start-ups?

Last week’s gigantic entrepreneurship jamboree in Hyderabad — the Global Entrepreneurship Summit — has turned the spotlight once again on India’s booming start-up economy.

India is now the rockstar of the start-up world. Over the past three years, it has become the third largest start-up ecosystem, big enough to pull not only the likes of Ivanka Trump, but also serious money. According to data compiled by Inc42, as of end September, over $9.4 billion in funding has flowed into Indian start-ups in 2017, up 1.3 times over last year. There are more than a hundred funds registered with markets regulator Securities and Exchange Board of India alone.

This is over and above the money the government is prepared to put in. The Centre alone has announced a corpus of ₹10,000 crore to fund start-ups, of which 75 have actually received some money so far. Earlier this year, India’s policy on foreign direct investment was specifically amended to include start-ups, with start-ups now allowed to accept up to 100% of their funding requirement from foreign venture capital investors.

Schemes galore

Then there are other schemes run by various arms of the government, all of which provide tax breaks, incentives, grant money and other forms of assistance to wannabe technopreneurs. At last count, there were more than 44 such schemes. The Department of Electronics and Information Technology offers not only technical assistance for filing patents, up to ₹15 lakh per invention, or up to 50% of the costs incurred in filing a patent, but also has a multiplier grants scheme which chips in with up to ₹2 crore for start-ups in the IT services, analytics, artificial intelligence, and Internet of things space. The Credit Guarantee Fund Trust for Micro and Small enterprises underwrites borrowings of up to ₹1 crore per unit. The Centre’s Atal Innovation Mission funds up to ₹10 crore for each Atal Incubation Centre set up under the scheme. The Atal Mission also provides funding to schools to set up ‘Atal Tinkering Laboratories’ to spur the spirit of innovation and enterprise amongst the young. And so on.

State governments are not lagging behind either. As many as 16 State start-up policies are listed on the Startup India hub, but even this is not exhaustive, since early movers like Tamil Nadu and Kerala had rolled out schemes of their own before the Department of Industrial Policy and Promotion, the nodal body charged with looking after all things start-up, started compiling information.

All of this begs the question: can something as individualistic and innovation-driven as a start-up ecosystem actually be created through state intervention and policy? More importantly, is it more important to sort out the operational issues impeding the ease of doing business on the ground — although India gained several places in the Ease of Doing Business Index this year, it still ranks a lowly 100th in the world — rather than coming up with more policies and schemes administered by the same bureaucracy being blamed for impeding business?

There is mixed evidence from around the world. Israel is the most celebrated success story of state intervention and policy creating and shaping an innovations powerhouse. It set up a technology incubator programme way back in 1991, under the office of its Chief Scientist. Since then, it has gone on to become a major world power in IT innovation, as well as innovation in the pharma sector. According to an OECD report, “Since the first companies emerged from the incubator programme in 1993, 61% have secured follow-on funding and 40% are active to this day.” It also set up a venture capital fund, Yozma, in 1993, with a corpus of $100 million. In just four years, the Israeli government received its $100 million back with a 50% return as a bonus, and the funds were privatised.

Following the Israel model

Many countries have tried to follow the Israel model, but with far less success. This is probably because Israel’s policy was clearly focussed in a few areas of technology where it enjoyed a human capital advantage, the ecosystem was small and manageable, and the policy was administered by science and technology experts rather than administrative generalists.

On the other hand, the U.S., with the largest start-up ecosystem (Silicon Valley alone has more than 25,000 start-ups compared to the 5,430 registered so far in India), has no clear start-up policy, though almost every state and several major cities have specific policies. But its vibrant business and financial environment, as well as ease of not only doing business but exiting it — about 3,75,000 businesses ‘die’ every year in America, almost the same as the number of businesses created — means that the U.S. dominates the global start-up environment.

It is too early to tell in India’s case. But given the proliferating schemes, the ever-growing involvement of the government and the lack of a targeted focus, we may end up repeating the mistakes of others.

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