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Create babies, not dwarfs

India is a hostile habitat for entrepreneurship because reforms have fixed sins of commission and not omission. This creates the wrong kind of companies.

Manish Sabharwal | Print Edition: July 12, 2009

Manish Sabharwal
Manish Sabharwal

Any entrepreneur can create two kinds of companies: a baby or a dwarf. Both are small, but a baby will grow while a dwarf will plateau. The difference between the two is not more food (money) but DNA (team, strategy, culture, etc.). While it is preposterous for me to suggest which is a better personal choice, empirical research suggests that the public policy context of entrepreneurship greatly influences the kind of companies created. Desirable companies from a public policy perspective are those that grow in employment, profits and taxes (babies). Contrast this with the creation of small companies (dwarfs) that simply replace other small companies that did the same thing. So, can policymakers do anything to breed babies rather than dwarfs?

Economic reforms since 1991 have focussed on the sins of commission (licence raj, price controls, trade tariffs, directed credit, etc.) and the next phase is the sins of omission (infrastructure, education, etc.). A recent conference on entrepreneurship at Indian School of Business (ISB) in Hyderabad showcased research by the Rand Corporation that suggested the two most important gaps Indian policymakers can fill are infrastructure and human capital. This is consistent with anecdotal evidence which suggests the biggest challenge for infants (companies in early stage whose destiny as a baby or dwarf is not yet decided) is substituting for the state. The Indian state has failed in fulfilling its role and companies have to generate their own power, provide their own transport, dig for their own water and invest substantially in training employees. This substantially raises the bar for entrepreneurship because upfront scarce equity and human capital resources go into building hygiene.

The baby vs dwarf issue is captured in an interesting study, What Holds Back Bangalore Businesses? by Professor Amar Bhide and funded by the Wadhwani Foundation. Bangalore may not represent India, but even this fertile soil has a lower proportion of rapidly expanding businesses than the mature US. His findings suggest that Bangalore companies grew slower, used more capital, and created few jobs than comparable US companies. This reinforces the notion that India does not need more entrepreneurship of all kinds, but entrepreneurship of the high-growth kind. Half of India’s labour force is already selfemployed and this is not symbolic of an overweighted entrepreneurial gene but our failure to create non-farm jobs and human capital. The poor cannot afford to be unemployed so they are self-employed, but this kind of entrepreneurship does not reduce poverty or exploit opportunities.

The dysfunctional economic regime pre-1991 killed first generation entrepreneurship by biasing the playing field in favour of big companies and people with connections. But entrepreneurship is about choosing change over the status quo, energy over experience, courage over connections, and growth over stagnation. It is how societies renew themselves. As Tennyson said: “The old order changeth, yielding place to the new... lest one good custom should corrupt the world.” Entrepreneurship in India has exploded since 1991 because of economic reforms, role models (Nandan Nilekani, Azim Premji, Sunil Mittal, et al), networks (TiE, NEN, Band of Angels, et al), and funding (venture, vulture, private). But fixing our two damaging sins of omission (education and infrastructure) will make India fertile soil for producing more babies than dwarfs. And that will make India more interesting, just and less poor.

Manish Sabharwal is Chairman, Teamlease Services.

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