The recent Nasscom report on India’s tech start-up system (bit.ly/3ofyOMK) provides a hopeful picture in areas where the nation first established a world-class presence in modern economic activity, namely, information technology. What else can we observe about business creation in India? A decade ago, academic work was pointing out that India’s rate of creation of formal businesses was below average, when conditioned on per capita income. These studies found that the rate of entrepreneurship in organised manufacturing was positively affected by the share of population with a graduate education, closeness to a city, and the strength of local supplier networks. These are plausible, but fairly general patterns of causation.
In the past few years, along with the current government’s focus on “Start-Up India” as one of its several missions to accelerate the country’s growth, more empirical work has tried to understand more closely what drives successful creation of innovative businesses. It is difficult to point to specific studies and definitive results, but what follows are some general impressions of what we know.
First, echoing what the Nasscom report says about the poor performance of incubators and accelerators, various studies find deficiencies in their effectiveness in the Indian context. It is difficult to identify clear reasons, but it does seem that these incubators often lack sufficient funding of their own, and even more, lack both their own management expertise and the expertise needed to provide quality mentorship. Indeed, this seems to fit in with what we know about start-up success. Incubators can easily provide physical infrastructure and routine services, but the real value-added from clustering may be elsewhere.
Instead of funding incubators, the government may do better by making sure that high-quality digital infrastructure is available for everyone, along with general promotion of ease of doing business.
The evidence for India seems to reinforce the value of access to venture capital, both foreign and domestic, as well as the presence nearby of multinational firms. One can conjecture that the combination of targeted financial resources and specialised expertise that marks the success of the venture capital model in many places, including Silicon Valley, is what is operative in India. Another feature of innovation clusters, as opposed to incubators, that helps is the existence of social networks. Again, Silicon Valley has a density of horizontal connections across many firms of all sizes that promotes the formation of new teams to pursue promising ideas, in ways that are not possible within large firms. This was a point made decades ago, in explaining why Silicon Valley grew in ways that the region west of Cambridge, Massachusetts (Route 128) did not— the latter was dominated by a few large firms, without the fluidity of its California rival.
Clusters rather than incubators also have the potential advantage of critical mass—this may also have been a lack in Indian incubators, in particular. The evidence suggests that China’s start-up incubators are larger, and go further in achieving the requisite critical mass. Of course, China has a longer track record in this dimension, and that support both size and effectiveness through learning by doing. India has to catch up in this respect.
Other areas where China illustrates a possible pathway for India are in the importance of universities and of intellectual property and patents. China has made great strides in the quality of its universities, and this is an area that India urgently needs to do better in, not just for promoting the creation of technology businesses, but much more generally, in educating its population for productive and satisfying lives.
On the patent front, it appears that the government’s Start-Up India Mission is promoting easier protection of intellectual property, along with reductions of bureaucratic hurdles and improvements in tax treatment of start-ups. My guess is that more can be done on the tax front to make risk-taking attractive, but it does seem that India is moving in a direction that could finally change its record as a laggard in new business creation.
A final aspect of start-up clusters that deserves attention is that of focus. The Nasscom report discusses many sectors of application, but to some extent, they all build on skills possessed by software engineers. Other areas, such as biotechnology or nanotechnology, require different kinds of scientific backgrounds. Though information technology pervades all these fields, knowledge of materials science or biochemistry come from different areas of science. The evidence suggests that critical mass in focus areas matters. The determination of the “next big thing” does not necessarily come from government, but is more likely from informed and experienced venture capitalists. In the US, UK, Israel and other successful start-up nations, university researchers play an important role.
In the final analysis, India is now doing many things right in its pursuit of business creation, innovation and growth. But the weakest link for sustained success may not be in physical infrastructure or burdensome regulations, but in the weakness of India’s universities in frontier knowledge production. To fix this will require some courage and openness on the part of the government, because it will have to admit that it needs extensive foreign help to upgrade its higher education system at the speed that India needs.
The author is Professor of economics, University of California, Santa Cruz