Entrepreneurship: Why Indians do better abroad

• India has a very supporting entrepreneurial environment with adequate supply of equity and debt capital.
• Cultural attitudes towards entrepreneurship are positive in terms of both risk-taking and legitimacy of entrepreneurship with attitudes towards bankruptcy constituting a drag.
• The administrative burden and transaction costs imposed by existing legislation are considered excessive.

These are some key findings from a study on entrepreneurship conducted by The Monitor Group in collaboration with Business Standard.

But any discussion on entrepreneurship in India quickly leads to the question: "Why do Indians do so well abroad but do not achieve the same degree of success at home?"

There has been little work done previously to understand the reasons behind this or indeed whether the answer has been changing for the better in light of liberalisation and increasing integration with the world economy.

Understanding which policy drivers lead to superior entrepreneurship performance is especially relevant in helping to answer this question, especially given a growing awareness among the business community and policymakers that capital and labour are only two of multiple factors influencing economic growth and value creation.

As their free movement accelerates, understanding the impact of entrepreneurship on economic growth will be critical for India's long-term competitiveness.

Says Michael Wenban, director and board member, The Monitor Group: The survey in India sought to answer three key questions:

• What are the characteristics of India's entrepreneurship policy environment -- as perceived by people operating in that environment?
• What are the relative strengths and what are the areas that need to be bolstered for improving entrepreneurship in India?
• What lessons can we learn from policies implemented in top performing countries?

Key highlights

The survey was administered to entrepreneurs and other participants in their ecosystem like venture capitalists, private equity firms, banks and industry associations across seven regions in India.

The sample has a large proportion of executives working for small and medium companies. For instance, less than a fifth of respondents were from companies with more than 500 employees or had revenues of greater than Rs 150 crore (Rs 1.50 billion). Majority of respondents were the entrepreneur/founder in a lead management role and most of the companies had shown commendable revenue growth over the last three years.

This is part of a multi-country initiative carried out by Monitor that included developed western world economies, Asian economies and specific BRIC countries.

The good news is that India had the highest aggregate score for policy drivers. These overwhelmingly positive responses may be due in part to India's recent economic success.

The Indian economy is currently one of the world's fastest growing -- with even the most conservative forecasts estimating the GDP to average 6 per cent in coming years. These recent successes, in conjunction with comparison to what it was earlier, have bred overly positive expectations.

The bad news is that the ranking was driven by superior performance in a few areas -- entrepreneurship assets and business assistance -- instead of being more broad-based.

The other areas of policy accelerators and motivations showed significant underperformance in some instances; especially in relation to interactions with the government, physical infrastructure and technology. These areas require more fundamental changes..

The focus will be on findings that have a direct implication on policy formulation. As such, recommendations outlined here elaborate more on what needs to be improved rather than where we are already doing well.

Entrepreneurship assets  refers to supply and access to financial, human and infrastructure resources. Supply of equity, debt, venture or seed capital were not an issue in that respondents placed the country first in all of these areas, possibly a function of the large amount of funds currently available to entrepreneurs.

Also, cost of capital was not considered a hindrance in company formation and growth; a reflection of the interest rate regime of the past couple of years.

What is insightful from a policy formulation perspective is that while 60-70 per cent of respondents felt that the supply of equity and debt capital for new firms was adequate, only 40-50 per cent of respondents agreed in terms of venture and seed capital.

This is especially relevant as our previous work had shown that "ease of entry" and specifically access to angel investors for early stage seed funding had a disproportionate impact in stimulating entrepreneurship.

Business assistance is a composite indicator for entrepreneurship support services, both government and from other professional services firms.

While India has a relatively high rating, from a policy formulation perspective the critical finding is that as compared to other countries, there are not a sufficient number of government programmes to support new and growing firms.

There is a high level of dissatisfaction on this issue. Seventy-seven per cent of respondents indicated that government programmes do not provide high quality services to new firms; 75 per cent believe these programmes are not easy to access and 78 per cent believe these are not available through a single agency.

This is a significant area of underperformance for India with only Russia having a lower composite score.

Policy accelerators refers to various aspects of the regulatory environment, and is a composite indicator measuring enacted legislation and the administrative burden imposed in adhering to the legislation. India's underperformance in policy accelerators is a function not so much of the legislation, but of the administrative burden.

For instance, only 28 per cent of respondents agreed that the government makes it easy for new and growing firms to get required permits and licenses.

Of particular urgency is the fact that only a third of respondents indicate that the time taken to start a business is acceptable and approximately two-thirds agree that the number of permits and licenses required is  excessive -- both areas where India is among the bottom two countries.

While our research from other countries show that administrative burdens matter relatively less in stimulating performance; India's current position at the bottom of the table is far from satisfactory. These low rankings point to the need for significant structural and governance issues.

Individual motivations  composed on various cultural and attitudinal factors had a disproportionate impact on performance. As illustrated in the chart Composite indicator score -- India vs "Best in class", indicators relating to motivations are among the weakest policy drivers for India.

Half the respondents felt that fear of bankruptcy prevents people from starting firms, as opposed to 30 per cent in the survey leader, China. In addition, two-thirds of Indian respondents agree that starting a business and failing is a disgrace, versus about a quarter in the US and China.

The problem is aggravated when one considers the financial impact of declaring bankruptcy with three-forth of respondents declaring that bankruptcy has excessively negative financial consequences, as opposed to 40 per cent in the US and 48 per cent in China.

These policy changes have the most impact in explaining why some countries do better than others in creating a positive entrepreneurship environment. These same policy drivers are also among the hardest to implement in that changing a society's attitudes about many of these topics are especially difficult to make progress on.

International experiences

"Four composite indicators -- incentives for innovation, ease of entry and exit, perceptions of risk and reward and cultural conditions-- were found to have the largest impact on performance," says Pedro Arboleda, Global Lead, Entrepreneurship Initiative, The Monitor Group.

Indicators concerning perceptions of risk and reward and cultural conditions are especially important for India if the country is to make visible progress on key entrepreneurship policy drivers. India is not alone in having to deal with these difficult issues and there are some successful examples from other leading countries.

In recent times, South Korea was a country dominated by large chaebols. A bright, young Korean executive was more likely than not to gravitate towards employment and opportunities in chaebols than start-ups.

The economic crisis of 1997, however, resulted in a dramatic deregulation of the economy and a major restructuring of the corporate system to one that favoured the establishment of smaller start-ups.

Other key policy decisions also had a noticeable impact on Korea's ability to spur entrepreneurial growth. For instance, commercialisation of R&D and technology transfer is supported through provisions of financial support to small firms.

The government, apart from being a partner in leading technology transfer firms, provides funding, technical and management assistance to firms commercialising new technologies.

Further, angel funds are widely sponsored by government-industry partnerships and pension funds are allowed to make venture investments. Risk-rewards perceptions were positively influenced by having lower tax rates for small and medium enterprises and bankruptcy regulations that are very supportive of creditor rights.

Singapore has historically been a risk-averse society with a strict, rules-oriented regime -- in recent years the government has enacted policies to encourage innovation and entrepreneurship.

Several venture-capital funds are managed directly by the government. Moreover, the economic development board guarantees funding for start-ups that find one other sponsor.

The government has created incentives for innovation, such as granting pioneer status for firms introducing new technologies and providing incentives that encourage businesses to manage their intellectual property from Singapore. In addition, Singapore's bankruptcy law encourages settlement of claims through voluntary arrangements and amendments.

An interesting experiment to positively influence cultural conditions is the "Phoenix Award" (awarded by the Economic Development Board) for serial entrepreneurs.

Individually these policies are interesting and compelling. In their entirety, they are indicative of concerted efforts to improve entrepreneurship environments. India would be well-served by taking a closer look at those policies that help address the most critical gaps as demonstrated in this study.

Policy implications

India scores relatively high on a number of key indicators, yet specific policy improvements could be undertaken to help ensure more effective results. There are also a number of structural changes required to help drive noticeable improvement in areas where India is currently lagging key competitors. The box on policy implications illustrates some of these specific policy implications.

Epilogue

This initiative sought to answer a number of key questions related to entrepreneurship and help derive policy implications that would ultimately influence India's overall entrepreneurship performance. These initial learnings will not only help inform future studies, they will also provide additional focus to key policy discussions on entrepreneurship.

Methodology

The framework has its roots in the Organization for Economic Co-operation and Development's growth model. Monitor's framework disaggregated entrepreneurship into performance factors and four broad policy categories measuring entrepreneurship assets, business assistance, policy accelerators and motivations.

The model was statistically tested to establish correlation between performance and policy as measured by the various indicators. This was established by the consistency among leaders and underperformers across performance and policy indices. The US and South Korea were leaders while Sweden and Denmark were rated as underperforming in both these indices.

"The Monitor approach focuses on the environment as experienced by the entrepreneurial ecosystem and through the correlation of performance to policy drivers establishes a clear line of sight from policy to performance," explains Ashish Karamchandani, director, Social Change Initiative, The Monitor Group.

Additional reporting by Ashish Karamchandani and Pedro Arboleda.