Monday, June 1, 2009

The challenge of making entreprenuership scale-up in India

Edward Glaeser's post on the "Slumdog Entrepreneurs" of Mumbai and the reference to the NSSO survey findings that 43% of urban Indians who worked were self-employed, four times higher than than in any metropolitan area in the US, raises interesting questions. It is surprising given the well established relation between the vibrancy of entrepreneurship and urban economic growth, why the high rates of self-employment in our cities have not translated into higher growth.

It has been found that a disproportionately small share of these entrepreneurial establishments manage to move up in scale to become employment generating establishments, that are essential to driving economic growth. Why is urban entrepreneurship in India more of the survival variety than employment (and hence economic growth) generating variety?

As Prof Glaeser writes, the maze of regulations surely comes in the way of entrepreneurial activity flowering and small businesses growing in scale to make profitable use of economies of scale. The clogged and relatively inaccesible credit markets, rigidities in labor market regulations, poor state of infrastructure linkages, problems in contract enforcement and delays in the judicial process, and government corruption have all contributed towards stifling the growth of the small entrepreneurs. The overwhelming majority of these investors populate the unorganized sector and the massive parallel economy it spans, and are therefore denied access to even the limited institutional support available from the government.

Apart from the institutional framework, the low literacy levels and poor skill levels severely handicaps such entrepreneurs. In this context, of relevance is the findings of World Bank's massive recent study of global poverty, "Moving Out of Poverty: Success from the Bottom Up" (full report here), which explores mobility out of and into poverty - who escapes poverty, who falls in, and why. The report draws attention to the huge burdens imposed by sudden health related shocks which are amplified by the absence of an adequate public health care system.

The microfinance movement has often been held up as an example of how the entrepreneurial drives within the poor in India have been tapped for improving their livelihoods. While it has surely contributed towards improving the lives of poor, it has severe limitations that come in the way of its scaling up entrepreneurial activity. I have already blogged here, here, and here on the limitations of the microfinance movement in promoting entrepreneuship.

Update 1
Niranjan has this op-ed in Mint about the challenge of helping entrepreneurs scale up. He refers to the possibility of local government owned China-style township and village enterprises (TVEs) as a platform to leverage entrepreneurial spirits.

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