Wednesday, March 22, 2017

The start-up story clarification

This is in continuation to this earlier post. Let me clarify. No body can have a problem with start-ups. After all business creation has been a feature of economic life much before Amazon and Uber.

I see three narratives around the start-up story. One, start-ups allow the expression of entrepreneurial talents and energies of the youth. Two, start-ups create jobs. Three, start-ups innovate to create new products and services that enable more efficient utilisation of resources and solve development challenges.

The problem with the first is one of glorification of entrepreneurship, almost to the marginalisation of all else. This trend overlooks the fact that India needs not more entrepreneurship, but more productive jobs. Just as human resource misallocation towards the financial sector has been a problem in the US, it cannot be denied that the best and the brightest could end up being seduced by the hype and glitz of the get-rich-quick narrative associated with the world of IT start-ups. The best and the brightest find even the most high quality jobs unattractive and lose out on the invaluable experience of acquiring the skills and expertise that come with starting a career in good organisations. 

The second and third are even more complicated, with potentially adverse secondary effects. In case of the second, there is the strong likelihood that start-up activity may be crowding-out other activities. Are scarce savings being misallocated towards specific sectors, those which run on IT platforms, at the cost of other more important ones? Would the median entrepreneur have been better served by seeking a job employment? Would the economy have benefited more in the aggregate with a less exuberant start-up environment by channeling top class talent into medium sized firms engaged with making stuff? Would the aggregate job creation been greater with a greater share of wage employment? It is difficult to answer these questions either ways with any degree of certainty.

It is on the third issue that I am least convinced. I will say no more than what has been written here.

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