Sunday, December 27, 2009

Is Entrepreneurship a Cultural trait?

A friend of mine sent this New York Times article a few days back.
The article discussed the lack of entrepreneurship (it took me two minutes to type that) culture in India. It discusses the lack of venture funds and angel investors.
It starts out by saying:
Innovation is hard to measure, but academics who study it say India has the potential to create trend-setting products but is not yet doing so. Indians are granted about half as many American patents for inventions as people and firms in Israel and China. The country’s corporate and government spending on research and development significantly lags behind that of other nations. And venture capitalists finance far fewer companies here than they do elsewhere.

More later:
Mr. Raghavan and others say India is held back by a financial system that is reluctant to invest in unproven ideas, an education system that emphasizes rote learning over problem solving, and a culture that looks down on failure and unconventional career choices.

I found the article informative. But the friend who spoke to me about it seemed to focus on the last line above - the cultural angle. In fact, I think most people who read that article would find the cultural angle more easier to understand than the financial or educational.
Most of the people who talk about innovation in public also seem to prefer trying to influence this "cultural" factor. There are conferences and seminars focussed exclusively on innovation and the need for inspiration for innovators.
Unsurprisingly, this coincides with a slew of management books about innovation in the corporation.
The narrative seems to run as follows: India has a culture that looks down on investing in new products. Failure is not an option. Therefore Indians do not start companies that create new products. To change this, we have to motivate Indian future entrepreneurs with a lot of seminars and conferences which charge a minimum of Rs.1000 only.
I am completely prepared to believe that entrepreneurship is low in India and that India is not a source of many patents. What I do NOT trust is that there is a cultural angle to it.That is, I believe that there are perfectly rational economic reasons for Indians not to get involved in creating products - I don't think you have to bring culture into the mix.
I also believe (cynical bastard that I am) that the only reason culture is touted as a prime factor is this: that is the only way a lot of people can easily make money, offering to change the culture. If we were to go after the root causes, we may be required to fight the battle on the political, policy making front. That is truly in public interest and there is not a lot of money to make in that direction.

The Cult of the Entrepreneur

I think entrepreneurship is being elevated as something equivalent to superstardom by management gurus. To start a company, and to create a product - the decision is usually made based on evaluating marginal benefits, not based on good intentions.
Let me take the case of the software industry:
(By the way, The Indian Patent Act does not apply to software! That is, you cannot patent a software algorithm in India. Software is protected by copyright - not by Patent Law in India. )
If you start a software company in India, you have two choices - start a company that creates an innovative product (remember, you cannot patent software innovations in India); or perform coding services for American, Japanese or European clients. Which option would you choose?
Purely going by marginal benefits, I would prefer a services company unless I am rich already. This is because with no outside investment, getting a software services company up and running is easy in India. Not only that, if I had just a couple of clients, I can break even pretty fast. The market for software services is high and has stayed high for the past fifteen years. Even under a bad recession, the market has been able to accomodate thousands of small companies.
Now, you may ask me, why would I do this? There are a thousand small and medium services companies - wouldn't I rather start a product company that I feel passionate about?
But people run businesses not just out of nobility. They run businesses because they want to make a lot of money as fast as possible. I know that we are all supposed to believe in passion, innovation and all that - but has anyone considered the true state of the Indian economy?

1. Our healthcare costs are skyrocketing
2. IT workers have no government mandated pension
3. There is no real social security net - unemployment benefits are abysmal and difficult to secure.
4. The public education system is bad and private education costs are soaring.
5. It is not easy to go into bankruptcy and come out of it.

Let me highlight the final point - the European Corporate Governance Institute had a paper out (pdf can be downloaded here)on Bankruptcy law and Entrepreneurship in 2008. The authors, John Armour and Douglas Cumming found a link between countries that support a "fresh start" through personal bankruptcy laws and entrepreneurship. The USA, for example, enables such a fresh start through Chapter 11 bankruptcy. Countries that allow such fresh starts have significantly more entrepreneurial activity.
What is the status of Indian law on this? The Indian Insolvency laws are dated. But more than anything, going to the a court managed bankruptcy in India will drain all your energy and time away.

Unlike Western countries, a person living in India cannot depend on government if he gets sick, for his children's education or for his retirement. Meanwhile it is obvious that all our costs are increasing exponentially. Would I be trying to make as much money as possible or would I be passionate about a product that may never work? The answer is clear.
So, my question is why don't all the innovation gurus turn their attention to a better bankruptcy law that actually works? Why don't they focus on a social security net? Why don't they focus on pension schemes?
Well, there is no money in such fights. You will likely lose over and over fighting policy changes.
Therefore, we are all back to wondering what the devil is in the Indian culture preventing risk taking. We are back to organizing seminars and conferences on innovation.

(By the way, I believe that people who create products also use the same marginal benefits analysis. They are not guided by nobility or pure passion either. They may see a niche market opening or a way to get funding. My point is that we can discuss innovation and entrepreneurship purely as economic decisions, without bringing in cultural angles.)

Those of you who find this article interesting may also read more about its background here.


Marcus said...

Excellent post Ram. I think you hit the nail on the head. I got to say though that as well as being a policy problem it is as well a cultural problem of accepting failure. This is equally true for all of Europe as well. In Sweden for example it is not as acceptable to "fail" even though we have the same bankruptcy (and even better social protection)like the US. In the US the cultural attitude is that you gave it your best and you failed but just try again. That is one of the many reasons why the US have created the most successful companies of lately. Just check out

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