Entrepreneurship as an Economic Development Strategy
As a Daayitwa Fellow, I am interested in learning how a government takes on the role of an investor to support innovation and how risk-taking attitude and entrepreneurial culture can be encouraged either at a behavioral level or at an institutional level. With these questions I set out to learn more on what strategies governments have used to develop entrepreneurship within a given state, region or nation.
One case that catches everyone attention is the American case. Yes, the Silicon Valley; the synecdoche for the American high-technology economic sector. Talking about Silicon Valley, it is particularly interesting to think about what led to this success? If we look at the history of entrepreneurship policy in the U.S. then we begin to understand how this success came and, to some level, the role a government plays in supporting innovation. And I say, “begin” because this is not the entire picture but looking at it from one perspective i.e. policy.
Economic development in the U.S came as a result of the government-sponsored efforts (Pages et al, 2003). In 1930s and 1940s, public officials tried to jump-start economic development through aggressive recruiting for manufacturing industries. For example, state economic development agencies tried to sell low labor cost in more expensive part of the country and offered subsidies and incentives to persuade firms to relocate. But as international trades developed, foreign competition increased. Cheap labor from Asia and Europe made it difficult to maintain labor cost at home, which ultimately changed the U.S. manufacturing industry landscape.
The government agencies, in response, focused on supporting homegrown small businesses and creating jobs. The programs and services that came into existence to reduce barriers for doing business throughout 1950s – 1980s are the evidence of the government’s shifting priorities. Examples of such services include, access to capital, business incubation space, business training subsidies, and state funded venture capital firms. One of the most notable federal programs is Small Business Investment Companies (SBIC), administered by the U.S. Small Business Administration (SBA) established after the enactment of the Small Business Act of 1953, which has been financing small business entities since 1959.
In 1978, the U.S. Small Business Administration, through SBIC program, invested in Apple, when it was a mere company of 63 employees and earned less than $50,000 in profit. Today, Apple employs 100,000 people and reported more than $53 billions in profit in 2015 (Techrunch, July 4, 2016).
So, the U.S. government can be credited for making Apple products available to the world but for those of us who aren’t quite the Apple aficionados but sure can’t live without an iPhone, iPad, Mac Pro or Mac Air, we can blame for inducing human race, unintentionally, to a state of high attachment and unrealistic love for inanimate objects!
The number of such programs and services grew during the decade. But the coordination among these entities and service delivery became difficult. Ultimately, this strategy also failed to address the gap created by declining manufacturing industries. Therefore, the delivery mechanism and content of the entrepreneurship policy became the next focus among public agencies and policy makers. Now, the American entrepreneurship thinking have shifted from businesses to individuals i.e. starting new business and growing businesses that can exploit new opportunities as opposed to just creating jobs (Pages et al, 2003).
Besides the American case, I learned about another interesting government initiative that led to the creation of capital markets for startups. The case in point is Yozma program, a $100M Government owned Venture Capital (VC) that invested $8M per fund, in 10 early stage private companies during in the 1990s. The big claim is Yozma triggered the creation of VC industry in Israel by dealing with specific system failures of the entrepreneurship process - the early stage equity gap and lack of complementary assets and skill in entrepreneurial firms (Avnimelech, 2009).
Other studies also support this claim by asserting that Israel’s high tech cluster development was strongly related to the development of a local VC industry. The story of this success is concentrated in the early 1990s, when the government was trying to find a way to employ thousands of engineers that emigrated from the Soviet Union. Hence, few targeted programs emerged during this decade such as Inbal, a government owned insurance company that gave partial guarantee to traded VC funds; Magnet program, a support for cooperative, R&D firms and universities; and Technology Incubator program, which supported startups for three years. Some of these programs failed but they did provide important learning lessons to move forward.
As I am looking at other country’s success cases, I wonder what will be Nepal’s story. As the prospect of Challenge Fund remains. I believe this mechanism will prove useful in a way that brings positive spillover effect that goes beyond the firm level and touches entrepreneurs at the individual level. If you’re wondering what is this challenge fund then simply put it is a financing mechanism to allocate money for specific purpose. By using competitive bidding process (SIDA Challenge Fund Guidelines), government can provide risk capital and pose a challenge to generate pro-poor innovations that are commercially viable for making social impact. Next, I will share more on challenge fund modality, strengths, weaknesses and other important considerations for implementers and administrators.
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