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The Problem With India's Entrepreneurs

Alex Tabarrok

India is a much more entrepreneurial society than the United States. That may seem surprising since India is poor and we typically associate entrepreneurship with being rich, but it’s clearly true.

Everyone here is on the make and open to opportunity. You need to hire someone to fix your wifi or repair a bicycle or make a movie? You can find someone within hours. “Yes, we can do that” is the default answer to any question. Of course, it may have to be done illegally but, subject to that, it can be done. The can-do attitude is especially prevalent in Mumbai but it’s true elsewhere in India as well.

Indians are entrepreneurial because they work for themselves. Overall, 95% of Indians are self-employed compared to just 10% of workers in the United States. That is perhaps one reason why the National Academy of Science report on immigration found that “Indian immigrants are the most entrepreneurial of any group including natives.”

However, when we reverse the employment statistic, only 5% of Indians work for a firm compared to approximately 90% of US workers, we see the problem.

No Other Way

Entrepreneurship in India isn’t a choice, it’s a requirement. Indian entrepreneurship is a consequence of India’s failed economy. As a I wrote in my Cato paper with Goldschlag, less developed countries in general, not just India, have more entrepreneurs,

If we define entrepreneurship as self-employment then there is much more entrepreneurship in poorer countries. People in poorer countries have to be entrepreneurs because there are relatively few jobs, that is to say few employers of large numbers of workers. Moreover, although not all self-employed workers have the skills or temperament for entrepreneurship, the identification of entrepreneurship with self-employment is not a definitional sleight-of-hand.

Travelers to less developed economies often are surprised at how much more market-oriented, dynamic, and entrepreneurial these economies appear to the naked eye. Indeed, tourists are more likely to visit an actual market in a developing economy than they are at home. The visceral hustle and bustle of the town market is a display of real entrepreneurship. The greater familiarity that people in developing countries have with entrepreneurship is likely one reason why immigrants to the US are more than twice as likely to start new firms as are natives.

The problem with developing countries is not that they lack entrepreneurs but that entrepreneurs cannot grow their firms large enough to become major employers."

Growing Businesses

The modal size of an Indian firm is 1 employee and the mean is just over 2. The mean number of employees in a US firm is closer to 20, but, even though that is ten times the Indian number, it obscures the real difference. The US has many small firms but what makes it different is that it also has large firms that employ lots of people. In fact, over half of all US workers are employed by the tiny minority (0.3%) of firms with over 500 employees.

Most workers in the United States work for large firms. In India, however, large firms are negligible as far as employment is concerned and that is a huge problem because large firms are more productive. India’s pre- and post-colonial history all put barriers in the way of large firms that only recently have begun to fall. In Can Indian Grow?, Anantha Nageswaran and Gulzar Natarajan’s admirably clear and useful summary of the Indian economy, they summarize some of the key issues:

Before independence, India’s colonial rulers snuffed out enterprise by exporting India’s raw materials to nurture businesses in their own countries. The capacity to create and nurture big businesses in the private sector in sufficient numbers has never been achieved since the state occupied the commanding heights of the Indian economy in the first three decades after independence. Moreover, the post-independence legal and regulatory framework favored small businesses: the production of certain items was reserved for small-scale industries, and labor protection was emphasized rather than efficiency and scale. Because of India’s experience of being ruled by a foreign trading company, a suspicion of big businesses still lingers."

As a result, small firms in India don’t grow:

Most Indian firms start in the informal sector and never grow or, worse, diminish in size over time: according to a 2013 International Finance Corporation study comparing the size of thirty-five year-old firms in India, Mexico, and the United States with their size at start-up, in India the size had declined by a fourth, in Mexico the size had doubled, and in the United States the firms were ten times as large. That is deeply troubling. As firms age, they are expected to get larger and to employ more people. Since India’s experience is orthogonal to this expectation, something in the Indian business ecosystem is badly broken."

Entrepreneurship, like other factors of production, can be misallocated. India has great entrepreneurs but their hard work, creativity, and risk-taking is being wasted building tiny, stunted firms.

Reprinted from Marginal Revolution.

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