Oct 10, 2019 in Business

Case Analysis

Entrepreneurship influences positive economic growth by being a source of innovation, which increases competition in the market. Entrepreneurs challenge the status quo in the market and force the incumbent competitors to invest in the development of new products and process. The improvements lead to high-quality products that earn more money and thus contribute to the economic development of a country. The positive association between economic growth and entrepreneurship is evident in the developed countries. However, the results in a developing country may be different. This term paper will identify the main issues related to entrepreneurship and economic development in India, evaluate them and offer solutions.

Identification of the Main Issues/Problems

The Global Entrepreneurship Monitor (GEM) model assesses the correlation between the entrepreneurial activities and economic development in various countries.  The economic development of a country leads to the reduction in the entrepreneurial activities because of improved employment opportunities that negate the need for people to undertake entrepreneurship. However, this condition is only true in the developed countries as indicated by the Indian case. 

The first issue in the case is that entrepreneurial activities in India continue to increase with the economic development. As such, the relationship between the economic growth and entrepreneurship contradicts the GEM model. The GEM model expects the composition of entrepreneur types to change as an economy develops. The Necessity Entrepreneurship should decrease with economic development while the Opportunity Entrepreneurship should increase with the growth of the economy.  However, the Indian case is different and challenges the GEM model. 

The second problem in the Indian case is that there is no substantial change in the type of entrepreneurs despite the economic development.  The number of registered small-scale industries (SSIs) has remained constant. The trend shows that in spite of the increase in entrepreneur activities, those recognized through registration are not increasing as expected.

The third issue is that India is just a developing nation, which has a minimal GDP per capita bandwidth. Consequently, the results of the analysis using the GEM model may not provide accurate information until the Indian bandwidth grows to the levels of developed countries.

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Analysis and Evaluation of Problems

The additional entrepreneurial activities in India, despite the economic development points to the peculiar nature of the country compared to others that use the GEM framework The development of the Indian economy relies more on the service than the manufacturing. As a result, the economy does not create many jobs, which would limit the Necessity Entrepreneurs from venturing into business. According to Acs & Roger, entrepreneurs are people who identify unique opportunities and devise ways to exploit them. In the process of their exploitation, they create value that drives the economic development. Therefore, one critical component that entrepreneurship must have to drive economic development is a unique chance with a potential for growth. The increasing number of business ventures by private citizens point to the effort made by jobless people to earn a living because they have no other choice. The service industry offers opportunities for small firms as opposed to the manufacturing industry in which large corporations dominate. As such, the nature of the Indian economy, which depends on services, has contributed to the parallel increase in the number of entrepreneurs and economy grows.

Despite the general improvement in the number of entrepreneurs in India, the number of those registered by the government has been stable over time. The stability means that there are few or no entrants into the market.  The additional entrepreneurial activities thus originate from the unregistered Necessity Entrepreneurs. Such a situation is problematic because it affects the quality of entrepreneurs since the motivation of those entering the market is sustenance rather than growth and expansion. Therefore, the economic development that India is experiencing comes from the few Opportunity Entrepreneurs with clearly planned business strategies. Success in business depends on the strategy that an entrepreneur uses to attain and retain the market. The Opportunity Entrepreneurs are likely to constitute the largest percentage of the registered SSIs. The conclusion that the registered SSIs drive the economy derives its support from the fact that firms register because they are large enough to pay taxes and tax exemptions drive their motivation.  As such, they provide the government with revenues used for economic development and offer employment, which increases the spending power of the population.  Although the high number of entrepreneurs could be a consequence of joblessness, there is another factor that could be the cause. Since India liberalized its economy recently, the surge in the number of new businesses could indicate the catch-up trend where people hastily embrace new opportunities that the government had restricted. However, if the Necessity Entrepreneurs are the main reason for the increase, India has a problem that it must address through policy. Failure to tackle the issue would eventually lead to reduced economic growth.

India’s small GDP per capita bandwidth may be the cause of the current difference between India and other developed countries from the GEM evaluation perspective. Therefore, the results from the analysis using the GEM model may not reflect the actual conditions because they cover a short period of economic development. The results may be deficient, and thus no viable conclusion may arise from them. Understanding the real condition of the Indian economy can only be possible after the country experiences an extended period of development.

Recommendations on Effective Solutions

The reliance on the Indian economy on the service sector means that the current trend of many Necessity Entrepreneurs is likely to persist because of lack of job opportunities. Since they have little contribution to the economic development except for self-sustenance, the government can offer low-labor cost incentives to foreign manufacturing firms.  The corporations can set up production factories in the country and employ the Necessity Entrepreneurs. The government will tax through their employment and increase its revenue collection base, which will improve the economy. The hiking labor costs in China present an opportunity to the Indian government to pitch itself as an alternative low-cost investment destination.

Secondly, the government should institute policy changes that affect entrepreneurship to improve quality. According to Shane, business knowledge is a prerequisite for success in entrepreneurship. People become confident to exploit opportunities when they understand how to manage their investments. The government should create incubation centers for the young people and provide financing to those with innovative business ideas. Through such initiatives, the quality of entrepreneurs will become better than before, and the number of Opportunity Entrepreneurs will improve.

Since the GEM framework may not provide accurate information on the economic development and the entrepreneurial activities in India, the government should create strategies that are unique to India. Countries with similar results from the GEM framework may use the same strategies to boost investment and promote economic growth. However, India is unique and should, therefore, make its tailor-made strategies that can fit its conditions. One such plan could involve educating the Necessity Entrepreneurs to assist them graduate to the opportunity category.

Conclusion

The issues in the Indian case include the increasing entrepreneurial activities with the improvement in economic development, the absence of change in the type of entrepreneurs and India’s small GDP per capita bandwidth. India can resolve the issues by offering labor incentives to multinational corporations to manufacture in India, develop incubation centers for young entrepreneurs and educate Necessity Entrepreneurs.

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