Reassessing the entrepreneurial ecosystem from a data perspective

Dr Farrukh Iqal, Executive Director, Institute of Business Administration (IBA), speaks to Aurora about Pakistan's entrepreneurial ecosystem and why start-ups may have a long way to go before they can make an impact on the economy.

AURORA: Do you think that in Pakistan, entrepreneurship can be a key driver of the economy?FARRUKH IQBAL: Entrepreneurship cannot be a key driver of the formal economy given the current structural conditions of the economy. I emphasise the term ‘formal’ here. Pakistani entrepreneurs exist primarily in the informal economy. Their transition to formal status is discouraged by a punitive tax system for filers characterised by high rates, multiple taxes and the need to negotiate with multiple agencies and authorities. Structural disincentives to formalisation also include an onerous regulatory system operated by a corrupt bureaucracy, the burden of which falls disproportionately on small businesses. One may ask whether the informal sector could drive the Pakistani economy. I do not think so, for two reasons. First, informal enterprises do not typically have the technology, scale and efficiency to generate high rates of value-addition. Second, to the extent that informal enterprises evade corporate income taxes, they do not contribute to the resources needed for public investment (education, health, energy, transport and other infrastructure) that typically underpin long run growth.

I would also draw attention to the fact that the state of entrepreneurship in Pakistan is not good. First, the entrepreneurship rate is low. According to the Global Entrepreneurship Monitor for 2012, the last date for which reliable data is available for Pakistan, our Total Early-Stage Entrepreneurial Activity (TEA) rate was less than 12%. This was only half the 24% rate found in comparable low-income countries. Second, within this already low rate, only a quarter reported being engaged in enterprise for opportunity; the rest were forced into enterprise by necessity. This composition was worse than in other comparable low-income countries, where opportunity-based entrepreneurship is three times higher. Third, only 3.4% of respondents reported being established as new business owners for up to three-and-a-half years – an indicator of survival. This compares unfavourably with an average of 12.75% in other low-income countries in the 2012 sample.

A: So it seems that there is almost a disconnect between the reality and the hype we hear regarding the potential for Pakistani start-ups to have a significant impact on the economy? FI: Yes, there is a disconnect. There is entrepreneurial activity in Pakistan but not as much as in other comparable economies.

A: So why the hype?
FI: The hype comes from the huge success of some IT-based dotcoms in the West and a few in the East. Everyone is aware of Amazon, Apple, Facebook, Google and Netflix. There are many other such businesses that were start-ups only a decade or so ago. They have been hugely successful. In some cases, they have invented entirely new products and businesses. In others, they have disrupted traditional businesses massively. It is the outsized successes of these dotcoms that have led many to believe that the same successes can be achieved in their countries as well. This is a good aspiration, but the fact is that most start-ups in Pakistan (and elsewhere) are tea shops, bakeries, restaurants, barbershops and so on. If you were to conduct a proper survey, you would see that these are the kinds of businesses most people start in because most people here have extremely limited resources and options. We are bedazzled by the start-ups that involve technology and apps, but looked at statistically, the bulk of them are in the areas I have mentioned and they are prevented from flourishing by problems such as corruption, inability to obtain permits and other hassles. The media, of course, prefers stories that are inspirational that involve big successes and this is what generates hype.

A: Yet the Global Entrepreneurship Monitor classifies people who venture into ‘traditional’ businesses as necessity entrepreneurs as distinct from those who create disruption through innovation – in other words, start-ups.
FI: The term start-up should be thought of in neutral terms as referring to all new businesses and not just those that involve information technology. Also, opportunity-driven entrepreneurs are not all disruptors. Many go into established business sectors and find a niche for themselves. The key point to note is that this segment, as you have defined it, constitutes only about three percent of all early-stage entrepreneurs in Pakistan. They are also very likely to be confined to a narrow segment in terms of population and geography. In Pakistan, the start-ups that have an element of disruption are probably those engaged in IT and app type activities relating to e-commerce, food delivery, transport and other services contracted over the internet. Little systematic information is available about their scope and impact.

We have discovered that a little training plus a little capital combined with inner drive and motivation is enough to propel people into opportunity-based entrepreneurship. The role of finance, especially government-provided finance, in early entrepreneurship is exaggerated by many public commentators. The academic literature suggests that potential entrepreneurs usually have enough resources at hand, in the form of friends and family, to be able to launch a business.

A: So in your opinion, Pakistan’s start-up ecosystem is too small to have a meaningful impact on the economy?
FI: Yes, the opportunity-driven enterprise ecosystem is too small to move the needle in terms of Pakistan’s GDP growth or employment. There may be individual successes but collectively they are still too small. Some are inspirational examples, but you should not build policy or strategy on a few inspirational cases. Nevertheless, suppose we shift the focus away from the overall macro effects and see what is happening in a few sectors in Pakistan. In some sectors, the impact of the new start-ups may be significant. To properly establish this would, of course, require more research, but let’s take food delivery as an example. My sense is there was no market for food delivery 10 years ago and today, there are probably several million rupee businesses in this segment. So we could say that they have moved the needle in that sector. You could say the same of Careem and Uber in Pakistan. They have made a difference in the urban transportation market, though I would say they have done so by creating a new market segment (taxi service for middle-class customers) rather than disrupting one that already existed. At the sectoral level, therefore, if not at the economy-wide level, this sort of entrepreneurship is making a difference, although it may not be as transformative as some commentators make it out to be.

A: Yet it seems as though almost all universities and business schools in Pakistan have jumped on the ‘start-up’ bandwagon by teaching entrepreneurship and opening up incubators. To what do you attribute the push in this direction?
FI: You are right. Many universities and business schools are now active in this domain. We at the IBA also teach entrepreneurship and offer incubation services. At the moment, we offer four academic courses and several certificate courses in entrepreneurship. We also provide about 50 incubation spaces and related services. These activities are in demand among students and some are also supported by government funding.

A: What challenges do business schools such as yours face in promoting entrepreneurship?
FI: We have been running an entrepreneurial development programme at the IBA for several years. We have discovered that a little training plus a little capital combined with inner drive and motivation is enough to propel people into opportunity-based entrepreneurship. The role of finance, especially government-provided finance, in early entrepreneurship is exaggerated by many public commentators. The academic literature suggests that potential entrepreneurs usually have enough resources at hand, in the form of friends and family, to be able to launch a business. The key challenge business schools face in promoting entrepreneurship is finding an adequate supply of faculty who can motivate and train potential entrepreneurs. At the IBA we have tried to address this challenge by collaborating with partner universities to develop a national entrepreneurship training programme, which relies on a ‘training of trainers’ model. IBA faculty conduct the bulk of the training initially, and partner university faculty trained in the initial phase of the programme take over in latter phases.

A: What do you mean when you say that the role of finance in early entrepreneurship is exaggerated by many public commentators?
FI: Our philosophy, and it is based on evidence, is that potential entrepreneurs can always find enough resources from among their family or friends to start. This notion that no money is available is a myth; anyone who wants to do something will always find enough money to start and then it becomes a question of motivation, hard work and sometimes luck.

Unfortunately, that idea has spread as though it is replicable everywhere else in the world. Pakistan is not a venture capital country; we are not even a Silicon Valley country in terms of the engineering basis of ideas and networking among graduates of first-rate universities. Except for a few examples, say in Taiwan and the UK, this notion of replicating the Silicon Valley model has not worked.

A: When you say that the notion that no money is available is a myth, are you also saying that the notion that one of the problems preventing start-ups from reaching a tenably viable position is a myth too – and by extension the fact that Pakistan lacks a sufficiently large pool of angel investors and venture capitalist is not really an issue?
FI: The fact is that most people about to start a small business do so by using the resources they have at hand; that is how 90 to 95% of businesses are formed. A certain aura emerged around the ICT business of Silicon Valley, which was connected with venture capital. Unfortunately, that idea has spread as though it is replicable everywhere else in the world. Pakistan is not a venture capital country; we are not even a Silicon Valley country in terms of the engineering basis of ideas and networking among graduates of first-rate universities. Except for a few examples, say in Taiwan and the UK, this notion of replicating the Silicon Valley model has not worked. Having said this, in Pakistan there are several people and companies which are active in the venture capital space. They are willing to invest several thousand dollars on new business ideas involving ICT; the idea is that they can come out ahead even if two out of a hundred ventures succeed in a big way. This is certainly possible but there are only a very few private companies willing to do this and it is not a good idea for the public sector to get into this business.

A: Do you think that too much emphasis has been put on start-ups, perhaps at the detriment of small businesses?
FI: These are two separate stories. The technology-based start-up story is the one that attracts attention and hype. Such companies, however, are too small and narrow-based to have a major impact on the economy, although they may be affecting some sectors. Then there is the story of micro and small businesses. This is where the bulk of entrepreneurial activity is concentrated in Pakistan. But it is a story of mundane and unspectacular businesses, of ordinary people earning an ordinary living in ordinary ways. These stories do not attract much media attention.

A: What, if any, would be the role of the government in promoting entrepreneurship?
FI: The best thing the government can do for potential entrepreneurs as well as established small businesses is to make the tax and regulatory system less onerous in both policy and practice. This is easier said than done, since a large number of corrupt bureaucrats feed off the present system. The recent World Bank Enterprise Survey for Pakistan (2015) revealed that 61% of small firms reported having been asked for bribes or gifts to obtain an operating licence, 79% to obtain an electrical connection and 96% to secure government contracts. Unfortunately, whenever the discussion turns to the promotion of small enterprises and start-ups, an unholy alliance of businessmen and bureaucrats collaborates to devise schemes requiring the provision of financing and subsidies. Global experience suggests that such schemes usually fail in weak governance environments. The Pakistani experience with various national development finance schemes and government banks, both large and small, bears witness to this as well. With respect to start-ups, there has recently been much enthusiasm in Pakistan for government-subsidised incubators, accelerators and seed finance schemes. Some of these use business schools as implementation agencies. It is too early to tell how well these are working. Furthermore, I am not aware of rigorous impact evaluation mechanisms in place to assess the long run efficacy of these schemes.

Dr Farrukh Iqbal was in conversation with Mariam Ali Baig. For feedback: aurora@dawn.com