India needs more jobs than it is creating. Without enough job creation, its demographic dividend?adding a million people to the workforce every month?will become a disaster. One possible source of job creation is entrepreneurship. Recently, Ejaz Ghani, William Kerr and Stephen O?Connell (GKO) have been systematically exploring this hypothesis for India, in several research articles. What do we learn from their work?
GKO start by clarifying the kind of entrepreneurship that matters. Self-employment alone is not enough. In India, much of self-employment is in the so-called informal sector, and does little to generate new jobs. Instead, it is new formal firms that make a difference. Silicon Valley, the acknowledged leader among US regions for entrepreneurship and innovation, has low rates of self-employment, but leads in creating new firms that grow and hire workers. GKO show that India?s density of new business registration is below average, conditional on per capita GDP. So India lags in the kind of entrepreneurship that could help growth.
The next step is to establish the link from new business creation to employment growth. This comes from looking at India?s annual manufacturing survey, which provides data on thousands of plants, including their age and their employment levels. Aggregating this data to the level of the states reveals a striking pattern. Those states that had higher levels of new business creation in 1989 had faster manufacturing employment growth over the subsequent 16-year period, 1989-2005. The major state with the worst performance on both dimensions was West Bengal. Among the states with the best record was Tamil Nadu. A partial exception to an otherwise strong relationship between business creation and subsequent employment growth was Uttar Pradesh, which did well in setting up new plants, but lagged badly in job creation.
GKO show that the same pattern is evident, perhaps even more strongly, when one disaggregates to region-industry clusters. It could be that the same factors are driving both patterns. State-level policies that encourage entrepreneurship may also make it easier for new firms to grow and hire more workers. State-level policies may encourage the creation of regional industry clusters, which attract new firms and make it easier for those firms to grow. For example, GKO find that just being in West Bengal accounts for the lower average rate of entry in that region.
There are other initial conditions that matter, beyond ones that might plausibly be conjectured to arise directly from governance or policy. Certain industries are more likely to grow faster, and attract entry. But even controlling for such factors, the pattern of new business creation leading to subsequent periods of higher employment growth is still evident. Other channels of influence also emerge from GKO?s analysis of the data. The rate of entrepreneurship in organised manufacturing is positively affected by the share of population with a graduate education, and by closeness to a city. The strength of local supplier networks also is a plus for setting up new establishments. On the other hand, the stringency of local labour laws has a negative impact on entrepreneurship.
In looking at the factors influencing start-up rates, GKO also analyse other data sets, for unorganised manufacturing and for services. For unorganised manufacturing, higher education and labour laws are not significant, as one might expect, but the demographic dividend shows a positive impact, and so do local infrastructure quality and the household banking environment. For services, higher education, infrastructure, banking, labour laws and the demographic dividend all matter with the expected direction of effects.
Taking stock of all these results, there are clear policy implications. Development is certainly about more than just growth. And inclusiveness of growth through income transfers and other welfare schemes is important both from a welfare perspective and a pragmatic one of preserving social harmony. But inclusive growth is ultimately about creating jobs. The most jobs and the ?best? jobs do not come from microenterprises, but from new, small, formal firms that have the potential to grow big. This suggests a policy focus on enabling the factors that allow this to happen. In India, it is not happening enough.
The factors that matter are labour laws, infrastructure, education, access to credit, and access to markets. Even when there is a lack of these factors, the government?s instincts have been to provide everything itself. This has not worked in many cases, because the government is spread too thin?it has neither the capacity nor the resources. Instead, governments in India can focus on creating better enabling environments for some of these variables, thereby creating an enabling environment for entrepreneurship. Of course, some of the enabling factors are ones that governments are best placed to provide?basic education, public infrastructure like local roads, and so on. In other cases, public-private partnerships might work best. The bottom line is that priorities need to be established and policies refocused. The opportunity to make ?inclusive growth? a meaningful goal lies in enabling entrepreneurship and job creation.
The author is professor of economics, University of California, Santa Cruz