The United States is a land where the rags-to-riches tale is a powerful social driver. This tale has pulled in immigrants throughout the country?s history, and been mythologised in fiction. The path to riches (and even just middle class comfort) often comes through entrepreneurship: starting new business enterprises. In particular, this route is followed for entry to the middle class by Indian, Korean, Vietnamese and other immigrants to the US, who often come without impressive enough educational credentials, and run numerous small businesses that require hard work, risk taking and street smartness which a university degree does not provide. It is not just immigrants?Americans of all stripes dream of innovating, of making it big, or simply making a good living while being their own boss. ?Selling on eBay? has become an income generator for millions.
Unsurprisingly, the US celebrates entrepreneurship and small business. What does the government do, and what does it not do? First, to understand the motivation for small business policy, one has to be clear about the special challenges that may face a start-up business or first-time entrepreneur.
The biggest is of information?the hows of finance, getting organised, identifying sources of support, and so on. US policy plays its biggest role here. Through its federal Small Business Administration (SBA) and associated decentralised
Small Business Development Centers, information and guidance is made available.
Second, the government deals with the disproportionate impact of fixed start-up costs by making sure that legislative requirements for incorporation and small-scale operation are not onerous. Sure, there are health, safety and environmental regulations, but these are enforced relatively efficiently and judiciously, not in a punitive or extortionary manner.
The SBA provides some direct help with financing, through loans, though this avenue is very limited. More significantly, the SBA assists small entrepreneurs by teaching them how to get bank funding. The government does not influence bank lending, nor are there policies favouring specific sectors. Note that most of these businesses are outside the venture capital radius?VCs specialise in high tech, as they look for growth potential not available in the average start-up. Tax incentives (particularly for investment) may exist, but these may be much greater for larger enterprises in specific industries: the US corporate tax code is very complex.
To sum up, the approach is to create an enabling environment, and provide ample information to improve the efficiency of decision-making. There is little direct subsidisation, and no attempt to do away with the biggest challenge, namely, risk. Most start-ups fail. Many small businesses do not make it for very long. Yet US policy does not try to control outcomes or protect small businesses from competition, because that would destroy incentives for honest effort and gut efficiency and innovation.
This is the biggest lesson for India, as it considers reshaping it dysfunctional policy towards the ?small-scale sector.? Getting rid of reservation, of the mentality that failure can?t be allowed (instead trying to mitigate the causes of failure), of the attitude that ?bureaucrats know best,? will allow the sector to flourish. The definitional issue is important, but not critical: what ultimately matters is whether the policies are sensible. Applying poorly designed policies to ?SMEs?rather than ?SSI? will not improve outcomes. It will be a real challenge, however, for Indian bureaucrats to move on to providing an enabling environment to SMEs. Perhaps the best that a government that can?t ensure honest implementation of regulation can do, in the short run, is to stay out of the way.
In the US, small businesses account for 50% of all private sector employees and are estimated to be responsible for 60 to 80% of recent job growth. While small firms fail all the time, new ones take their place. A few become world-beaters. Even Microsoft and Wal-Mart started small. India needs flexiblity, both in exit and growth, and not have policies that kill this flexibility. It will be nice when India?s population is as well educated as that of the US, so we can have more professional jobs for them. Meanwhile, quick and simple fixes to its SSI/SME policies can begin to generate badly needed employment in a relatively short time.
The writer is professor of economics, University of California, Santa Cruz