There are two meanings for the word "investment". When you buy a house, stock or bond you invest. But economists, when they refer to investment, refer to new investment and not the purchase of existing real or financial assets. Entrepreneurship, both within the context of existing firms as well as those of the start-up variety, spurs the expansion of business, creates new employment potential and fuels economic growth. Economists have been particularly impressed by phenomena such as the explosion of growth in Silicon Valley, its innovativeness and wealth creation.

Pioneering spirit

Bill Gates started his IT business from scratch, not knowing whether he would make profits. He took the plunge as do so many other entrepreneurs worldwide. Such entrepreneurs have to raise money from others to convert a technological opportunity to a profitable business. Gates depended on his colleagues as did other IT pioneers. My friend Dr Tirimanne produced in the laboratory an extract from tea to produce tea cola, similar to Coca Cola. But he couldn’t get investors to back him. The project depended on stable sugar and tea prices. It would also require an extensive advertising and marketing budget.

Economists have been studying the behavior and traits of entrepreneurs to come up with a theory of what makes a person an entrepreneur. What makes some people take risks and launch their own businesses when others are not willing to do so or not willing to enter that particular business? Gamini Wikramanayake is a successful entrepreneur who was a pioneer in chicken farming. He is a Chartered Accountant and an MBA and had a lucrative practice when he launched this business. I asked him what made him take the risk when he was comfortably off in his profession. No one else had thought of investing in a large scale poultry project at that time. He told me that when he was in his teens he was in a life saving club. He would plunge into the sea whenever someone was in difficulty despite the risk to his own life. He ascribed his risk taking spirit to this love of adventure.

Last week Bloomberg television interviewed the owner of Patagonia textiles, a large clothing manufacturer who was a pioneer in using organic textile materials. To a similar question he ascribed his entrepreneurial spirit to his love of mountaineering where he pioneered the climbing of a particular mountain. He was engaged in risks and loved the spirit of adventure. Entrepreneurs risk not only their finances. They may risk their careers as individuals and jeopardize their future standard of living. Instead of gaining they may lose everything and risk their reputation as well. There could also be emotional consequences of failure.

But being rational individuals, entrepreneurs will also take into account the risk involved which is often different from the perception of risk of others. Atkinson had a model of risk taking which included six variables - the subjective probability of success, the subjective probability of failure, the incentive value of success, the incentive value of avoiding failure, the achievement motive and the motive to avoid failure. He also spoke of three levels of risk preferences- low, intermediate or moderate and high. Established entrepreneurs tend to be moderate risk takers. Of course those who entered low risk or moderate risk ventures could also fail. Some say the managers in established enterprises are only moderate risk takers.

Economists point out that the higher the risk, higher is the return. In fact unless a pioneer can reap super-normal profits, there is no incentive for risk taking. So high risk enterprises must be rewarded with higher than normal returns. Recognizing the need to promote high risk enterprises, some countries give tax free status for such businesses in new fields. The development of technology is due to creative individuals but to bring about economic prosperity these technological changes have to be turned into profitable businesses.

Electricity was discovered in the late 1870s in Edison’s laboratories. Although we think electricity must be a state monopoly, it was not so in the beginning. There were over 500 small business houses providing electricity for street lighting and for lighting and power driven machinery in factories. In the beginning they were constrained by the fact that direct current could be transported only over short distances. But with the introduction of Alternating Current this problem was overcome and it paved the way for large enterprises producing electricity. It is the harnessing of the technology by entrepreneurs that led to the widespread use of electricity.

New technology which can be harnessed by business for the production of new products or the improvement in the quality of existing products always leads to a higher level of prosperity. We have seen new technologies in the last fifty years which have transformed life in unimaginable ways. There is television, the personal computer, satellite TV, jet aircraft, the automobile, electrification, telephones and mobile telephones, all of which are constantly changing our lives. More such technological break- troughs are in the pipeline. All these technological changes create opportunities for business. Old businesses will get wiped out and new businesses will be born. So economists refer to a life cycle for any business with growth peaking and followed by stagnation and decline.

Promoting Entrepreneurship

Two things are needed for achieving economic progress and prosperity. We need creative individuals and risk taking businessmen; the former to create and expand technology and the latter to make use of the opportunities created by new technology. Our educational system is not geared for producing either of these aptitudes. We are only used to rote learning which prevailed during the medieval period in the world which was suitable to train monks to memorize and reproduce the sacred texts of the religions. Our entire educational system is still based on this inappropriate model. We neglect this aspect of development and instead depend on the state to promote development.

The state is nothing more than the collection of individuals who exercise authority in its name. They are as much the product of the educational system as the rest of society. We place too much faith in government investment when the state employees have no incentive whatsoever to take the risks involved in harnessing technology to business.  So we find outdated machinery, outdated technology and obsolete business practices in the SOEs set up in the last fifty years. Economic prosperity will not depend on government investment, budget deficits or monetary policy. It has to be propelled by private risk taking individuals called entrepreneurs. This is a scarce commodity in our country. We produce wheeler-dealers instead who utilize the opportunities for corruption.

There is little entrepreneurship in the established business concerns. A supermarket chain released its interim results last week. It gave a poor dividend but carries over Rs 1 billion of retained profits. Listed companies lack the entrepreneurial spirit which is why the pioneering investments have often been made by individuals and partnerships or private companies rather than public listed firms. Of course we are good imitators. When one person pioneers a new project there are several others to copy him and soon there is over-supply driving all of them to bankruptcy.

This is another reason, apart from the benefits of scale economies, where a small market is a disadvantage. Unfortunately because of our macro-economic failures in the last fifty years and the consequent inflation we cannot even take advantage of India’s offer of a Common Economic Partnership. Whether we will ever correct the macro-economic imbalances given our politicians habit of force feeding populism on the people is doubtful.

We all profit from economic and business growth whether we are businessmen, managers, salesmen or production workers. We need our education system to produce individuals who can understand, anticipate and articulate new technologies. Businessmen need to understand and anticipate changes in technology as well as in business and economic conditions.

Why the lack of entrepreneurship?

Why is it that there are so many people who are prepared to take risks in the developed world but not in the developing countries?  Why is it that there are few founders of pioneering businesses in our country? In developed countries the individuals risk profiles have higher preference for risk taking and less risk averseness. There are cross-cultural variations in child rearing or parenting and one economist thought that the children in the developing world are over-protected by their parents which inhibit their temperamental development. David Mc Leland argued that the child rearing practices made children either adventurous, preferring to take risks, or timid, preferring to avoid risks. One recent writer has said that as China introduced a market economy and advanced technologies social changes are also taking place and the ideal of the shy individual is being transformed to one who has initiative and freedom in his behavior. Children are becoming more outgoing and assertive, seeking to be popular rather than be shy and withdrawn introverts. We do have individuals who are would be entrepreneurs but they can’t raise capital. This is another serious problem which requires attention perhaps by the state.  If we do not have individuals as entrepreneurs, we must at least promote entrepreneurial managers who will innovate in their businesses as CIC is doing.