Governments Should Enable Entrepreneurship, Not Pamper Only A Few Entrepreneurs
Governments around the developing world like to claim that they support entrepreneurship, especially social entrepreneurship. To show their intent, most of them have created agencies that aim to develop and nurture startups. In Southeast Asia alone, I have met or attended events organized by these agencies, including Indonesia’s BEKRAF¹, Malaysia’s MaGIC, Singapore’s raiSE, and Thailand’s TSEO. Their most visible programs involve organizing conferences for entrepreneurs, providing grant capital and non-monetary support like training or incubation services. UK’s Big Society Capital is one of the most ambitious of these kind of government agencies, allocating GBP 600 million to invest in social enterprises. All of these are of good intentions and should be highly appreciated, but I think the governments have greatly missed the mark in various other aspects that they could provide to the impact enterprises.
Today, in most countries, apart from the poorest ones, investment capital is largely available for tech and impact startups, leaving the government agencies with the second-best startups. There are bigger tasks beyond capital and training that impact enterprises need the government to resolve for them. Government capital could only reach a limited number of enterprises. There are other risks with limited hand-holding support, as government support often come with strings attached — a lot of time commitment on the entrepreneurs’ side, maybe some “pet projects” directed by the government, or even blatant conflict of interests. Establishing a traditional entrepreneurship agency is actually a lazy way for a government to support entrepreneurship, and a more focused and scalable effort is needed.
In my experience, both from talking to impact entrepreneurs and managing investments in portfolio companies, there are a few recurring problems that no one but the government could help:
- Investment Regulations
Impact enterprises are small and often rely on FDIs (foreign direct investments) and foreign loans. However, many developing country governments try to attract large capital investments, and devise the regulations accordingly⁵, leaving small startups struggling. Indonesia, for example, have a USD 700k (IDR 10 bn) minimum paid-in capital for an FDI company and full currency hedging requirements for all USD-denominated loans. It requires too much resources for most early-stage companies to fulfill or working around such requirements.
2. Utilities Support
Many impact enterprises operate in remote/rural areas and need access to utilities like reliable electricity and water supply that government-owned companies can provide, that are often unavailable in these remote areas. It is not realistic for impact enterprises to always demand priority access to such services, but if the government really wants to support impact entrepreneurship, this is a way to do it, better than providing another incubation services or business management training.
3. Local Business Climate
Many local/regional governments in rural areas are not used to host any businesses. Because of that, either or both of these things could happen: (a) the permit processes take unbelievably long time due to inexperience, or (b) they extract various unofficial fees to make the process faster.
4. Sectoral Regulations
Impact enterprises sometimes have to compete with government-provided services (usually in education or healthcare sector) or operate within tight regulatory framework (e.g., in financial inclusion, clean energy, fishery, or forestry sectors). Being regulated is totally fine, in fact, in many cases, very desirable to impact enterprises. However, given that impact startups are very prone to small disruptions, it would be very helpful if regulation is crafted in predictable manner, and impact enterprises — not only large players — are involved in the consultation process.
5. Government Assets Management
In Indonesia, the government built many assets that shortly became underutilized. I have personally seen two empty cold storages, a wind farm, and a mid-sized plastic pelletizing machinery lies unused, and I have heard many more similar stories at larger scale. If those assets can be somehow managed by impact entrepreneurs, of course through proper tendering and contracting process, then it will save them a lot of valuable resources.
Coordinating all of the above support is definitely not easy. Government is not a single entity, but consists of a number of ministries, agencies, hierarchies, and individuals. Coordination is going to be challenging but not impossible. I strongly believe it is much more effective for the government to understand real on-the-ground challenges that they can tackle and to start tackling them, rather than playing VC game and, worse, using startups as political pawns. Since the government will require larger resources and political will power to be able to do such coordination function, it might be easier for them to start with tackling a subset of the issue and establish a go-to agency for all impact enterprises, or even for all enterprises if possible, that can guide these enterprises in navigating a myriad of agencies on their own.
For impact enterprises, government relation is very important and need to be part of the overall strategy even since the very beginning, either by having direct relationship or through industry associations. This could be tough considering that most of the times startups are sort of resources and have market challenges to scale as well, but it may well worth the effort.
Entrepreneurship is a powerful tool to solve many, albeit not all, of the society’s problems through market-based solution. It is aiming to survive in perpetuity; it is almost always wanting to scale/grow up and engage more people; the incentives are aligned for the entrepreneurs, investors, and “beneficiaries”. Let’s unleash the power of entrepreneurship in the most effective way possible, understand how the market work and shape the enterprises, and get the government to be involved in areas where the private sector is unable to tackle the problems.
[1] BEKRAF, now defunct after cabinet reshuffle, is an agency for the creative economy, but it has a lot of programs for startups. Indonesia has many other sporadic government initiatives from various ministries that provide financial and non-financial support to startups
[2] COVID-19 pandemic situation might change that temporarily
[3] In the case of Indonesia, perhaps in other quasi-democratic countries as well, there is a likely possibility that politicians and entrepreneurs use each other to increase popularity
[4] A recent case in Indonesia: Founders of two startups, Ruangguru (online classroom provider) and Amartha (microfinance), were selected to become special staff of the President. They resigned amid conflict of interest allegations when Ruangguru was awarded a large contract to provide training to workers laid off due to COVID pandemic, and Amartha was trying to bypass multiple layers of government entities to obtain field support from all Head of Districts across the country
[5] Almost all governments have been able to improve their countries’ business climate, as reflected in “Doing Business” report. However, many developing countries have a long way to go
[6] Many Indonesian startups are incorporated in Singapore. Much simpler although a bit more expensive due to higher legal fees
[7] The Andhra Pradesh microfinance crisis in early 2010s happened because the sector was not properly regulated in term of interest rates cap and prevention of overborrowing
[8] In Indonesia, many local government officials are understandably uneasy of providing facilities to companies, due to potential repercussions of giving unfair treatments to some businesses and not the others
