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Creating a City of Start-ups by Start-ups Such a place could turn out to be truly transformative and disruptive, leading to increase in productivity of the larger economy and improved society

By Rudra Sensarma

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Paul Romer of the New York University won the Nobel Memorial Prize in Economics last year for showing that innovation driven growth happens when there is a market place for ideas. Economists before him assumed that the factors of production such as land and labour have diminishing returns that set limits on economic growth. But Romer showed that ideas as inputs in the production process are non-rivalrous in nature (i.e. discoveries are shareable) and therefore, as long as there are economic incentives to produce them (such as patents), innovation can spur economies on to high growth paths. In this way innovation creates the possibility of unlimited growth that can help poor countries catch up with rich ones and indeed invalidate any doomsday predictions pronouncing the end of human progress.

Unfortunately, governments do not always understand this very well. Government policies, particularly in developing countries, do not do a great job of recognising, incentivising and rewarding innovation. Take the case of India. For many years there have been sundry entrepreneurial support programs for small scale industries from ministries of industry and finance as well as from dedicated institutions such as SIDBI and NABARD. The past five years have certainly seen focussed efforts towards start-ups in the form of targeted schemes like Atal Innovation Mission, Stand-up India and Mudra, covering the spectrum of support from innovation in the classroom to fast tracking the process of opening a business and obtaining easy credit. However, it is interesting to observe that the entire gamut of initiatives from the Indian government have invariably prioritised self-employment and job creation.

Idea as an Economic Priority

While the key feature of entrepreneurship is self-employment and job creation, start-ups are characterised by their disruptive innovations that make the world a better place for everyone. This is the multiplicative growth potential of ideas that Romer talks about. Yet we do not see the government making innovation a priority in a meaningful way. To some extent it is understandable that in a developing country the government's attention is taken up by the needs of the large numbers of poor and unemployed. However, given the importance of ideas beyond just employment, the government must reimagine policies to kick-start an innovation ecosystem. For that there are few standard prescriptions such as setting up incubators, making it easy to start business and creating an ecosystem for venture funding. But owing to the need to be equitable, the government ends up spreading its resources across a large number of institutions and entities through the length and breadth of the country. If innovation-driven entrepreneurship takes a priority, it would be worthwhile to examine with a new type of ecosystem that could be an innovation in itself and therefore transformative in many ways.

A City of Ideas

Going back to Romer, he has talked about something called a charter city in an entirely different context. His argument is that bad rules in modern societies have limited the possibilities of growth and therefore, a new city called a charter city can be set up where new rules created from scratch make it possible for industry and society to flourish in ways that are not possible in existing paradigms. Extending this idea of a charter city, a "city of ideas" can be conceived to be driven by start-ups and those associated with the start-up ecosystem. All segments of the economy across primary, secondary and tertiary sectors would entail start-ups. Governance and urban management would be supported by start-ups. Education in the start-up city would focus on creativity, design thinking and venture management. Those setting up businesses or employed by them would be the ones who would be naturally attracted to this city and live there. Consequently, all needs of the community, starting from housing to consumer goods and utilities to luxuries, would be served by start-ups. Existing businesses would participate in the start-up city, but only through start-up subsidiaries or investments in existing start-ups.

Live Laboratory

A start-up city could facilitate or even force innovations. The rules governing the city would be crafted from scratch which means they would not put big and small businesses at cross purposes as often happens but would be tailor made to encourage and sustain start-ups. Entrepreneurs would themselves feel the need to constantly devise innovative solutions to everyday problems within the resource constraints of this start-up city. Such solutions could turn out to be truly transformative and disruptive leading to increase in productivity of the larger economy and improved society. Once start-ups attain a certain scale they would be encouraged to exit and expand their operations elsewhere. The start-up city would be a sandbox for venturing with ideas and the entire mindset, infrastructure and ecosystem would be oriented towards risk taking leading to trials, failures and redesign.

Such a start-up city would also capture the imagination of the rest of the country in an inspirational way. It may motivate many more entrepreneurs to innovate and set up ventures in their own cities or move to the start-up city. Indeed, there need not be one start-up city but a handful of them across the country. It would certainly require an innovative approach to public policy, regulation and administration. When many things are tried out to fix broken rules, a flawed education system and an inadequate financial system, an experiment of a dedicated start-up city deserves a shot.

Rudra Sensarma

Professor of Economics, Indian Institute of Management Kozhikode


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