The link between innovation and growth provides justification for the government to invest in innovation and entrepreneurship
Not every business enterprise is a start-up. A start-up is an innovative new venture that offers a differentiated value proposition to its customer and can scale up rapidly, thus creating disproportionate value for stakeholders. The journey of a technology start-up is not an easy one. Start-ups typically face multiple risks at an early stage—concept risk, execution risk, technology risk, market risk and scaling-up risk—leading to a high mortality rate. It is estimated that 90% of all start-ups fail. Business incubators are organizations that assist innovators in converting their innovations into sustainable and scalable enterprises. Incubators do this by business handholding, tech support, and facilitating a host of other resources that may be required for the start-up to survive and scale. The Atal Innovation Mission (AIM) at NITI Aayog is supporting incubation centres around the country with the objective of radically transforming the ecosystem for innovation-driven enterprises in the country.
As the fourth industrial revolution based on a knowledge economy starts taking shape, it is these technology-based innovative start-ups that have the ability to drive economic growth and generate large-scale employment opportunities. There are innumerable studies that link innovation with economic prosperity. Joseph Schumpeter was one of the earliest economists to advocate the relationship between innovation and economic growth; he did so as early as 1942, when he introduced the concept of “creative destruction". Simply put, creative destruction is the constant progression of innovation through which new products and processes are created, replacing the old ones. This cyclic process spearheads economic growth. Morris Abramowitz, after studying the growth in output of the American economy between 1870 and 1950, concluded that 85% of growth stemmed from innovations that could get more output from the same input. According to a PricewaterhouseCoopers report, research and development (R&D) and innovation capital will be essential for India to grow its gross domestic product by 9% per annum to become a $10 trillion economy over the next two decades. Innovations boost productivity through new technologies that reduce costs and/or increase output. The process of commercialization of the innovative technologies creates entrepreneurs.
A start-up, to be successful, requires a unique concept, capabilities, capital and culture. An efficient incubation centre is able to support the start-up with all of the required ingredients for its growth story, either by itself or through its network partners. It connects the entrepreneur with experienced mentors and subject-matter experts who can counsel her on building a scalable business plan and assist her in specific challenge areas. Other business support services such as legal assistance, intellectual property protection, accounting support are often a just a phone call away. One of the most critical resources an incubator provides is access to seed funding and/or connections to angel investors. Most importantly, the incubator provides a cultural connect to the entrepreneurial ecosystem—innovation-related events and awards, training, chambers of commerce, global entrepreneurial communities, academic institutions, investors, media, other successful entrepreneurs, and industry partners.
The critical link between innovation and growth provides sufficient justification for the government to invest in innovation and entrepreneurship. Successful examples of public support to innovation and incubation exist around the world. The Israeli government had made significant investments in developing technology incubators, resulting in its leadership generating hi-tech start-ups. The Singapore government rolled out multiple initiatives, including grants, equity financing schemes, incubator schemes, debt financing and tax incentives, to attract innovative start-ups. In about five years time, the tech start-ups in Singapore have received record private equity and venture capital investments, totalling $3.5 billion in 2016 . Closer home, investment of Rs100 crore to create technology business incubators by the National Science and Technology Entrepreneurship Development Board, government of India, has generated a cumulative revenue of about six times (Rs595 crore) through the incubated firms.
Targeted incubation can help fill the gaps that exist in the business environment, including social entrepreneurship in infrastructure, public service delivery, or related areas with higher economic returns than financial. Such efforts with examples will be covered in greater detail in the final piece of this series.
AIM is not only supporting the setting up of 100 new Atal Incubation Centres (AICs) and scaling up of Established Incubation Centres (EICs), it is providing comprehensive support for developing the incubation ecosystem in the form of grant-in-aid, seed-funding support, training for the incubator managers, incubation manuals, tech tools and platforms through industry partners and ecosystem partnerships. While the concept of government support to business incubation is not new, the focus of AIM is on accountability and the efficiency of incubators. The AICs and the EICs will have outcome-oriented deliverables and performance will be measured through an online monitoring system.
Ishita Agrawal and Aditi Banerjee are with Atal Innovation Mission, NITI Aayog.
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