Blog

Blog

Ejaz Ghani

Ejaz Ghani is Lead Economist at The World Bank. Prior to joining World Bank, he taught Economics at Oxford University and Delhi University. He did his M. Phil and D. Phil from Oxford, and Bachelors from St. Stephen’s college Delhi. He has worked for ILO, UNCTAD, and UNICEF, and for different regions including Africa, East Asia and South Asia.
Entrepreneurship and Jobs: Think Small

Entrepreneurship and Jobs: Think Small

May 23, 2017

Nearly one million new workers will join the labor force every month in India for the next two decades. This is equivalent to the entire population of Sweden joining the labor force in India, every year, for the next two decades. The pace at which India creates new jobs will determine whether India’s demographic trend turns into a dividend or a disaster.

Our understanding of what can be done to accelerate the pace of job creation is still evolving. Experience of USA and other developed economies have shown that there is a strong link between entrepreneurship and jobs. Entrepreneurship helps allocate resources efficiently, strengthens competition among firms, supports innovation and new product designs, and promotes trade growth through product variety. Perhaps most important for policy makers, high rates of local entrepreneurship are linked to stronger subsequent job growth.

Multiple studies have examined role of entrepreneurship in job creation in advanced economies, but there is very little empirical evidence for India. This lack of research hampers the effectiveness of policy efforts to promote job growth through entrepreneurship. We examined the link between entrepreneurship and jobs, in some 900 districts in India, in both manufacturing and services. Within these two industry groups, we also compared the formal and informal sectors (Ejaz Ghani & William R. Kerr & Stephen D. O'Connell, "Who Creates Jobs?," World Bank Other Operational Studies 10072, The World Bank).

India’s economic geography in entrepreneurship is still evolving, unlike in USA where it has matured. At such an early point, and with industrial structures not entrenched, local policies and traits have profound and lasting impacts by shaping where industries plant their roots.

Just like in the USA, jobs in India are created by small firms. The two most consistent factors that predict the entry of new firms in any district in India are human infrastructure and physical infrastructure. These patterns are true for both manufacturing and services. This relationship is much stronger in India than that found for the United States.

Higher education in a local area increases the supply of entrepreneurs and increases the talent available to entrepreneurs for staffing their companies. Investment in people is an easy call for policy makers. Likewise, local areas must provide adequate electricity, roads, telecom, and water/sanitation facilities. Entrepreneurs are especially dependent upon these public goods. Identifying these attributes and acting upon them is essential to accelerate the pace of job creation.

Unfortunately, entrepreneurship rates in India continues to remain low for its stage of development. Many policy observers have observed that India’s manufacturing sector is underdeveloped relative to economies of similar size, and stronger entrepreneurship will help close these gaps. This will also help move people out of subsistence entrepreneurship and into entrepreneurship in the formal sector. This reallocation will help close India’s productivity gap.

Policy Interventions  

There are several policy levers that can be used to promote Start-Ups and entrepreneurial growth. Instead of being preoccupied with firm chasing—attracting large firms from other locations—policy makers should shift their focus to improving physical and human infrastructure and encouraging entrepreneurship in their communities. Small is beautiful in job creation.

There are well-understood limits to the pace with which countries can accumulate physical capital, but the limitations on the speed with which the gap in knowledge can be closed are less clear. Because of the strong link between education and entrepreneurship, policy makers should remove any constraints that restrict the growth in the quality and quantity of local colleges and educational institutions.

Along with education, physical infrastructure is also essential to supporting a modern economy. Goods and services cannot be produced and delivered without roads, electricity, and telecommunication. And moving people is as important, if not more important, as moving goods. Investing more in roads, railways, bridges and schools should be an integral part of any jobs agenda. If this is important in the current U.S. context, the role of both infrastructure and education in job creation is even more fundamental in developing countries, where there's much more to be done than in the U.S. and other advanced economies.

There is no magic formula, or one size fits all, for making cities more enterprising. More competitive cities—that are  livable, have good infrastructure, invest widely in knowledge generation and capacity building, are well governed, support sound national urban policy frameworks, and work through strengthened public and private partnerships at local, national, and international levels—attract entrepreneurs.

The entrepreneurial potential of India is very large. Imagine if India had more entrepreneurs: given the link between entry, young establishments and job growth, how fast would its growth and job creation then be?