SL’s slide in Global Entrepreneurship Index – A challenge for next political regime

As Sri Lanka heads to elect a government led by a new president, the main political parties have come up with economic agendas to outdo each other, in addition to promising to do a better job than the current political regime. Developing entrepreneurship is embedded in these agendas in various forms. 

The new political regime, which will be elected within next few months, will certainly have to do a better job in creating a favourable environment to foster entrepreneurship because the current government appears to have done the opposite despite its promise of better economic freedom and entrepreneur-friendly policies. 

Sri Lanka’s score in the Global Entrepreneurship Index (GEI) has declined by 30 percent during 2015 and 2018. The score has declined to 21.8 percent in 2018, from 31.1 percent in 2015. Currently Sri Lanka ranks at the 90th place, among 137 countries and is one of the lowest ranked countries in the region.  

Politicians are now talking about the Fourth Industrial Revolution and how Sri Lanka could benefit from same. However, it is not clear how Sri Lanka is going to be part of the Fourth Industrial Revolution unless Sri Lanka successfully graduates from being an “efficiency-driven economy” into an “innovation-driven economy” and entrepreneurship plays a vital role in the process of graduation of an economy into an innovation-driven economy. 

Governments have to intervene if the necessary conditions to foster entrepreneurship are weak. The GEI provides insights into Sri Lanka’s current status and areas policy interventions may be required. Among the 16 categories that have been used to create the GEI score, Sri Lanka has managed to score well in just one category, which is Product Innovation (95 percent). The five areas Sri Lana has scored low are Technology Absorption (5 percent), Risk Acceptance (7 percent), Networking (7 percent), Cultural Support (12 percent) and Risk Capital (13 percent). 

Discussed below are some aspects of these low-scored areas and possible ways the state could help to improve these areas. In addition to taking steps to support weak areas directly, the state can also implement programmes to give a boost to weak areas through indirect eco-system agents such as the large corporate and financial sector. 

Technology absorption
This is a measure of availability, ability and capacity to absorb new technology by businesses. It is interesting to note that Sri Lanka has scored well in Product Innovation, despite scoring less in this category. This suggests that Sri Lanka’s Product Innovation could be much more if the level of Technology Absorption is improved. 

Further, Sri Lanka’s low score in Process Innovation (24 percent), which has direct impact on the development of the industrial sector, is probably due to low Technology Absorption. This is an area where the state needs to intervene by playing an active role in promoting and introducing new technologies to businesses through various programmes and platforms. It is also important to develop local technology by promoting technology education, research and development. 

Another way the state can help technology absorption is providing tax incentives and financial assistance to target industries and technologies. 

Risk acceptance
This factor refers to “fear of failure” that prevents people from starting a new business. This has both cultural and socio-economic perspective. However, it is possible to improve risk acceptance by the people with the state interventions like enhanced social safety net programmes. 

Also simplified procedures for business-closures/bankruptcies and less stringent labour laws could also help. Also, it is important to create an efficient institutional and regulatory system to support business start-ups.

Networking
This refers to entrepreneurs’ capacity and knowledge to connect with others within the country and overseas. The entrepreneurs, who have better networks, are more successful, can identify more viable opportunities and can access more and better resources. This is also an area where the state can help by creating platforms for industry networking and linkages in addition to programmes like incubators, etc.   

Cultural support
This is a measure of how people view entrepreneurs in terms of status and career choice and how the level of corruption affects such decision. Without strong cultural support for entrepreneurship, people tend to choose traditional professions. There are many ways the state can help to improve more entrepreneurship through cultural support. 

One is to reduce corruption and nepotism. It is also important to create awareness about entrepreneurship and benefits through the education system and also encourage entrepreneurship among various communities through educational and training programmes in addition to business support programmes. 

Risk capital
The availability of risk capital or funding is an important precondition for entrepreneurship development. Both informal and formal funding channels play an important role in this regard, together with a well-functioning and developed capital market. Sri Lanka’s low score reflects its less developed capital market and less funding options like venture capital. 

The state can play a vital role in encouraging risk capital. It can create an environment to encourage more venture capital and private equity and also play a role of capital provider as in the case of many other countries. The capital market also needs to be developed in a manner that caters to all segments, including small and medium sized businesses. 

Entrepreneurship is the vision to see an innovation and the ability to bring it to the market. It is beyond operating a restaurant or running a taxi service. As the Sri Lankan economy is stagnating with lack of industrial and export diversity, it is essential that Sri Lanka take steps to boost entrepreneurship in industrial and export-oriented businesses. It is a challenge for the next political regime. But it is an achievable challenge with appropriate policies and efficient implementation after identifying the areas needing policy interventions. 

(Indika Hettiarachchi, an independent consultant specialising in projects, venture capital and private equity investments, can be reached at [email protected])