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What drives innovation and entrepreneurship today?

A look at India, China and the US.

By Rajiv R. Shah, Timmaron Managing Partner

Innovation and entrepreneurship have transformed the western world, and especially the US, from agricultural economies of the past, through the industrial revolution into the information age of today. The impact on the US economy has been to transform the US into the most dominant economic power of today with the world’s largest GDP. However, the information revolution and globalization that we are experiencing today is also transforming the world. Fundamental economics, easy and rapid access to information, ease of global travel and opening up of societies, although in some cases to a limited extent, that were previously completely closed to the West, are sowing seeds of change that have the potential of creating a future somewhat different from what we have been used to in the recent past.

Global engines of growth

Most significant among these changes is the rapid growth in the economies in other parts of the world – BRICS countries, as well as in the Asia-Pacific region, in general. China and India have especially received the most mention in the recent past, particularly during the recent economic downturn in the US and the resultant job losses. China, and perhaps to some extent India, has become a global engine of economic growth, while the growth in the US has been sputtering. Both China and India are today world’s biggest emerging economies with high GDP growth rates. However, the case of China is especially compelling, given that by most accounts, its economy is expected to surpass that of the US in the not too distant future.

Alibaba worlds greatest bazaar2

Is innovation the key to long-term success?

While innovation and entrepreneurship have driven the US to its present status as the most dominant economic power of today, can the US continue on that path? What are some of the key issues and concerns? China and India used to be dominant economic powers several centuries ago, when the US was not even on the map or was not very heavily populated. With the rise of the West, and due to a number of social and political reasons, these two nations lost their economic clout, and their economies were dwarfed by western economies. While both these countries have shown significant growth in recent decades, can that growth be sustained? If we believe in the premise that innovation and entrepreneurship are indeed vital for long term growth of a country, can these two nations exhibit that? That brings one to the question of what are the factors that are important for innovation and entrepreneurship to thrive. We need to look at these factors and compare them between the US, China and India, and look at the evolution of these factors in the past, and assesses the pointers they give us about the future, and hence about the likelihood for continued growth in these economies.

What do we really know about these emerging countries? What do we need to know?

A lot is known and has been written about in the context of innovation and entrepreneurship in the West, and the US in particular. But the same is not true about China and India – not a lot is known in the West either about their distant past or about the recent evolution and the present state of affairs with regard to the fundamentals that drive innovation and entrepreneurship. What has been written about innovation and entrepreneurship in these two countries very recently, given the recent growth in their economies, is either very anecdotal or very prescriptive, and very often also with highly romanticized perspectives on the state of affairs in those countries in the areas of innovation and entrepreneurship, without taking into account some fundamental challenges these countries face.

So, what needs to happen to assess the growth in economies of India and China? What needs to happen is an identification of factors that drive innovation and entrepreneurship and the resulting economic growth. Starting out with clear and the best-accepted definitions of what are innovation and entrepreneurship, we need to understand what factors contribute to both innovation and entrepreneurship. These factors include – history; economy; social and cultural factors; laws, rules and the role of government; personal characteristics; demographics; education and universities; opportunities for entrepreneurial training; industry and market clusters; infrastructure; capital availability; role of domestic and international corporations and corporate internal venturing, along with other factors. A careful assessment of these factors and their evolution over time and their interaction with each other must be made. This must be based on factual and quantitative data from reliable sources, to enable an unbiased data driven analysis. This data for China and India must be collected from various sources and then this must be benchmarked against similar data from the US, which is far more readily available. This data can then be utilized to model the impact on the economy – for China, India or the US.

Mobile use as an economic factor:

Mobile sales India China

Other important economic factors

The next question then is to understand how innovation and entrepreneurship specifically affect the economy in relation to all other factors that also affect the economy, of which there are many, especially in the near-term. The importance of innovation and entrepreneurship to any economy has been recognized since the pioneering work of Joseph Schumpeter. Number of books have been written on the subject of “Innovation and Entrepreneurship” since the landmark book by Peter Drucker on this subject. The importance of innovation has been studied and written about, especially radical, transformative, or disruptive innovation by a number of authors in recent years, most notably, Clayton Christensen.

However, while the impact and the results of innovation and entrepreneurship on the economy are generally easy to see, the task of mathematically relating them is extremely challenging. This is further complicated by the fact that macroeconomic theory for the best part of the 20th century has been divided into two opposing philosophical and mathematical camps which have not shown a sign of coming together until recently and has been discussed by Greg Mankiw. While it is well known that a large number of other factors – monetary and fiscal policies, budget and trade deficits, inflation, unemployment, exchange rates, and a host of others – affect the economy in the near term, the long-term vector, an area of macroeconomics which is now known as Economic Growth, is driven by innovation and entrepreneurship.

Global GDP Comparison

Solid economic data review, not fear, must drive decisions

Since the early and pioneering work of Solow, a number of economists have mathematically modeled the impact of innovation and other factors on economic growth. It is important to review their previous work – the works of Schumpeter, Solow, Acemoglu, Aghion and Howitt, Barro, and others. These authors and a number of organizations, such as the World Bank and the OECD, have collected data on entrepreneurship and published Entrepreneurial Indices. Macroeconomic framework and how economic growth fits into that must also be reviewed before proposing a new model to address economic impact of innovation and entrepreneurship. The results of the model can then be, compared with data from the World Bank, IMF, OECD and other empirical data, as well as a comparison with projections of the future in other books.

Given the qualitative nature of some of the factors responsible for innovation and entrepreneurship, the task of modeling the impact on the economy is next to impossible and new methods and approaches need to be explored to model these and relate these to empirical data. Until such a model becomes available, what is needed is a comparative assessment of the various qualitative factors that are necessary for innovation and entrepreneurship to thrive, rather than romanticized anecdotal perspectives on what is happening in these three economies, in order to make educated guesses about how these economies might evolve in the future.

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Dr. Rajiv Shah has written extensively on this topic, and can offer valuable insights and actionable strategies to help companies succeed in the global markets of today and the future. He is the lead author of the book, "A Closer Look at India, China, and the U.S." available at Amazon Books.