Entrepreneurship is considered essential for a competitive economy as it provides the spark of innovation and creativity needed to avoid stagnation in the market. It also provides grounds to generate innovative products and services that can open up new sectors for businesses to expand into. As a result people now believe in the power of ideas more than ever. In addition, the internet with all its knowledge riches continues to make each day easier then yesterday for entrepreneurs and small businesses alike.
Entrepreneurship, though susceptible to risk, is inherently an encouraging factor for economics of any country. Pakistan ranks high when it comes to entrepreneurs and freelancers and is quite an eye-catcher for foreign investors. Recently, the trend has been that several startups poised to go big eventually became foreign owned. Though it may seem like a much coveted milestone, it is by no means as promising as imagined. There are negative consequences for young Pakistani entrepreneurs in the short run and question marks over the impact of continued foreign entrepreneurial presence in the long run.
Foreign interest and acquisitions in the Pakistani startup sector might not be as great as they are drummed up to be
In line with the global trend, most of Pakistani entrepreneurs are emerging from the IT industry as they seek to take advantage of the gradual shift of consumers and buyers from offline to online. Our country is ripe with such business opportunities for investors as new age media expands its reach among the population. With almost no support from local businessmen, investors and the government, it left ample room for foreign investors to come and take control of the market. This, in turn, created lack of competition especially from within the local market.
The likes of Rocket Internet for instance are taking advantage of this vacuum to set up new startups based on pre-established and tested business models in other parts of the world. Daraz.pk is a key example. Modeled after Amazon, it was launched through Rocket Internet and made use of that company’s infrastructure to establish itself as the premier online shopping portal for Pakistanis.
Another important aspect is that the foreign investors are not only setting up new startups, but also acquiring local competitors to reduce competition for their own services. Foodpanda’s acquisition of EatOye! this past February is one such example.
The lack of competition has allowed the likes of Daraz.pk to enter the market and effectively establish a monopoly
What Pakistani entrepreneurs do not possess are the vast resources available to such corporations and thus cannot effectively compete with them. They need capital and resources to fight off these big multinationals. The responsibility lies on each of the stake holders.
Our government needs to do more in order to nurture the country’s entrepreneurial sector and safeguard it from such foreign investors. This can be done by introducing new policies and by the establishment of more venture capital firms and business incubators in the country so that entrepreneurs can get the necessary capital and guidance they need in order to have a fair chance at success.
If we take a view of the flip side, it may be easy to assume that with the abundance of foreign control, the domestic businesses will suffer due to acquisition. However, effect of foreign ownership on host country is a subject that has undergone extensive research and results to show that foreign owned firms display more productivity in developing countries than their domestic counterparts due to their ability to reap economies of scale.
Government is focusing on attracting foreign interest but that can not be the sole strategy. Local entrepreneurs have to be protected as well.
According to the ‘Journal of Economic cooperation and development’, a study conducted on three major sectors accounting for 67% of foreign investment in Pakistan, foreign ownership in local firms enhances TFP (total factor productivity) in all researched sectors. Foreign owned firms utilize advantages of drawing modern technology, managerial experience and credit availability from their parent companies. These positive externalities, far from discouraging young Pakistani entrepreneurs, offer competition and diffuse to the domestic businesses through interaction.
According to a study conducted in universities all over Pakistan by Ali, Topping and Tariq in 2011, titled ‘Entrepreneurial attitudes among potential entrepreneurs’, 65% of the students had a positive attitude towards adopting entrepreneurship as profession while 58% aimed to adopt it a career.
There are various local startups which have made a name for themselves worldwide. Enterprise social network “Convo” and online car portal called “PakWheels”, both of which were initiated by Pakistani high-flyers are two such examples. That is not to say that these ventures didn’t attract foreign investment. In fact PakWheels recently attracted US$3.5 million from Malaysia based VC Frontier Digital Ventures which served as a secure footing against competition like Carmudi, enabling stronger business structures.
Steps need to be taken to ensure that the most promising local entrepreneurs don’t go abroad to seek greener pastures
The fact remains that foreign owned businesses don’t hinder Pakistani entrepreneurship but can, in fact, encourage their growth. The question to ponder though is that if this is a good strategy in the long run? Will this impact the local businesses to a point that they will have to start acquiring or supporting Pakistani startups? Will the government end up a victim of the foreign owned entrepreneurship industry just like the automobile industry?
We need to trust our entrepreneurs to have a larger contribution in our country’s economy so that they do not get discouraged by competition and take their ideas to another country or market with policies that suit their needs. Steps should be taken to grow entrepreneurship through local investors and institutions rather than foreign investors, as otherwise we risk losing our economy to these foreign firms who will hold all the power while Pakistanis themselves are reduced to just consumers and workers. We need to be the owners as well as the consumers.