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Last Updated : Oct 14, 2020 10:32 AM IST | Source: Moneycontrol.com

Why protectionism won’t end well for Indian startups

By taking a protectionist stance India will signal greater risks to investors and threaten the vibrancy of India’s startup ecosystem.

Note to readers: Hello world is a program developers run to check if a newly installed programming language is working alright. Startups and tech companies are continuously launching new software to run the real world. This column will attempt to be the "Hello World" for the real world. 

Some Indian startups have asked this before: can we protect our market from foreign companies like how China does? The promise is that if we have a market that puts the interests of Indian companies first, then we’d also have mega startups like Alibaba and Tencent. But what could go wrong? Many things.

Firstly, to have a China like tech and internet ecosystem, we’ll have to build a firewall like China which cuts off access to technology companies from other countries. This can be catastrophic for the openness of the internet, ergo the digital economy. As Michael McLaughlin and Daniel Castro point out in their December 2019 report for the Information Technology and Innovation Foundation: “The general openness of the Internet supports economic growth by increasing international trade, productivity, employment, and innovation.”


Secondly, we must ask what happens if all countries close access to their markets for tech companies from other countries? Do we win or lose? In the short term, a few homegrown companies will get the time to build out their products unhindered by competition. Let’s play this out a little into the future. Say our companies grow big and strong under a protectionist policy environment. How will our companies access foreign markets? Companies built on the back of protectionism will be seen as nationalistic entities and not as corporations built to maximize shareholder value. This can have terrible side effects as they try to go global. Take for instance the troubles of Chinese company Huawei which grew to become China’s largest privately held company. Its global overtures are often thwarted on account of alleged ties to the Chinese government and national security concerns. The company is banned from some of the world’s most lucrative telecommunications markets including the United States, Canada, Australia, and several European countries. Other Chinese companies including TikTok, arguably with a better product, face similar challenges as they try to go global.

Since customers are now buying technology products online, India is also seeing a surge of startups that are born global and sell to enterprise customers across the world. Many Indian companies are competing and winning their fair share of the market. But enterprise buyers tend to shy away from buying software from companies that come from protectionist regimes as it poses geopolitical risks for their business. This will stymie years of progress made by Indian product companies that are now competing and winning globally.

hello world logoMoreover, taking a protectionist approach in India will strengthen the nationalist agenda in richer markets. They’ll argue that if India won’t let us, why should we let them? This excuse will be used to boot out Indian talent, tarnish Indian products and in general, create an anti-competitive environment for global trade. India’s $215 billion technology services industry that employs millions of workers already faces challenges during election years in the US, where politicians like to attribute job losses to offshoring.

Homegrown companies operate under the assumption that India’s middle class can support their businesses. In reality, India is still a poor country. Even though many people self-identify as belonging to the middle-income group, they are in the lower-middle-income group. To support domestic technology businesses at scale, India will have to have a large middle class like in China or Indonesia. One benchmark is to see when India will hit $4,000 in per capita GDP, an inflection point for sustainable technology businesses to take off. The International Monetary Fund expects India’s per capita GDP to decline by 10.5 percent to $1,877 in 2020.  By some estimates, $4,000 is at least 10-15 years away, if not more. With the current economic contraction, it could take longer. Venture capitalists typically have a 10-year window to make money off their investments. By taking a protectionist stance India will signal greater risks to these investors and threaten the vibrancy of India’s startup ecosystem.

(Jayadevan PK is a former technology journalist and recovering startup founder. He now works with Freshworks Inc as an evangelist, focusing on efforts around brand building. He’s also a commissioned author at HarperCollins.)
First Published on Oct 14, 2020 10:32 am