Article originally published in April 2017 issue of Business360° Magazine, one of Nepal’s premier business magazines, under the monthly column – Innovation Insight. Read original article here.
It is natural that people from different parts of Nepal, depending upon their backgrounds and levels of understanding, will explain reasons behind country’s poor economic performance in different ways. Despite all these differences, in my personal opinion, they agree on one fact – innovation drives economic growth. In fact, in 2015’s Enterprising States and Cities report, the United States Chamber of Commerce Foundation had outlined that the positive correlation between innovation and economic growth had been one of the most consistent findings in macroeconomics that had been true for centuries. Currently, 50% of American annual GDP growth is attributed to increase in innovation.
However, in case of Nepal, there are no major studies that assess current status of innovation and its overall impacts on local and national economy accurately. As a consequence, concerned stakeholders often seem to be ignorant about the true potentials of technological disruptions. According to the Global Innovation Index 2016 (GII 2016), out of 128 countries, United States of America ranks in 4th position while Nepal in 115th position. Though the country has improved its ranking from last year’s, its performance in all seven pillars – Institutions, Human Capital and Research, Infrastructure, Market Sophistication, Business Sophistication, Knowledge and Technology Outputs, and Creative Outputs – is still unsatisfactory. Among South Asian economies, India (66) tops the list followed by Sri Lanka (91) and Bhutan (96). Only two South Asian countries, Bangladesh (117) and Pakistan (119), lag behind Nepal’s position in the ranking.
Innovation does not take place automatically but for it to properly influence economic activities of an economy, there should be few pre-requisites in place. Inadequacy of these factors across the country explain country’s poor innovation outlook. There are numerous factors that hinder innovative disruptions to occur in the country. For our ease, we can categorise such major factors into following three groups:
Poor Investment Climate
Political instability, small market size and difficulties trading across the borders, meagre public and private R&D investments, inadequate infrastructure, insufficient human capital and incompetent access to finance status of Nepalis are some of the key factors that hamper modernization of country’s entrepreneurial activities.
Nepal continues to suffer from rapid changes in political regimes. In past 26 years, the country has witnessed 24 Prime Ministers. With the presence of 164 registered political parties and formation of new parties, Nepalis have stopped thinking of having a single party-led government sometime in next 2-3 decades. In country like Nepal where politics has huge influence in business activities, frequent changes in the governments have negative impacts on overall business environment. In addition, small domestic market, low purchasing power of majority of Nepalis and difficulties while trading across Nepal-India and Nepal-China borders further discourage entrepreneurs and investors to invest their efforts and capital in the country.
A recent study from Berlin’s Deutsches Institut für Wirtschaftsforschung (DIW) has found a positive correlation between R&D and innovation in micro, small and medium enterprises (MSMEs). Nepal still ranks in 93rd position in R&D pillar in the latest Global Innovation Index. In addition to unsatisfactory R&D investments from government authorities and private business entities, country’s academic institutions and think tanks also do not invest ample resources in such activities. Besides poor R&D facilities, Nepal also does not have sufficient infrastructures to boost innovations. Except for gross capital formation (as percentage of GDP), Nepal’s position in rest of the indicators in GII 2016 is in poor conditions. Though country now has mobile phone and Internet penetration rates of 116.59 per cent and 54 per cent respectively, the corresponding growth in use of ICT tools in public and private business activities is low.
A competent human capital also helps to enhance novelty in business activities. A 2015 study by McGuirk et al has concluded that skilled workforce is vital for the conceptualization and implementation of nouvelle business ideas and strategies. By using the concept of Innovative Human Capital (IHC), a concept that incorporates four key elements – education, training, willingness to change in the workplaces and job satisfaction, they have found that IHC is valuable for both small, firms with less than 50 employees, and the large firms, firms with more than 50 employees, with more value being seen for the formers. In case of Nepal, the Government expenditure on education – primary, secondary and tertiary – as percentage of GDP is marginal. As a result, even if we have enough innovation ideas and capital, we do not have sufficient skillful human capital to make use of those resources. Furthermore, Nepalis still do not have an easy access to financial resources. As per the available data, only 61 per cent of Nepali adults have access to formal financial services and 18 of the adults are yet to be provided with such facilities. Also, of those who have formal bank accounts, the ratio of a branch of banks and financial institutions (BFIs) and consumers remains astonishingly high – national average of 6,647 individuals and in some rural parts 72,026 individuals per branch respectively. Likewise, the entrepreneurs have huge difficulty obtaining credits.
The second category of barriers to innovations in Nepal comes from insufficient policy instruments. The recent year has given entrepreneurs and investors high hope with the Parliament approving Special Economic Zone Bill, amendments on old Industrial Enterprise Act and Company Act and government also ensuring an investment friendly Foreign Investment and Technology Transfer Act soon. In addition, the proactive roles of the Ministry of Industry, Nepal Electricity Authority and other related public and private stakeholders have further heightened the motivations of local and foreign investors to initiate and upgrade their business ventures in the country. The positive impacts of encouraging developments between August 2016 and March 2017 were clearly visible while Nepal concluded a 2-day long Nepal Investment Summit 2017 during first week of last month with more than 250 investors from different countries pledging investments worth of $13.51 billion. For now, though there has been adoption of favourable policy instruments and progressive commitments from three major political parties recently, we are yet to see how these new policies go into implementation. As Nepal holds bad reputation for turning good policies into actions, this time, the costs for failure to do so would be huge for the country.
Attitude and Behaviour
There has been prevalence of “Fear of failure” among Nepalis, more predominately among majority of country’s youth entrepreneurs. Moreover, there has been simply duplication of business ideas among majority of local businesspersons when it comes to starting a business or investing in one. Besides these individual-level attitude and behaviour problems, there exists an inconvenient perception of private sector stakeholders among government authorities and vice versa. All these factors further deter potential and capable Nepalis from coming into the market with new business ideas or invest into old and new firms by either limiting individual business creativity or by failing to praise one another’s ideas and efforts or both.