Should India Protect Its Homegrown Startups From Competition By Foreign Multinationals?

“Pursuing protectionism is just like locking one’s self in a dark room: Wind and rain might be kept outside but so are light and air.”  ― Xi Jinping

Above is not the flavour of the season these days in the Indian business diaspora. Many Indian startups are clamouring for government intervention of some form. Business stalwarts like Sachin Bansal and Bhavish Aggarwal are asking the government to take protectionary measures towards Indian startups to protect them from unfair competition by foreign multinationals. While speaking at the Carnegie India Global Technology Summit, the bigwigs raised the banner of nationalism and spoke about the unfair advantages that foreign multinationals have. They proclaimed that to introduce a level playing field for all players the government needed to intervene by way of introducing measures that assist the Indian companies by providing them with a certain level of protection. This protection could be in the form of policies, tariffs; tax benefits etc. anything that gives a comparative advantage over the multinationals so that both parties allegedly have some strong backing.

There are two basic arguments on which Bansal and Agarwal rest their case. Firstly, multinationals have the power of foreign funding while the second is the ability to use capital from successes at other locations to push forward their ventures. Both these arguments, as per Bansal and Aggarwal, suggest the necessity of protectionary measures.

While these arguments might sound plausible and compel one to ponder, they come at a time when some of these companies are facing a rough time. Many companies have seen a reduction in their valuations, which has made the investors a little cautious and not that easy with their money. Thus, such claims reek of ulterior motives. Are Sachin Bansal and Bhavish Aggarwal voicing their concerns as they have observed some unfairness that was invisible to the onlooker or is this just a way to protect their company from the hard time?

Let us take a step back and examine what these protectionary measures could be and what could be the possible ramifications. If the country does implement protectionary policies would it lead to a level playing field or would it lead to a monopoly that is detrimental for the population at large? Protectionary measures could mean numerous things. However, if we go by what these bigwigs are suggesting it would resemble the closed economy policies adopted by many countries to an extent. Imposing tariffs or favouring Indian companies over the others could lead to similar retaliation by the other countries. Such a retaliation will only prove to be harmful to the country. At the time when India is, looking towards expanding its global presence such a move could prove to be very hurtful. Further, history has been a witness to the success of open economies. Protectionary measures have the potential to weed out competition, which would make the very same companies complacent thereby reducing their creative output. When there is no competition, prices tend to be increased which harms in turn is detrimental for the population and country at large. Examples of companies like Nokia are a proof of how open competition (minus any assistance or intervention) has helped them flourish domestically and globally. Swedish company Nokia had always faced intense competition both at home and outside which helped it stay vigilant, work harder and keep innovating.

Another example where an analogy could be drawn to protectionary measures to study what could be the possible consequences is the practice of having a closed economy. In a closed economy, countries impose bans on imports, fix ceiling on trade, have a state monitored growth and policies for every sphere in the business. These are to an extent similar to what Sachin Bansal and Bhavish Aggarwal are asking for. They too are requesting policies be framed that favour the Indian startups or have only inflow of foreign capital minus the companies. India, post its independence had adopted a closed economy. However, the policy could not last for long. We realised how the policy had restricted the growth potential of the country and reduced the influence we had on the global front. It was only after India opened up its economy did it see exponential growth. Only when there is competition do people and companies keep working hard to stay at the top of their capabilities. Even companies like Flipkart that are now clamouring for intervention benefitted from stiff competition from outside. This competition made them re-design their offering and come back with a better value proposition each day.

Another advantage that a homegrown startup has over its foreign counterparts is the local know how. Knowledge about the consumers and cultural understanding goes a long way in marketing one’s product. These insights equip a company to position and deliver their offerings that have a higher probability of getting a good reception. No amount of money power can substitute this knowledge. Many recent partnerships like the Tata-Starbucks came into existence just to tap into that knowledge base and brand equity. Chinese cab aggregator – Didi is a stellar example of the above theory. The company using its customer knowledge gave global giant Uber such a stiff competition that it could not make any significant inroads in China. Uber had to finally move out of China and satisfy itself by just owning a minority stake in Didi. Similarly, Indian companies can use their know-how of the Indian subcontinent to mould their offering and offer better services.

Coming back to the second argument presented by Sachin Bansal and Bhavish Aggarwal which referred to foreign funding. The statement looks to be ironic for the same foreign investor Tiger Global too initially funded Flipkart. A little digging reveals that the same investing agencies are investing in startups across the globe. Thus, it is up to every company to leverage their strengths to convince the investors to overlook issues and concentrate on their assets. To cry foul when you feel a crunch would not be an ideal situation.

If we look at the situation objectively, what could prove to be more beneficial is providing a level playing for all competitors. Initiatives like Startup India that aim to provide financial assistance, favourable conditions in the form of reduced red tape and smoother policies would go a long way in improving the situation than any protectionary measure can. These measures would help to create a positive push for budding entrepreneurs to take the plunge.

Protectionary measures were a solution given in the pre-liberalization era. These solutions did not work then and will not work now. The very genesis of a startup rests on disruption. They enter the market by disrupting the existing scenario, move on to become the competitive force and eventually become the mainstream phenomenon. Any attempt at stifling this competition will be the death of the startup ecosystem. This ecosystem thrives on competition to find itself, search for new avenues and flourish. Thus, any attempt at obstructing this root of the startup ecosystem by blocking competition and introducing protectionary measures will lead to the demise of the potential that this ecosystem has.