Governments Shouldn't Help Startups

Not magic.

Photographer: Dimas Ardian/Bloomberg

By most measures, Southeast Asia is a thrilling frontier for the tech business. It’s the world’s fastest-growing online market. About 70 percent of its population is under 40. Economic growth is brisk. Smartphone sales are surging. Even Eduardo Saverin, erstwhile Facebook impresario, is bullish.

So it’s understandable that governments across the region are creating funds to invest in local startups, hoping to foster new tech hubs. Thailand, for one, is doling out $570 million with the aim of generating 10,000 startups by 2018. Such efforts are ambitious, well-meaning and almost certainly misguided.

Booming
 
Source: World Bank

When civil servants pump money into companies, they risk driving up costs for private investors and keeping uncompetitive businesses afloat. Their goals often diverge from the firms they’re funding (governments want to maximize jobs, investors don’t). And it’s hard to get the balance right: Although some state support can be beneficial, too much can cause problems.

That’s why it’s usually better to let the market decide where investment should go. In Southeast Asia, it’s already doing so. Venture capital firms have increased investment in the region by 127 percent a year since 2010, reaching about $1.1 billion last year. Roughly 7,000 startups have emerged. Some, such as Indonesia's Tokopedia, are thriving. Others clearly aren’t. That’s okay; it’s why they call it venture capital.

But taxpayers are typically less tolerant of failure, and rightly so. Although rich countries such as Singapore can afford to patiently cultivate local enterprise, most others are better off investing in the basics: good public works, predictable rules and diligent research.

For Southeast Asia, perhaps the most crucial thing is to improve internet access. Most countries in the region lag the global average for network speed. Many of their citizens aren’t connected at all. Investing in broadband could give a boost to entrepreneurs, expand trade and connect talented workers. It could also unleash creativity: In recent years, many ingenious inventions -- from mobile-payment systems to microgrids to medical devices -- have arisen where people have internet access but not much money.

Slow and Slower
 
Sources: Google, Temasek, Ookla

Simplifying regulation would also help. E-commerce in Southeast Asia is expected to grow by 32 percent a year over the next decade. Yet most people still pay for such services via methods like cash-on-delivery. Harmonizing the region’s rules for online commerce could help companies come up with inventive payment methods that would work across markets.

A final step -- boring but important -- is to support basic research programs at universities and think tanks. Such efforts create benefits that are often more widely shared than what corporate R&D projects produce. That, in turn, can broadly spur creativity, improve workers’ skills and boost growth, all of which helps aspiring startups.

Such workaday reforms may not produce the next Google. But there’s no magic formula for doing so. What works, and what doesn’t, is still mostly a mystery. The prudent move, then, is to lay the groundwork for a digital-age economy -- and let the muses of innovation take care of the rest.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.