Barriers to Entrepreneurship in the Sri Lankan Software Industry - Part 1

Note from the Author : This post is based on a paper presented at the International Research Conference on Management and Finance 2011. I had the privilege of co-authoring this paper with Prof. Gamini de Alwis and Dr. R. Senathirajah from the Faculty of Management and Finance, University of Colombo. This post was written exclusively in the hope that this would be useful to the TechWire.lk readers.

The global Tech Industry has it’s share of success stories of wealthy and powerful companies that grew out of garage-office start-ups. You’ve no doubt heard of the early days of Apple and Microsoft, Facebook’s humble beginnings from Zukerberg’s dorm room, and of the billion dollar cash-ins of Instagram and Tumblr. At a glance, Tech Industry seem to be the best place to be if you are a startup. But, if that’s the case, why does the Sri Lankan tech-startup landscape look so depressingly flat?

Entrepreneurship has always been a hot research topic in Sri Lanka. But, the focus has always been on assisting the unemployed and underprivileged to be self-employed. So, there’s a wealth of research data on low-tech/low-income industries and almost none on high-tech industries. This lack of insight and the burning question highlighted above, lead us to the research that’s presented here.

Why do we need to care about entrepreneurship in the Software Industry?

Entrepreneurship Future

Entrepreneurs and professionals carry out two distinct and vital functions in an economy. Entrepreneurs push the technology boundaries of a nation through product or process innovation. Professionals turn these innovations in to implementations that deliver actual economic benefit. Therefore, the ratio of entrepreneurs to professionals, is a key factor for the growth rate of an economy. When there’s a high percentage of entrepreneurs, the rate of innovation is expected to be high. This generates high demand for professionals which leads to higher salaries that attract more and more people to these professions. The excess supply of professionals causes the salaries to drop, encouraging some professionals to switch to entrepreneurship in search of better income. As the economy would now be consolidating, these new entrepreneurs will be forced to innovate even more aggressively. This cycle will eventually stabilize once the optimum ratio of entrepreneurs to professionals is reached [1].

This is where the IT Outsourcing Industry hurt us the most. We did not innovate locally and allow the cycle to run its course. Instead, we “rented” out our professionals’ to foreign entrepreneurs. Much like the Garment Industry and the Rubber Industry before that, the Software Industry exported professional skills and competencies on a Time and Materials basis. As the supply of professionals kept growing, the industry worked tirelessly to bring more outsourcing jobs. Until the day a cheaper outsourcing destination pops up and steal our jobs, this model is likely to continue.

Professionals vs. Entrepreneurs

Researchers Hurst and Lusardi [2], found that for the general public, a person’s wealth had almost no impact on whether that person desired to become an entrepreneur. However, they found that this was not the case for professionals whose entrepreneurial aspirations increased with wealth. The researchers believed that as professionals became more affluent, they saw “business ownership” as a way to gain flexible work schedules and freedom in decision making. To them business ownership was also a “luxury good” that symbolizes success and power.

This is a very interesting argument. Would the same hold true for Sri Lankan software professionals? If so, we can identify the ideal period in their careers where they’ll be open to setting up their own business. We approached our research from this angle and built a conceptual model based on motivation theories, with a focus on variables such as personal wealth and industry expertise.

Entrepreneurship is an unattractive career choice

A professional has to face two types of risks when to investing full-time in a business: One is the obvious financial risk; the other is the risk of disrupting his/her professional career growth.

The financial risk is easy to understand and quantify. If the business was to fail, he risks losing the invested capital and the earnings that he/she could have made as a professional. The impact of the career disruption is somewhat indirect. It’s caused by the fact that entrepreneurial skills and professional skills have to be accumulated at the expense of each other. By focusing on business operations as an entrepreneur, the individual has to give up the opportunity to enhance his/her professional skills and keep abreast with new technology. In a fast evolving high-tech industry, being disconnected for an extended period, could lead to a significant competency gap.

So, imagine that you as a Software Professional, is interested in starting your own business. You are willing to invest some money in to it and dedicate the next five years to make the business a success. You are reasonably wealthy and the possible financial losses are not a major concern for you. Since this is your first venture, you make a backup plan to go back and get a job as a Software Professional, say in five years, if the business keeps losing money and you no longer feel it can succeed.

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Here’s where the above competency gap comes in to effect.

The competencies you hold now will be obsolete in five years. When you return to the industry as a professional, you’d have fallen far behind your current peers. This means lower pay and lower status than those who may have worked with you or under you if, you were to take a job under this circumstances. In our analysis, we found that this possible loss of “esteem” was so overbearing in our Software Industry that even when combined with other positive influences towards entrepreneurship, the net effect was still negative.

In a culture that has a low tolerance for failure, it is not difficult see why professionals prefer to stick to the “safety” of their jobs than to venture out and fend for themselves as business owners. Given the earning potential of a software professional, the choice is perhaps a no-brainer.

When we planned our research, we made an effort to confine ourselves to objectively measurable variables. We especially wanted to steer clear of the “cultural effect” which is often the scapegoat for anything. Sadly, even after a methodical research we found ourselves staring back at this elephant in the room. But then again, we cannot dwell on this aspect; culture is not something we can take upon ourselves to change.

Where do we go from here?

Unsurprisingly, our data showed a genuine disinterest towards entrepreneurship among Sri Lankan software professionals. There was no upward trending curve between entrepreneurship intent and wealth or expertise. Consequently, there’s no threshold on either variable to earmark possible entrepreneurship candidates. And we’ve found evidence that this is not due to lack of skill or financial or political factors, that we could have addressed.

As the goal of the research was an implementable strategy, we kept looking at other variables we captured during our data gathering. Cross tabulation of this data led us to uncover an interesting trend that could be used to mobilize more professionals in to setting up their own software businesses.

Please stay tuned for the Part 2 of this article for the details.

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