CHALLENGES FOR LOCAL ENTREPRENEURSHIP IN SMALL ISLAND ECONOMIES:A CASE FOR ANDAMAN & NICOBAR ISLANDS

TEPE 2018 FINAL PAPER PROPOSAL SUBMISSION

CHALLENGES FOR LOCAL ENTREPRENEURSHIP IN SMALL ISLAND ECONOMIES: A CASE FOR ANDAMAN & NICOBAR ISLANDS OF INDIA Ankur Podder podder@mit.edu Harvard Business School, USA May 2018

1. Introduction The primary research question is: what are the challenges that local entrepreneurial efforts face in small island-economies? While this is the broad inquiry that the paper intends to perform and attempt to answer, it situates itself in a contextual case of Andaman & Nicobar Islands, located in Bay of Bengal. The group of islands are Union Territory belonging to India. Through the lens of ongoing events surrounding future sustainable pathways for Andaman & Nicobar Islands and the need for escalation in local entrepreneurship to support them, the paper suggests an analytical framework based on various theoretical evidences and empirical models that have been put forward in respect to small island-economies. The motivation behind considering inquiring into entrepreneurial activities and their effects in small island-economies germinates from experience of the author when residing in Andaman & Nicobar Islands. The islands are home to the author and thus, this paper would be majorly a personal undertaking and of immense selfindulgent value. Furthermore, the author is involved in various projects related to the future of islands and self-sufficient urban models for island-states. The paper proposal and subsequent research on the same would directly feed into the author s upcoming obligatory thesis project on island urbanism.

The research question also stems out from the author s reading of a range of working papers and published papers (as part of TEPE 2018) on entrepreneurship and its implications on developmental economics. One of the crucial understanding shaping the formulation of this paper proposal was that familyowned small and medium enterprises (SMEs) dominate local markets and they

seldom can be deemed as entrepreneurial activities. This is a predominant case in small island-economies (Haskins. J, 2012). Several other reasons make Andaman Islands the perfect testing ground for such a broad inquiry. As an introductory overview - the islands are urbanized, have high literacy rates, lack vital infrastructure and their dependence on mainland India (especially aidbased) predicts an unsustainable future that heavily relies on tourism industry.

Due to lack of lucrative job options in the islands, local talents (especially youth) have been susceptible to emigration. While local enterprises, mostly in the tourism industry, prolifer to an extent, there has been dearth of entrepreneurial activities that can move into other more important sectors as such an intent faces challenges aplenty. That being said, projects like smart city project and sustainable tourism project are being implemented by the government with minimal contribution from the local community. Several other small islandeconomies across the world can fit into this description. Thus, the paper proposes to draw evidence-based methodologies to attack the problem of lack of local entrepreneurship in small island-economies.

While this proposal throws light upon various literature surrounding entrepreneurship in island-economies, it also puts forward some empirical strategies that the paper would benefit from. The research question could be further decomposed into two parts: i) what are the barriers to entry for local entrepreneurship in small island-economies? and ii) what are the factors that hinder growth of local entrepreneurs in small island-economies?

2. Literature Review The paper would review the limited literature on entrepreneurship in small island-economies, from around the world. The methodology of building this literature library is by situating the dialogue at different contexts and deriving

learnings from it. By looking at these examples squarely, the approach is better suited.

2.1. Pacific Islands In the late 1980s, a pioneering study was undertaken into role and economic contribution of entrepreneurs in the Pacific region, the largest group of small island-economies in the world. Coordinated by the East-West Center at Honolulu, Hawai i, this research delved into the challenges of entrepreneurship and small business development in a number of Pacific island countries, providing some insights into the operational problems faced by indigenous entrepreneurs, their performance and factors contributing to their success or failure (Fairbairn, 1988). For many Pacific island families, informal sector s activities is the only source of cash income, employment, and avenue for participating in the cash economy. To some extent, too, informal trading has served as a training ground for would-be entrepreneurs and a means of maintaining traditional skills, as in the case of handicrafts (Dunlop, 1999).

2.2. Caribbean Islands Studies on entrepreneurial motivations conducted in the Caribbean and globally, have considered factors such as parents occupations, business ownership by parents or relatives, sex and ethnicity. The Entrepreneurial Motivations of Engineering Students: Case of a Small Island Developing State from the Caribbean focused on the entrepreneurial motivations of more than 200 engineering students and recent graduates in Trinidad and Tobago (T&T), to gauge whether, among this group, some of these traditional factors are associated with higher order or pull entrepreneurial motivations such as taking advantage of market opportunities, the need for control and independence, and desire for a

challenge (Benjamin C.T., 2017). This literature points out that entrepreneurial motivation was, however, significantly correlated with birth order and experience running or assisting in managing a business. Further studies were proposed to better understand the factors which could affect the entrepreneurial intentions or behaviour of engineering students and graduates.

2.3. European Islands The NISSOS Project is a study of successful small-scale, export-driven manufacturing from five European island regions (www.nissos.net) and on the economic development of these island territories—Åland (Finland), Iceland, Malta, Saaremaa (Estonia) and the Scottish Isles. Furthermore, The first Smart Islands Forum , a specialised conference on sustainability, was held in Athens from 21 to 22 June 2016. Over 40 island experts from 13 different European countries participated. The outcomes are compiled into Smart Islands Projects and Strategies Issued from the 1st European Smart Islands Forum, June 2016, Athens, Greece . All these island territories are today either full members of the European Union or of the European Economic Area. Yet, as with their Pacific island counterparts, extensive intrapreneurship was common in all island locations, with would-be entrepreneurs spending considerable time incubating and perfecting business ideas slowly and patiently in the context of employment or with the support of their former employer.

2.4. Andaman & Nicobar Islands of India Due to the lack of literature connecting local entrepreneurship to development of Andaman & Nicobar Islands, the paper aims to assert, based on a prime literature, the importance of the issue. Mega Tourism in Andaman and Nicobar Islands: Some Concerns by Sunita Reddy highlights it is worthwhile to take stock

of the current ecological state of the islands, socio-economic and demographic profile of the people living in these islands (Sunita Reddy, 2007). The body of work questions on how far these islands can take the possibilities and pressures of tourism, by putting forward the vitality of carrying capacity . One can notice similar trends in small island-economies like Seychelles (Wilson, D., 1979).

Philpot, Grey and Stead (2015) who studied Seychelles as a SIDS, did another study of a particular small island developing state (SIDS). Globalisation, tourism (transborder movement of tourists), transborder capital movements, rapid transference and adoption of institutional design and policies from some countries to others – influences on small states. Nevertheless, tourism, due to its specificities, also can have negative characteristics on economies, which are too dependent on it.

The evident learning from the literature review points at the following: 1) Resource-dependency is a major barrier to entry 2) Lack of accessibility to basic infrastructure hinders growth 3) Permanent emigration of local talent lowers possibilities of local entrepreneurship driven by highly motivated people

3. Institutional Background The paper proposes to highlight a mainstream theoretical model called the MIRAB model of Pacific island micro-economies that was developed in the mid-1980s by the New Zealand economists, Bertram and Watters, and dominated the literature on the economics of small island nations and economies until alternative models were proposed two decades later. MIRAB is an acronym for migration (MI),

remittance (R) and foreign aid (A) and the public bureaucracy (B); the main components of the MIRAB model. The nature of this model is explained and the importance of distinguishing between the two processes involved in it (one based on foreign aid and the other on overseas remittance) is emphasised. While the model points out to a lot of important issues surrounding the current state of small island-economies, it leaves no scope for the local entrepreneur to contribute as the model, by its very nature, is follows a top-down predicament of small island-economies.

From a more bottom-up approach, one can identify why building the stock of entrepreneurs and entrepreneurial skills represents a vital challenge for small island-economies. The life-histories of the inhabitants of small islands reveal a complex juggling of the pros and cons of home and away and they demonstrate an uncanny skill repertoire in the economies and temporalities of scope which include entrepreneurship, flexible specialization, public sector employment, and stints abroad. Occupational multiplicity is a natural survival strategy assumed by individuals or households in small-scale settings (Comitas, 1963: 41).

Khadan (2016) argues, the current entrepreneurs are not suitable for the task of economic diversification, citing factors such as the age of the enterprises, structure, family ownership, lack of innovation and poor export readiness, as responsible. Entrepreneurial motivation is important because it influences the type of enterprise formed, its sustainability, and potential for growth and impact.

A comparison of the

push

vs

pull

factors which motivate potential

entrepreneurs is therefore imperative. Individuals sometimes start a business because there is no other way of adequately meeting their financial needs (Mohan, Strobl, and Watson, 2017 and Dawson and Henley, 2012). The paper identifies these generic models aligning with the case of local entrepreneurship in small island-economies too.

Motivational factors of Entrepreneurs Source: Adapted from Dawson and Henley (2012)

4. Data The paper would benefit from studies surrounding small island-economies, especially when deriving data pertaining to our two main categories of exploration - resource dependency and emigration of youth. The following subsections present data being used as a point-of-entry towards answering the research question. Similar datasets can be found pertaining to Andaman & Nicobar Islands through Registrar General and Census Commissioner of India and The World Bank.

4.1. Dataset to explore challenges due to Resource-Dependency One of the main intentions of the proposed paper is to study the research hypotheses empirically, by comparing the role of natural capital in the Andaman

& Nicobar Islands, as the islands are dependent on natural resource exports or tourism.

As the goal is to study the empiric effects of natural capital, the paper would include the variable Gross Value Added (GVA) as a proxy variable for natural capital. Further, as the proxy variable for economic growth, the paper aims to standardly account by measuring the inflation adjusted Gross Domestic Product (GDP), while for measuring political stability we use two variables constructed by Kaufmann, Kraay and Mastruzzi (2010). There is generally limited data available for Andaman & Nicobar Islands and other small island-economies, which might be represented as a significant research constraint.

The goal using this dataset would be to study whether natural capital causes negative impulses in these variables, thus creating the forefront of what is variously known as the resource curse (Kurecic, P., 2017) 4.2. Dataset to explore challenges due to Emigration of youth Emigration of youth is vital to lack of local entrepreneurship to a great extent because of lack of awareness in local institutions regarding the value of entrepreneurship, and is less lucrative in contrast to an education with exposure to entrepreneurship somewhere away from home.

To understand this, the paper proposal points to a study that was conducted between October 2015 and March 2016 and involved 250 respondents who were citizens of the Small Island Developing States of the Caribbean and current students or graduates of engineering programmes in two T&T universities, namely, The University of the West Indies, St. Augustine Campus (UWISTA) and The University of Trinidad and Tobago, O Meara and San Fernando Campuses

(UTT). The participants had graduation years ranging from 2010 to 2019. This study was an exploratory study which is really the first part of more extensive research on the potential for engineering entrepreneurship in the SIDS of the Caribbean and the Pacific Islands. (Benjamin, C.T., 2017). The dataset generated from this served as the foundation for their empirical study.

5. Empirical Strategy The paper proposes an empirical approach based on Vector autoregression (VAR).

As a starting point towards developing a more robust empirical strategy, this section points at a proof-of-concept through evidence of a similar empirical approach.

The VAR framework is described by the following basic equation:

To use this framework, the paper aims to first enlist and extract data from selected small-island economies (including Andaman & Nicobar Islands). The goal would be to study the empiric effects of natural capital. The dataset for variable Gross Value Added (GVA) of Andaman & Nicobar Islands is to be sourced, and used as a proxy variable for natural capital. The other selected islands datasets would be sourced accordingly. These datasets could pertain to emigration and entrepreneurial pedagogy too.

From this basic equation, the only difference which exists is viewing the differences of GS on various dependent variables, meaning that not only the relevance of natural capital on GDP is tested, but also the variables which account

for other factors, like emigration of youth. In order to test these relations, Impulse Response Functions (IRFs), would be used. This form of analysis will allow the paper to test the impact of change of one of the variables on the dependent variable, with the assumption that the level of the other variables are held constant (Kurecic, P., 2017).

The preliminary hypothesis is that through these IRFs, the paper will manage to prove both a direct link (an adverse impact of natural capital on GDP) and an indirect link where natural capital has a long-term negative impact on other factors (Kurecic, P., 2017), like emigration of youth in this paper s case.

6. Conclusion With the defined framework, the immediate future work would include sourcing the datasets and performing quantitative research in the Andaman Islands. This stage would also involve sourcing a wide range of readily available datasets of other small island-economies (especially Pacific, Caribbean and European). A further stage would involve performing the analysis using the defined VARframework. Expanding the scope of this analysis beyond the paper being proposed, the results would serve as critical evidences upon which the author would formulate a futuristic thesis proposal that encourages entrepreneurship in small island-economies so as to render them resilient, sustainable and selfsustaining.

7. Acknowledgement I would like to thank Prof. William R. Kerr for giving me the opportunity to pursue the central idea of my paper proposal and having a worthwhile discussion with me that set me on the right direction towards it.

8. References 1. Haskins, J. (2012). Building Resilience in Small Island Economies: From Vulnerabilities to Opportunities. CTA Policy Brief, (8).

2. Fairbairn, T. I. J. (1988). Introduction to entrepreneurship in the south pacific. Island Entrepreneurs: Problems and Performances in the Pacific, 227-242.

3. Baldacchino, G., & Fairbairn, T. O. I. (2006). Entrepreneurship and small business development in small islands. Journal of Small Business & Entrepreneurship, 19(4), 331-340.

4. Benjamin, C. T. (2017). The Entrepreneurial Motivations of Engineering Students: Case of a Small Island Developing State from the Caribbean. West Indian Journal of Engineering, 40(1).

5. www.nissos.net (The NISSOS Project) 6. Smart Islands Projects and Strategies Issued from the 1st European Smart Islands Forum, June 2016, Athens, Greece 7. Reddy, S. (2007). Mega tourism in Andaman and Nicobar Islands: some concerns. Journal of Human Ecology, 21(3), 231-239.

8. Wilson, D. (1979). The early effects of tourism in the Seychelles (pp. 205-236).

Oxford University Press for World Bank and UNESCO..

9. Philpot, D., Gray, T. S., & Stead, S. M. (2015). Seychelles, a vulnerable or resilient SIDS? A local perspective. Island Studies Journal, 10(1), 31-48.

10. Bertram, G., & Watters, R. F. (1986). The MIRAB process: Earlier analyses in context. Pacific Viewpoint, 27(1), 47-59.

11. COMITAS, L. (1963). Occupational Multiplicity in Rural Jamaica Symposium on Community Studies in Anthropology, Proceedings of the 1963 Annual Spring Meeting of the American Ethnological Society.

12. Khadan, J., & Ruprah, I. J. (2016). Diversification in Trinidad and Tobago: Waiting for Godot?.

13. Mohan, P., Strobl, E., & Watson, P. (2017). In-Firm Training, Innovation and Productivity: The Case of Caribbean Small Island Developing States. InterAmerican Development Bank.

14. Dawson, C., & Henley, A. (2012). Push versus pull entrepreneurship: an ambiguous distinction?. International Journal of Entrepreneurial Behavior & Research, 18(6), 697-719.

15. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). Response to What do the worldwide governance indicators measure? . The European Journal of Development Research, 22(1), 55-58.

16. Kurecic, P., Milkovic, M., & Kokotovic, F. (2017). An Introduction to Empiric Approach to the Resource Curse Phenomenon in Small Island Developing States (SIDS). Economic and Social Development: Book of Proceedings, 362.