– Siddhartha Rayamajhi
Overview
Startups are pivotal in driving economic development by generating employment opportunities and catalyzing innovation. As Nepal strives for progress, it’s increasingly evident that a robust policy framework for startups must be anchored with the Knowledge Economy (KE) principles. By grounding the startup policy framework in the KE principles, Nepal can cultivate a conducive environment for startup growth and innovation. The KE framework nurtures growth and innovation and encourages collaboration, knowledge sharing, and continuous learning, laying the foundation for long-term economic growth and sustainability.
Global Landscape on Knowledge-Economy
Advanced economies have consistently emphasized the development of the Knowledge Economy to achieve high-income status. The United States has harnessed innovation to advance its overall economic goals. As of 2021, the United States spent 3.5 per cent (as a share of GDP) on research and development (R&D) activities. Demonstrating a similar trajectory, Japan’s journey in KE growth illustrates rapid advancement alongside other leading nations, with a notable investment of 3.30 per cent of its GDP in R&D. In under two decades, the Republic of Korea underwent an impressive transformation into a knowledge-based economy.
During the 1960s and 1970s, the nation established major public research institutes like the Korea Institute of Science and Technology and the Korea Advanced Institute of Science and Technology. From the 1980s onwards, the private sector took a larger role. Government incentives such as tax credits and import tariff reductions encouraged R&D investment, even among smaller companies, with some SMEs allocating up to 10 per cent of total sales for research.
Finland also transformed from an agriculture-based economy in the 1950s to one of the twenty-first century’s leading innovation-driven, knowledge-based, and high-tech producers. Moreover, Rwanda has leveraged the digital economy for significant economic growth. In 2018, the ICT sector grew by 18 per cent, twice the rate of overall GDP. The World Economic Forum ranked Rwanda first in East Africa for ICT readiness, driven by a government commitment to integrate ICT into its vision of becoming a knowledge-based economy and reaching upper middle-income status by 2035.
National Context
Nepal ranks 101st out of 133 countries in the Global Knowledge Index 2023, signaling a modest performance in terms of knowledge infrastructure. For the fiscal year 2023/2024, the Government of Nepal (GON) allocated NPR one billion in research, innovation, and invention and NPR 1.25 billion to encourage startups by developing incubation centers. However, despite these efforts, the research and invention investment is inadequate. Another significant issue is the process of starting a business in Nepal. It takes an average of 22 days to start a business, which is longer than in other South Asian countries. Similarly, the cost of starting a business is high, constituting 20.2 per cent of income per capita. A past Policy Research Institute(PRI) study shows that 42.9 per cent responded to difficulty in receiving loans, and 58.7 per cent of respondents reported not having adequate funding for start-ups.
The Next Policy Agenda
Learning from the global trends, Nepal must prioritize investing in innovative financing models to bolster startup ecosystems and drive innovation forward. GON should provide economic incentives to drive knowledge-driven entrepreneurship and improve the business environment. This strategic move will pave the way for fostering innovation and competitiveness. Prioritizing investments in technology, especially for high-tech entrepreneurial firms, is crucial to drive innovation. Similarly, GON must improve governance structures to provide economic incentives and institutional regimes (EIR) to set the regulations and institutions. A robust EIR framework is a critical component of an effective knowledge economy. Furthermore, increasing R&D investment as a share of GDP is essential, aiming for at least 1.5 per cent. This heightened investment will fuel sustainable growth and innovation within Nepal’s startup ecosystem, ensuring long-term economic growth.
