14 July 2018

Ethiopia: Encouraging Startup Companies for Economic Development

Startups as the golden standard for economic development in Africa - is it a myth, or does it have a chance to become a reality? In the past 5 years, the world has been a witness to the booming startup economy in the developed world. Dozens of successful startups, from Airbnb to Uber, have grown to become multibillion dollar companies. This rise of startups is a logical extension of the learning and knowledge economy, where creative and innovative ideas become the main strategic advantage for small businesses. Startups come to replace larger companies and even government institutions while closing the existing product, service, and need gaps. For many "fresh" businesses, Ethiopia is an uncharted territory. Ethiopia has some remarkable startup companies and has even launched a startup academy for new entrepreneurs. However, these efforts are still too fragmented to create a startup economy - Ethiopia needs a new government policy to foster the growth of effective startups in future.

Startups represent a new standard of economic development in the 21st century. For decades, developed economies promoted an idea of small and medium businesses as a foundation for continuous economic growth and prosperity. Startups have become a new form of doing business in the global world where technologies, information, and continuous learning define the success of even the most ambitious enterprise. The global market has become too competitive and saturated. Only the most innovative and creative business projects have a chance to survive this harsh competition. Countries like the United States have already realized the dramatic potential of startup companies, providing policies that can harness the advantages of a startup economy and make these benefits available to everyone.

The US is fairly regarded as one of the world's most technological and business-oriented economies. It means that the US: (1) fosters the development of advanced technologies; and (2) creates policies and strategies to facilitate the creation and subsequent expansion of tech startups. Of course, American startups are not simply about technologies. By the end of the second decade of the new millennium, they have become virtually omnipresent, affecting each and every sector of the American economy. Square, a business payments startup, and Total Quality Logistics, a transportation and logistics startup - these are just some examples of the successful startup companies that have become the headliners of small business growth in America.

Fairly speaking, every big company has once been a small startup. This is why many countries adopt a forward-looking stance and develop policies to facilitate the integration of startup companies into their economies. This is what happened in India, a country that has recently drawn its political fame from implementing the Startup India Action Plan. It is a policy framework aimed to help new startups in India become profitable enterprises. "Under this plan, new startups in India can avail of regulatory and tax benefits, capital gains tax exemption, as well as access to government funding if they fulfill certain criteria", according to India Briefing. It is an ambitious and bold attempt to turn startups into a powerful driver of economic and technological development in India. Unfortunately, the initial results of the Indian startup policy are unsatisfactory - 80 percent of Indian startups say that they have not benefited from it in any way, Mugdha Variyar says. Of more than 5,000 startups officially registered in India, only 70 have received tax benefits, according to Variyar. Thus, a successful startup economy is not simply about having a comprehensive government policy; it is about how well this policy is to be implemented.

Ethiopia is an uncharted territory for many startups and small businesses. As an emerging and rapidly growing economy, it provides ample opportunities for creating successful business startups. 2017 became a triumph for several Ethiopian startups that were planned to participate in Seedstars - the global forum for technology startups in emerging markets, a 2017 IT News Africa article states. The fact that the forum was held in Addis Ababa says it all: Ethiopia is viewed by many as a prospective field for creating and growing businesses. Added to this was the creation of a Startup Academy in Ethiopia, exposing investors and business owners to the advantages of the startup ecosystem in the emerging African markets.

However, these efforts to launch a startup economy in Ethiopia are just too fragmented to produce any systemic improvements in this field. In this sense, Ethiopia is no different from India or the US that have well-designed startup policies and provide formal government support to businesses. The Ethiopian government can follow the Indian suit and create a platform for business startups.

Ethiopian startups need several things to thrive: (1) transparent and easy taxation mechanisms; (2) minimal government involvement in business operations; and (3) access to infrastructure. Such policy will signify a new stage in the evolution of Ethiopian startups and create a sense of confidence among Ethiopian and global investors. It will provide a framework for managing startup operations while ensuring that startup companies serve the needs of Ethiopians, by creating new jobs and contributing to sustainable community development in the country.

Ed.'s Note: Samuel Alemu is a partner at the ILBSG, LLP. His partner at the ILBSG, LLP, Praveen C. Medikundam, contributed to this article. They are both admitted to the bar associations of New York State, United States Tax Court, and the United States Court of International Trade. Samuel can be reached at salemu@gmail.com.

Contributed by Samuel Alemu

Ethiopia

China's Reprieve On Interest-Free Loan Only

It has come to the attention of Addis Standard that China's pledge to write off Ethiopia's debt is related only to… Read more »

See What Everyone is Watching

Copyright © 2018 The Reporter. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.