According to Wikipedia, “A startup ecosystem is formed by people, startups in their various stages and various types of organizations in a location (physical and/or virtual), interacting as a system to create new startup companies.”
Besides the entrepreneurs who start the startup, the startup ecosystem consists of various stakeholders, incubators, accelerators, service providers, educational and research organizations.
Politics brings a lot of changes in the country and these changes directly or indirectly affect the world of startups and entrepreneurs. Here are 20 ways politics affects the startup ecosystem:
1. Taxation
Tax plays a huge role in a startup ecosystem. Policies to increase the income tax will leave the consumers with less capital to buy products/services from businesses. As a result, there is a reduction in the level of investment due to less expectation of fewer sales.
An increase in VAT will mean consumers have to pay more for the goods which reduce the buying power of citizens in the country. It also leads to inflation which affects startups’ costs.
It can directly affect the startup company as they have to figure out the tax procedure. Generally, young entrepreneurs running startups don’t have a good idea about tax-related issues and suffer a lot. A good government controls the taxation systems of a country so that it supports the startup ecosystem. Many governments are also providing a certain level of tax exemptions for growing startups which encourages entrepreneurs to open startups.
2. Provision of Loans / Incentives
Providing loans to startups by the government can help them get off their feet. When good policymakers are in the power, they can make policies to provide loans for 0% or less interest to startups.
Policies to simplify the loan-taking procedure can also be made possible for startups. Simpler loan-taking procedures will encourage more people to open startups.
3. Funding Startups
Suitable policies for creating an environment for investors to invest in a startup will help startups get funds easily and flourish the ecosystem.
Governments can even fund their country’s startups by injecting venture capital using the same instrument as the private market. For example, Taiwan offers funds at starting phase of startups for preferred stock.
Lack of funding to startups due to incompetent political leaders will damage the startup ecosystem.
4. Employment Laws
Startup and resources needed for startups need the hiring of people and employment laws affect the hiring process. It determines an employee’s rights regarding hiring, wage and benefits, eligibility for overtime pay, discrimination, family and medical leave, termination, and more.
Employment laws that make hiring easier can create a good startup ecosystem whereas the reverse is also true.
5. Run Startup Incubators
Startup incubators are non-profit programs designed to help new startups by giving them office space, legal counsel, and network councils. This makes it easier for the startup founders to push through that initial stage of creating a successful startup.
When good parties/ leaders come to power, the government can establish these incubators to help the startup ecosystem.
6. Social Stability
Social stability supports innovative and creative thinking in people. It allows individuals to innovate and use their time to make these ideas come to life through startups. Younger people can study, learn and ultimately get into the development of new ideas. Various service providers and resources required for startups are also available.
When good policy-makers are in power, there is peace and social stability in the nation which ultimately helps the startup ecosystem.
7. Consumer Attitudes and Buying Decisions
When certain policies are made, the consumer’s attitude changes along with their buying decisions. For example: If a political party coming into power decides to raise taxes on a specific product required for a startup company to run, the consumer may start to buy other companies’ products. This is just a simple example while there are a lot of possibilities of policy changes that may favor or affect a startup company.
8. Demographic Insights
When a ruling party is decided, the demographic of a country can be estimated. E.g., A country that elected a liberal leader shows that the country consists of a bigger population of liberals. Startups which target the liberal mindset are likely to grow in this type of country.
The startups can gain insight into the demographic from the leader and target the spotlight demographics to prosper.
9. Social instability
On the other hand, social instability causes wars and disputes. It doesn’t allow creative and innovative thinking. Also, it affects the education system and young minds cannot even function properly in a chaotic environment and hence the production of enthusiastic entrepreneurs also reduces. Also, the startups are not given priority as all the money and focus from the government goes towards solving social issues.
When people in power cannot manage these disputes or cause wars, the startup ecosystem along with other ecosystems of a country is bound to collapse.
10. Foreign relations
Startups that target to foster their business internationally will benefit when people in power can make good foreign relations. For example, Due to the war between Russia and Ukraine, foreign relations of Russia with other countries have been bad lately. At this point, the possibility of Russian startups being able to target the consumers in those foreign countries is very less to none. This hugely affects the profitability and sustainability of startups.
11. Interferance In Business
Every budding startup starts with a new energy and fresh, innovative and creative ideas but the startups only thrive if government rather than interfering acts as a catalyst to help grow the business exponentially. As rightly pointed out by Piyush Goyal that less the interference by government the more chances a business has of succeding.
Statistics have shown that frequent intervention in startups drastically decreases their innovation and performance lowering the potential of the startups. Hence startup ecosystem don’t thrive where government constantly interfere in the business.
12. Establishment Of Innovation Centers
Policymakers who want to support startups can create government-funded innovation hubs that make people attracted to innovation. It cultivates the right environment for growth.
Some features to include in a good innovation center would be to provide free internet facilities and computer resources, labs for research, subsidies for rents, and so on.
13. Production of Quality Manpower
Policies made to support the production of quality manpower will help the startup ecosystem. Manpower that can create and innovate is required for running startups. This manpower can be produced by providing quality education along with hands-on training and opportunities which is possible if the policies favor quality education for young children.
14. Infrastructural developments
Big projects like the building of hospitals, roads, schools, training centers are possible through funding from the government. When government funds these infrastructure development projects, it indirectly or directly affects the startup ecosystem.
The startup ecosystem consists of people who are directly benefitted from infrastructural developments. Having access to proper health care, education, and transportation facilities makes people of the country have a quality life and promotes innovative and creative thinking.
15. Entrepreneural Culture
A place where problem-solving, innovation, and risk-taking are encouraged is the place where entrepreneurs and startups thrive. A nation that has entrepreneurship-friendly policies gives rise to new and young entrepreneurs with innovative and visionary ideas.
The government can play a critical role in developing an entrepreneurial culture to motivate citizens to work hard and take risks to excel economically.
16. Attraction of Foreign Investments
The government can attract foreign investments by making good trade policies, improving logistics and trade facilitation. The FDI (Foreign Direct Investment) depends partially on the business and its business model but relies a lot on the politics of the country.
A country that has laws that support entrepreneurs, a lower tax rate, good infrastructure of the network, and transportation attract foreign investors like a magnet. The startups in such countries flourish within no time and scale nationally and internationally.
17. Stability of Government
The statistics over the years have shown that investors look forward to investing in a country that has a similar or more promising environment than their own country. Venezuela, Yamen, Haiti are examples of countries where investors avoid investing because of political instability, corruption, and crimes.
Investing in startups of such countries is a high-risk low reward for the investors. Investors are hesitant in investing in startups although it has high potential.
18. Legal Support for Patent Filing
Patenting is important for inventors to safeguard their inventions and prevent others from using them. In countries like Maldives and Eritrea that are no patent laws, there is a high chance that a large organization will take advantage of your invention, will execute your idea on a large scale, and take the majority of the market share.
It is very tough for a startup to emerge and sustain itself in a country without proper patenting laws.
19. Proper Security System
The startup ecosystem and enterprises only flourish when the policies of a country ensure the security of a business. If the country provides proper security for entrepreneurs and their businesses, they become creative and innovative. They can fearlessly grow the business and attract foreign investors.
Policies to protect entrepreneurs are vital for the growth of startups in any country. The sense of security also gives startups owners the confidence to take risks and makes them inventive and imaginative.
20. Quality Of Life
Businesses in cities and metropolitans have a competitive edge over a business in rural area the reason being difference in quality of life. The quality of life of people an area greatly affects the startup ecosystem there. A startup at a place with low QOL will most certainly fail if it sells products or services that goes beyond the need of human and target the desire which lie in the upper level of Maslow’s hierarchy pyramid.