Can Pakistan be the next Silicon Valley?

Pakistan can take its cue from the world to develop super-clusters of entrepreneurs and startups. Here's how.
Published June 24, 2016

Adolph Schwimmer — who preferred ‘Al’ over Adolph — sat next to Shimon Peres, who became Israeli president half a century later. Flying over the Arctic tundra, they were heading for Israel. This was 1953. World War II was over but not yet forgotten.

Having previously smuggled warplanes to Israel for the 1948 War, Schwimmer’s mandate was different this time; he was building an aerospace startup in Israel on invitation by David Ben-Gurion, the ‘founding father of Israel’ and its first prime minister.

Schwimmer had previously floated the idea himself but backed down realising he didn’t want any part of Israel’s socialist economics or crony politics. But Ben-Gurion had culled those fears, promising him a private-styled company and zero government meddling.

Originally from California, Schwimmer agreed and relocated to Israel. The aviation company he founded — the Israel Aerospace Industries (IAI) — would eventually be valued at $1 billion upon his retirement thirty years later.

Humble beginnings

In 1939, William Hewlett and David Packard started working in a garage in a sleepy town of California, called Palo Alto.

In 1979, a dreamy-eyed Chen Chunxian returned to China. After visiting Route 128, better known as the Yankee Division Highway and Silicon Valley — and set up the first private entity in China’s now famed tech-hub, Zhongguancun.

Nobel laureate William Shockley moved to Mountain View (located in the San Francisco Bay Area) in 1956 and hired the ‘traitorous eight’, in the bid to commercialise a novel silicon device he had invented, the transistor.

Did any of these pioneers fathom the waves they were going to create through history?

Take a look: Pakistani tech entrepreneur invited by White House

Silicon Valley would later become ground zero for technology, Israel’s economy would blossom fiftyfold in 60 years, and China’s Zhongguancun would emerge as a supercluster of Asia’s leading entrepreneurs. Nowadays, other startup hubs like India’s, Ireland’s and Singapore’s have begun gaining momentum too.

Should Pakistan strive for this club when it remains beset by fundamental issues like inadequate food, water and sanitation?

Read more: Working hard for the money

The century of tech entrepreneurs

“We can’t even make bicycles.” This might sounds like a Pakistani quote, but is actually how most responded to Schwimmer’s IAI pitch in 1951 (bicycle manufacturing was indeed failing in Israel at the time). The IAI would later become Israel’s biggest employer giving rise to an entire industry. Therein lies a point to ponder for Pakistani policymakers.

Extrapolating labour force data shows 100 million Pakistani youth entering the labor force in the coming decades. During the 1990s’ boom — a decade of the longest recorded economic expansion in its history — the United States added 26 million new jobs to its economy.

Now even if Pakistan somehow matches that feat, it will remain short tens of millions more. Graphs are not needed to illustrate how mismatched the Pakistani economy is against the economies of countries it sees as competition, and how we are teetering on the edge of irrelevance.

Unbaked potential and tactical wins don’t undo decades of losing. Ultimately our economic existence – and whether our posterity stands in the poverty line – will depend on our youth becoming job creators instead of job hunters. Ergo, they have to start companies and get really, really good at it.

Moreover, since technological innovation is the core growth driver in the 21st century, policy makers can’t ignore its interplay with entrepreneurship and focus solely on ‘bricks and mortar’. This is the century of the ‘tech entrepreneur.’ Embracing this notion intelligently – by studying others’ successes and mistakes – is Pakistan’s only real option.

India's decade of innovation

When Prime Minister Manmohan Singh took the podium to speak about a new national innovation policy on a sunny morning in January 2013, there had hitherto been no comprehensive government-led focus on innovation in India. Policies of yore never tied knowledge production to commercialisation, leading to innovators unable to make money. So innovation never boomed.

The policy Singh unveiled in 2013 finally took a much-needed holistic approach. The decade leading to 2020 was labeled the ‘Decade of Innovation’, with a central theme of supporting for innovative entrepreneurship. Fragments of the Indian innovation ecosystem were all streamlined for the first time.

There existed within Singh’s policy echoes of the Chinese model. In China, the central government plays a homogenising role to curtail knowledge gaps caused by too much provincial devolution. The thinking is that for the machine to work, every cog must be made to do its part. And while the jury is out on India’s Science, Technology and Innovation (STI) 2013 policy, the success of its Chinese counterpart is readily visible.

Pakistan may be a large country, but in this respect, it must act like a small one, with the central government formulating a holistic and nation-wide innovation policy. Everyone must get on the same page, or else Pakistan will remain stuck as the world pulls away ever faster.

The right ingredients

The consummate failure of 24 government-led incubators gave Israeli policymakers a pause. This was 1991. Over the years, hundreds of start-ups were seeded with up to $300,000, but hardly any ended up successful.

Israeli chief scientist Yigal Erlich — the founding father of the country’s venture capital industry and one of the most prominent figures in the high-tech arena in the past 15 years — later reportedly said: “Every year I reviewed the success of these small companies. It was disappointing. They may have succeeded at research and development (R&D), but most never became growing companies.”

Read next: What is the Pakistani dream?

He concluded that the public sector, lacking venture capital training, wasn’t suited to build proper support and management structures entrepreneurs actually needed. Elrich went on to conceive the now-legendary Yozma program (Hebrew for ‘initiative’).

Under Yozma, the government earmarked $100 million for 10 venture capital funds, including one seed-stage fund. Each fund had a mix of Israeli venture capitalists in training, a foreign venture capital partner and a local investment company or bank. The government injected $8 million for every $16 million raised, retaining 40 per cent stake in each fund. And here was the kicker; if the fund was successful, the government would sell its stake to partners at a heavy discount in five years. The government took on the risk but gave away most of the reward. It was a great deal.

Take a look: How a 26-year-old Pakistani found a multi-million dollar company

Between 1992 and 1997, Yozma funds raised $200 million. And as stipulated, most of these were privatised within the set period. By the time Yozma ended, Israel was second only to the United States in terms of private equity capital invested as a share of the gross domestic product (GDP).

Today, there are 70 venture capital funds in Israel; 14 being international funds with an Israeli office. This is a very healthy per capita number — Israel’s population is eight million. Yozma has been dissected and iterated on by the likes of Japan, Australia, South Korea, Ireland, Russia, Singapore, and Taiwan. It’s a rock star program.

But until home conditions are ripe, a program like Yozma cannot be mindlessly copied and expected to succeed. For instance, most Israeli start-ups target multibillion dollar American market segments. In contrast, most Pakistani start-ups are shut out from the greater regional market, and the local verticals they focus on are not well-established. We’re basically cornered, relegated to the back of the pack.

But can we jump the queue?

China provides a clue. Stanford professor and China expert Chuck Eesley notes how the Chinese government routinely facilitates new entrepreneurs to grow within state-dominated industries, enabling them to land government contracts, incentivising mergers and acquisitions, and providing tax incentives for high growth entrepreneurial firms.

Essentially, Chinese entrepreneurs are being fast-tracked through established local industries the government can assert control over.

Taking lead in Pakistan

The Pakistan government can achieve something comparable by channeling local entrepreneurs into industries it fully or partially controls, for example defence, healthcare, ports, oil and gas, education and governance. These are robust segments. Some big successes can be seeded on their back, making international venture capital sit up and take notice.

One can even align the goals of industry officials involved in those of entrepreneurs via instituting financial incentives for the said officials. China does it too, and thus keeps corruption from bubbling over.

So is the local industry the only anchor for Pakistani entrepreneurship? Perhaps, there’s a way to make foreign inroads, as well. An instructive example is how Israeli start-ups started doing business in foreign markets, such as the United States.

Long before Yozma, there existed Binational Industrial Research and Development (BIRD) Foundation. From 1977 onwards, the BIRD Foundation procured contracts from big American corporations, matching them to Israeli companies. BIRD subsidised 50 percent of R&D and product commercialisation costs incurred by both the parties. It made Israeli services cheaper for the American companies, and American clients highly profitable for Israeli companies — a win-win situation. By 1992, multiple BIRD companies were listed on both the New York Stock Exchange (NYSE) and NASDAQ.

A matchmaking institution loosely based on the BIRD Foundation can probably make inroads for Pakistani entrepreneurs in foreign markets. But will it be as effective, given how terrorism has tarnished brand Pakistan?

Here, too, the Israeli example is applicable! Intifada, war, rocket attacks, a testy neighbourhood — Israel isn’t exactly a paradise of stability. Yet, it has successfully built a counter-narrative that makes its economic growth outshine the violence. How does Israel do that?

Stabilising our ship

Early morning on January 18, 1991, Saddam Hussein fired eight ballistic missiles on Israel, followed by 31 more in the coming days. Many of these so-called ‘Scud’ missiles exploded close to Intel’s manufacturing facilities across Israel (it’s a tiny land of just over eight million people).

At the time, the International Business Machines Corporation (IBM) had begun shipping its ‘80386’ desktop computers, the fastest PCs available. The microchips in these computers were provided by Intel. And Intel, in turn, sourced 75 percent of the required global output from its Israeli facilities. As Israel came under attack, the government announced mandatory closure of all businesses, including Intel’s facilities. So there arose a moment that threatened to derail Israel’s economic growth story and put violence on the front seat.

In Startup Nation, author Saul Singer describes how Intel Israel’s boss, Dov Frohman, realised closing down his factories and missing shipping deadlines would have repercussions far beyond Intel’s stock price. No one would trust ‘warzone Israel’ again. He decided that the only one way to salvage the situation was to not let IBM consumers feel the pinch of the war.

Scuds fell on Israel for several more days but Intel Israel defied the government’s directive of closure and never missed a beat. In doing so, it set a precedent that businesses follow till this day: Israel honours its business commitments regardless of the security situation. This uncompromising core, when combined with intelligent PR and aggressive lobbying, perpetuates the positive perception of Israel’s business environment despite geopolitical instability.

Pakistanis only see the lobbyists and the media outlets, deducing that that’s all there is to it. But the reality is that even the best public relations, the best brand wouldn’t last without a substantive core. Israel’s innovation and ability to deliver is that substantive core; everything else wraps around it and polishes the package.

Explore: Entrepreneurs build brands, not products

This is a blueprint that can help Pakistan get out of its funk too. Effective public relations for brand Pakistan and friendly commercial policies for local businesses feeling the stress of violence will be decisive factors in stabilising the ship.

Fighting the brain drain

Even if meaningful action diminishes the narrative of terrorism, the Pakistani government will still need to fix rule of law. Instability, extortion and crime bring down standards of living, causing smart people to find employment in greener pastures and relocate with their families in tow. Those with the means to flee, flee.

Undergraduate, postgraduate, firstever jobs, mid-career employment — these are all points in a Pakistani’s career when he or she weighs up ways of leaving the country to improve economic outcomes. Remittances are touted as Pakistan’s strength, $18.5 billion in 2014.

But what’s a better keep? Retaining the most enterprising and thoughtful minds or the largesse received in lieu of renting them out to someone else’s innovation ecosystem? Pakistan’s smartest and most enterprising people sending back money from foreign lands is like someone sending a stipend to their ‘simpleton’ village cousin to make his ends meet.

To retain the smartest Pakistanis, a richly-funded, high paying and elite training program can be instituted that polishes them into innovation leaders.

A programme of this sort — called the Talpiot — has already existed in Israel for 35 years — it harnesses human creativity for developing novel military technology. The military service remains compulsory in Israel; out of thousands that are conscripted every year, only the top 45 becoming Talpions. They undergo command experience, elite combat training and engineering studies from Israel’s best university, emerging as innovation leaders with a high tolerance for pressure. Many Israeli companies listed on NASDAQ were founded by Talpions. Overall two-thirds of Talpions end up in academia or in technology companies. A similar programme, tailored to Pakistan’s needs, can help retain the country’s best minds too.

Another concept worth a look is that of ‘brain circulation’. In The New Argonauts, author AnnaLee Sexanian explains how regions are getting ahead in the global economy. Skilled expatriates garner experience in hubs like Silicon Valley, and then return to their roots, bringing all that maturity, contacts and perspective with them. Countries that are incentivising such expats to return — and then empowering them upon returning — are seeing, in some cases, double or triple more economic growth.

In China, the government has instituted the Outstanding Young Scientist Fund, which fits well with the inflated perks Chinese tech giants dole out to lure back executives. India has been taking similar steps to get its own army of smart expats. Israel has a strong tradition of expats returning — in fact, Intel Israel came into being because of a returned expat convincing Intel headquarters to open a facility there.

So although Pakistan isn’t slick enough to tempt foreign immigrants from developed economies, it can at least try to get its own immigrants back. About 13,000 Pakistanis working in Silicon Valley are obvious candidates — their engineering skills as good as any.

Luring back expats is an integral part of the equation but it doesn’t complete the equation. The other part is producing greater numbers of smart people in the first place; exploiting that massive population base.

At all levels, the education system instituted by the Pakistani government relies heavily on rote-learning. That’s got to go. Moreover, the secondary and higher school certificates curriculum promotes convention and obedience at the expense of experimentation or creativity. Guess which of these traits produce innovation?

Unshackling minds

Back in 1955, Silicon Valley pioneers, such as Robert Noyce, Gordon Moore and their temperamental mentor, William Shockley, relocated to what is now Silicon Valley squarely because the bureaucratic, ‘by the book’ East Coast companies didn’t suit them. Likewise, even the Chinese government — a notorious micromanager and paragon of uniformity — has learnt to mind its own business vis-à-vis innovation and entrepreneurship.

Governments that stifle experimentation can’t catalyse innovation — no matter how much money they spend. There’s a wide-ranging case study to support this, i.e., the Arab world. The famed Dubai Internet City — having offices of a third of the world’s top 500 companies situated in its state-of-the-art Michael Porterian business cluster — acts less like a hub where innovation happens, and more like an encampment hosting outside innovators selling their wares to the Gulf Cooperation Council states and India. Though awash with petrodollars, the Arabs of the 20th and 21st centuries have largely failed to produce innovation. Only one Arab, Ahmed Zewail, won a non-political, engineering-focused Nobel Prize for Chemistry 16 years ago.

But even if it doesn’t produce its own, the Arab world has the money to attract the world’s sharpest minds. Because it rarely naturalises immigrants, immigrants cannot own a stake in the culture of the place, unable to contribute to it and help it evolve. At best, most immigrants remain transient travelers who ply their trade, make money and leave. As for the locals, the elite subsidise them through petrodollars, elections are nominal and the governments are not transparent. There is no real space for experimentation, free speech or academic freedom.

In Political Order in Changing Societies, noted author Sam Huntington coined the term ‘King’s Dilemma’ to explain how a ruler seeking economic modernisation is limited by how much he or she can liberalise since liberalisation gnaws away at the ruler’s power base. This remains accurate for the Arabs, especially in a post-Arab-Spring world. Consequently, globally sought after researchers never congregate in enough numbers to any part of the Arab world; not feeling the pull to invest their careers there.

Compare the current situation with the time when the same lands were hot-beds for intellectuals and thinkers and innovators like Omar Khayyam, Ibn Rushd (Averroes) and Ibn Sina (Avicenna) represented an epoch — between 800CE and 1100CE — when the Islamic civilisation was the intellectual centre of the world. It was the era of the Mutasilites (Islamic rationalists).

In The House of Wisdom, author Jonathan Lyons describes how Basra and Baghdad were overrun with scholars studying Greek works of antiquity (Aristotle, Plato, and so on) and fusing them with Islamic principles and understanding. The first degree granting university ever was founded in Cairo. There were big advances in mathematics, biology and engineering. Celestial navigation came of age. The abstract discovery of zero was exploited.

Also read: Pakistan gets smarter

Improving the ecosystem

Legacies lose their meaning if they are not maintained. Most Muslim governments now do not sponsor R&D meaningfully. Pakistan’s R&D expenditure vis-à-vis its gross domestic product (GDP) was 0.33pc in 2011. In per capita terms, it was $2 per person. In comparison, India spent $9 per person (with a population seven times that of Pakistan’s). China, Israel and United States’ expenditures dwarfed Pakistan’s even more.

In similar vein, for every patent Pakistanis filed between 2010 and 2013, Indians filed 12 more. Again China, Israel and the United States dwarf Pakistan’s contribution even more. This is a high-level overview. A closer look at patent utilisation rates and patent quality brings out starker differences.

Pakistan’s low R&D budget is a missed opportunity since commercialised R&D is a significant moneymaker. For example, a patent for inserting foreign DNA into cells brought the Columbia University $790 million. The Hebrew University in Jerusalem earns $60 million in annual royalties through commercialisation of its R&D, whereas products based on the said R&D generate over $2 billion in annual sales. When it’s well-funded, well-staffed and well-planned, R&D becomes a major growth engine.

But where R&D benefits from input of intellectual capital, its facilitation by strong intellectual property, anti-plagiarism and patent laws shouldn’t be ignored either. What legacy will an innovation ecosystem produce if it can be easily gamed by con artists?

One of the heads of a big Pakistani public university was recently found to have plagiarised his PhD thesis. This is how rewarding plagiarising had been for him; a career spanning 35 years, leadership position in a leading public university, a Sitara-i-Imtiaz (the Star of Excellence) awarded by the government. Pakistan needs policy and executive overhaul that ensures rewards are reaped by true innovators, not imposters. These laws, when botched, pollute the entire ecosystem.

An example of a slightly different facet of the same ecosystem anomaly is China. Although Chinese patent laws were formed by 1984, enforcement has remained erratic. Stanford Professor and China expert Chuck Eesley characterises how Chinese courts are wobbly in adjudicating cases involving intellectual property disputes or patent infringement. This forces entrepreneurs to nurture a relationship with economic elites as an alternative way to defend against opportunistic behavior. Consequently, the Chinese economy continues to be run patrimonially — a private system subservient to government bigwigs.

Patrimonial systems empower the elite to force outcomes that promote their personal objectives. And where these objectives diverge from the state’s goals, opportunity arises to game the system and supplant the said state’s goals. Ultimately, any economic system with loopholes like these is usually gamed. Having felt the pinch with a slowing down economy, China’s ongoing crackdown on corruption is a bid to purge the gamers.

Where's the money?

In Pakistan where the economy is yet to take off, streamlining incentives through thoughtful policymaking and enforcement is going to be a transformational step. Will it be enough to attract international investors?

That depends on how fast Pakistan produces wins. Ecosystem improvements are powerful but they take time. International investors care about macro fundamentals, yet quick wins catch their attention too. E-commerce can be the vertical which produces those first few quick wins, sparking investor confidence in Pakistan.

By and large, Pakistanis are price-sensitive. Therefore, they’ll give e-commerce a shot en masse if it’s cheaper than real-life shopping. Government subsidies can facilitate that by removing delivery costs from the equation altogether. It’s like a dating service bringing together neophyte Pakistani online shoppers and local e-commerce companies by subsidising the cost of the date.

Moreover, following up on the Pakistan Telecommunication Authority’s successful 3G auction, Pakistan will do well to bring it’s whole populace to the Internet — handing them a subsidised smartphone if need be, and utilising digital literacy drives to speed up onboarding. This measure will greatly increase the ‘total addressable market’ for Internet-based innovations in the country. It could jumpstart its e-commerce in a big way.

Pakistani e-commerce has lots of low-hanging fruit, a big chunk of which is being farmed by a German Internet company called Rocket Internet, providing hands-on business training, and 0-2pc equity plus salary to ‘founders’ hired from the host country (all profits are repatriated to Berlin).

For Pakistan, it makes more sense if it does all this indigenously and keeps all of the value generated and creates some local entrepreneur rock stars in the process.

Venture capitalists follow the money trail; this can show them the money. The first big exit would create a domino effect for innovation in Pakistan.

Explore: Careful incubation and encouragement must for start-ups

A moment of miracles

There are some moments that change the stories of societies that witness them. The world takes years to see visible changes but for the men and women who experience such a moment first-hand, it is instantly evident that nothing will ever be the same again.

In 1957, Silicon Valley wasn’t born yet. Then two things happened. One, eight of the smartest minds from pioneering semiconductor startup Shockley Labs quit for setting up their own venture, Fairchild Semiconductor (the precursor of Intel). Two, America had its Sputnik moment when the Soviet Union overshadowed America’s global standing by launching the first-ever satellite, Sputnik 1.

In the aftermath, Pentagon’s defense spending yielded a semiconductorboom, the National Aeronautics and Space Administration (NASA) and the Apollo shuttle program were launched, and commercialised discoveries gave the world telecommunications avionics, the Internet and the birth of Silicon Valley.

A similar moment came for Israel in 1969 when France embargoed the sale of 50 Mirage aircraft Israel had already paid for. This led to a national consensus around self-reliance that eventually spurred R&D around avionics, communications and optics and voice recognition.

India’s moment was a triple crisis in 1991. An economy unable to finance even three more weeks of imports, the implosion of the primary Indian export buyer (the erstwhile Soviet Union), and the United States-led invasion of India’s primary oil supplier (Iraq). The Indian government was forced to airlift 67 tons of its own gold to Europe to procure an International Monetary Fund (IMF) bailout. Wide-ranging economic reforms followed this ignominy. India hasn’t faltered since. Is Pakistan still waiting for its miracle moment?

Explore: Where does Pakistan stand as India chases digital dreams?

In search of Meta ideas

With 100 million Pakistanis joining the labor force in the coming decades, Pakistan cannot afford to wait. Economist and thinker Paul Romer advocates a spectacular idea of countries building entire startup cities to fast-track reform. At the core of this thesis is his prediction that like previous centuries, the 21st century’s economic powerhouses will be those which implement the best idea that improves the spreading of ideas generally. Ergo a Meta idea.

Plato’s Academy and Aristotle’s Lyceum are notable examples of Meta ideas from the ancient times. In recent centuries, maturation of intellectual property laws and formation of research-oriented universities were Meta ideas that propelled innovation. Now in the early 21st century, compelling new Meta ideas are incubators, Google’s 20pc time, Rocket Internet’s startup factory-like model, programs like Israel’s Talpiot and Y Combinator’s experiment to create a hybrid incubator-university.

Pakistan needs to test lots of Meta ideas and discover quickly what works for it. This is above and beyond the basic blueprint which, to reiterate, includes introducing an experimentation-friendly curriculum, brain retention and circulation programs, safe passage for entrepreneurs in government-influenced industries, polishing brand Pakistan, improving the total addressable market, setting up professional venture capital and protecting intellectual property rights. Fixing an entire ecosystem requires fixing every layer of the system.

In the recent years, government-backed initiatives like Plan9 Technology Incubator and PlanX Technology Accelerator have had a ripple effect on the start-up culture, encouraging other private incubators to be established. Their model, tailored to local needs and cultures, draws inspiration from the Silicon Valley with the hope of creating an ideal space for local start-ups to build, connect and grow.

Take a look: Karachi’s tech incubator aims to help start-up community

The substantial impact of these initiatives has been the increased awareness of startups in a society where business has largely held an archaic definition. Young people are now more curious and willing to experiment with their own start-ups. However, there is still a long way to go regarding understanding and implemention of start-up culture while a more active role of universities, tech industry and the business community is required.

By their very nature, technological innovations are non-linear. When they work, they shoot to the stars. So once Pakistan perfects its meta-ideas, it will shoot up faster than it can collectively imagine. But the flip side is that if it’s left behind, Pakistan’s gap with competitors will increase exponentially, relegating it to oblivion. Future generations will look back and wonder what could have been done but wasn’t.

The competition never sleeps. Pakistan shouldn’t either.

This piece first appeared on MIT Technology Review Pakistan and has been reproduced with permission.

Hassan Baig is Duke University and LUMS alumnus. He is a serial entrepreneur and currently runs ClubInternet, a company bringing ‘the next billion’ online.