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Jun 07, 2020 PRINT EDITION

How digital start-ups are shaping foreign direct investment

 With the advent of the digital age, start-ups are shaping people’s lifestyles now. 
 The aim of a start-up is to
Updated October 10, 2019
  • With the advent of the digital age, start-ups are shaping people’s lifestyles now.
  • The aim of a start-up is to present an innovative product as well as fulfil a need that was previously unmet.

Due to the technological revolution that has raged with unprecedented gusto over the last decade or so, the digital world has wielded a definitive influence on the workings (and outcomes) of the global economy as well. Previously, every country maintained clear-cut categories of indigenous, imported, and exported goods and services. And the economists, with the help of simple statistics, were easily able to calculate the inflows and outflows of their respective polities without needing recourse to much complicated analyses.

From Adam Smith to Mark Zuckerberg: How has the digital age affected economics?

The advent of internet and the globalisation which took place as a result of the digital boom completely transformed the global economic principles; with more and more businesses entering the market every single day. Many of these companies operate on the digital sphere, but have their operations in multiple countries across the world – something which has facilitated an upward trend in the economic statistics of the world, particularly foreign direct investment. The start-up culture has further accelerated this global economic growth, since different start-ups attract investment from all over the world. Most of these companies have their headquarters situated in countries other than the ones they operate from.

In addition, regulations and economic principles (which have made great strides forward since the time of Adam Smith) still have a long way to go before they catch up with the technological world; where capital generation takes place in quite unique (and interesting) ways. However, whatever income is generated does have a positive impact on the economy, as it promotes development and progress in the country. Many tech companies are now worth much more than the companies dealing in conventional goods. For example, Facebook’s market capitalisation (as of October 9, 2019) was valued at a staggering USD 507.11 billion on NASDAQ.

The concept of venture capital firms has added to the complications. These are firms which specialise in building high-risk financial portfolios, and invest in various start-ups. Most of these organizations have become a source of foreign direct investment, especially for developing countries.

A changing world: How do start-ups become part of the global economy?

With the advent of the digital age and easier access to the global market, start-ups have become more than just a buzzword in the tech industry and are shaping people’s lifestyles. Companies such as Uber and Airbnb had humble beginnings, but eventually transformed into corporate giants; with presence and offices in hundreds of cities. These organizations serve as the blueprint for success when it comes to start-ups, and have had a massive cultural impact as well.

Their operations have even affected legislation in various countries, as the ideas they presented were quite new in this changing world. After the initial adjustment period, world governments realised that these start-ups could be important contributors to their respective economies and, therefore,commenced with the drafting of rules and economic principles with an aim to facilitate these companies.

As of today, many of these start-ups have already floated their shares in the stock market – this initial public offering (IPO) has created an interesting economic situation; with observers expecting a shift in the traditional equity market practices.

Blurred lines: How do digital start-ups attract foreign direct investment?

The aim of a start-up is to present an innovative product (partly in an effort to bring about a change) in the market, as well as fulfil a need that was previously unmet. This, in turn, gets a positive response from customers and the start-up makes a name for itself in the market; securing funds from venture capitalists or other established individuals in the process.

For digital start-ups, venture capital firms are a godsend, as conventional banks (for such emerging businesses)come off as tough lendersto negotiate loan agreements with. Venture capital firms gather funds from high net worth individuals, who are looking to increase their wealth through investments in risky businesses. These people can be based anywhere in the world and prefer to make investments in countries with high potential for start-up establishment. The funding thus gathered is considered as foreign direct investment and it contributes to the national economy.

The advent of digital start-ups in developing economies

Before property portals came into existence, e-classified real estate advertisers were not a familiar concept in developing economies. Take Zameen.com, an online property portal based in Pakistan, as a case study.  After running for a few years as a start-up, Zameen.com gained enough traction to hold investment rounds and, in response, received funding from Catcha Group (headquartered in Malaysia and Singapore) and Frontier Digital Ventures (headquartered in Malaysia).

This, along with the company’s own growth and additional successful investment rounds, established its position as both a market leader and influencer. The company basically brought Pakistan’s real estate industry to the digital platform and is now in the position to bring even more foreign direct investment to the country.

This is just one of the many companies that have made their name in the global market despite being mere start-ups at the start of their respective journeys. Such companies even influence legislation, like in the case of Lyft and Uber, where new laws had to be drafted in various states in the USA to accommodate the concept of ride sharing. The fact that legislators are willing to make these amendments shows that countries are aware of the foreign direct investment (FDI) these companies attract and want to ensure that all stakeholders benefit from the growth of these start-ups.

In conclusion, digital start-ups are definitely affecting foreign direct investment, and with most of them yet to go for an initial public offering (IPO), their potential remains largely unexplored. These companies have proven that the world is now a global village and that the global economy is changing due to the innovation the digital age has brought with it.