Building markets and the ‘can do’ mindset: why entrepreneurs play an even more important role in emerging economies

How can innovation improve economic, social, and political well-being around the world? That is the focus of the book, The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty, by Clayton Christensen, Efosa Ojomo, and Karen Dillon.

The authors explain that countries like the US were earlier as impoverished and lacking in infrastructure and institutions as many emerging economies are today. “Investing in innovations, and more specifically, market-creating innovations, has proven a reliable path to prosperity for countries around the world,” they write.

“By investing in market-creating innovations, investors and entrepreneurs inadvertently engage in nation-building,” they add. A focus on this type of innovation eventually leads to economies becoming more resilient, and societies becoming safer and more prosperous.

Harvard Business School professor Clayton Christensen is the author of 12 books, and co-founder of the innovation consulting firm InnoSight. Efosa Ojomo is a senior fellow at Christensen Institute for Disruptive Innovation, and Karen Dillon is the former editor of the Harvard Business Review.

Here are my key takeaways from the book, which is a compelling mix of business history, development economics, and storytelling. The 11 chapters are thoroughly referenced and spread across 345 pages.

The material builds on Clayton’s earlier publications in the field of disruption and innovation. See my reviews of his books on jobs theory and innovation frameworks, as well as the related titles A World of Three Zeros, Blue Ocean Shift, A Beautiful Constraint, Frugal Innovation, Grassroots Innovation, China’s Mobile Economy, and Scaling Up.

Problems with the top-down ‘push’ approach to development

Foreign aid and donor packages have constituted much of the development approach to support emerging economies. The traditional method has been to ‘push’ aid for transportation, healthcare, education, and utilities onto developing nations.

Though some of these attempts have been well-intentioned, many such projects have failed or not scaled up, and there continues to be much poverty in the world. A better approach advocated by the authors is to support market-creating innovations that ‘pull’ in the necessary components and services to consumers that want them.

The three types of innovation at national scale

The authors define innovation as “a change in the processes by which an organisation transforms labour, capital, materials, and information into products and services of greater value.” Innovation has broader impacts at social and political levels also.

Sustaining innovations improve existing offerings for the current base of consumers, eg. tea flavours, heated car seats. Efficiency innovations focus largely on process improvements, and improve productivity while even cutting jobs, eg. resource extractions (oil), offshore factories.

Market-creating innovations bring desirable products and services into the affordable range for consumers who currently are not buying them, and eventually create profits, jobs and culture change. They democratise access to these offerings that were previously exclusive to wealthier consumers. Such innovations create jobs in areas like manufacturing, marketing, selling and servicing.

All three types of innovations help a country in varying degrees, but market-creating innovations create local jobs that stay, and not just global jobs that can move to another country, eg. Ford moving a factory from Mexico to China for better cost advantage, or Fiat Chrysler moving truck manufacturing from Mexico to Michigan.

Unfortunately, Mexico’s maquiladoras manufacturing operations are only efficiency innovations, and largely sell into the US market, the authors explain. The Russian economy has also become largely dependent on commodities, and is susceptible to shocks from global price changes.

In contrast, market-creating innovations can trigger off a virtuous cycle, which can support government institutions and policies in the long term. Local entrepreneurs are also likely to fund future innovations locally, and instill pride and confidence in the next wave of entrepreneurs that they too can solve their own local problems.

Success factors for such innovations are insights into local and global needs, business models for new consumers, enabling technology, value networks with ecosystem players, operational excellence, frugal innovation, and flexible or emergent strategy.

Identifying new customer segments also means closely connecting to users. This helps get around lack of market research, which traditionally focuses only on established customer bases. The outcome of all these measures is overcoming barriers of skill, affordability, access, and time.

Experiences from the US

The authors present their arguments against a broad sweep of economic history, spanning over a century. Visionary innovators imagine a different world, one that is filled with possibilities that many others can’t even begin to understand. They end up launching not just breakthrough products, but triggering ripple effects across the entire economy and society.

For example, Isaac Merritt Singer’s sewing machines were sold with low up-front investments and affordable monthly plans; this spurred the garment, fashion, retail, and wardrobe industries. The company even built railway lines and power stations in some locations.

A little over a century ago, there were few paved roads and gas stations in the US; automobiles were only used by the wealthy. Ford’s Model T led to the automobile boom, and sparked a cultural revolution. It leveraged steel, glass, rubber and wood industries; enabled transportation, construction, suburban dwellings, tourism, and hotels; and created jobs in manufacturing, design, distribution and advertising.

George Eastman’s Kodak company spurred the photography industry in the late 1800s; it changed popular culture and helped spawn the multi-billion dollar cinema industry. Amadeo Giannini’s Bank of America (earlier Bank of Italy) brought banking services to average citizens, beyond the earlier confines of the wealthy; this required customer education and branch banking.

Innovations by Apple, IBM, Microsoft and Intel made computing affordable for average consumers. Skills to operate computers first had to be taught in universities and companies. Canon and Ricoh innovated on the photocopier and printer to make them affordable beyond corporate segments.

Other examples cited in the US are Samuel Insull of Commonwealth Edison Company (who gave away electrical appliances to increase demand for electricity), Sarah Breedlove Walker (cosmetics for African Americans), Charles Goodyear (industrial rubber products), and Georges Doriot (world’s first publicly owned VC firm, ARDC).

Eventually, waves of such pioneers made innovation the new normal in the US, the authors explain. Many of these pioneers also built their own infrastructure, which eventually became national infrastructure, eg. Goodyear (roads), Dupont (highways), Singer (railway stations).

Market-creating innovations in Asia and Africa

The authors then switch focus to Asia and Africa and identify successive waves of market-creating innovation. For example, Sony’s early products included electric blankets, but they often caught fire. Undeterred, the founders Akio Morita and Masaru Ibuka went on to pioneer products for Japan (including overlooked segments like teenagers). The products eventually went on to win in global markets at the time, such as transistor radios, TVs, and the Walkman. (Unfortunately, Sony later missed the boat on digital music players.)

Toyota began with economical cars for the Japanese market, and then targeted the low end of the US market before moving up the spectrum. It invested heavily in training and even driving schools, and eventually went on to become an admired global brand.

Japanese motorcycle manufacturers formed an industry association to promote the overall industry. When the country’s laws were changed to allow younger drivers, Suzuki was one of the first to create affordable bikes for this segment. Japanese consumer electronics and office equipment players also targeted new local segments first before expanding globally.

“Innovation is contagious, and it often feeds other innovations,” the authors explain, drawing on examples from Kia and Samsung from Korea. Steel company POSCO created science and technology institutes for R&D and education (POSTECH and RIST) to connect industry and academia. The economic freedom in Korea eventually led to political freedom as well.

When Mo Ibrahim set up mobile operator Celtel in Africa in the 1990s, he looked beyond the picture of poverty, lack of infrastructure, and inadequate access to finance. He could see that even the ‘non-consumers’ would appreciate low-cost affordable mobile phones and tariffs.

The mobile operator built on much of the required infrastructure by itself (in addition to staff training and health care), and went on to become a success story that paved the way for other digital players in Africa. Some of its innovative measures were the use of helicopters to build towers in areas with no roads, launching low-denomination prepaid cards, and introducing scratch cards.

In the long term, the operator generated jobs for citizens, profits for shareholders, and tax revenues for governments. It also unlocked value for other industries like finance, and changed the culture of societies.

Richard Leftley launched MicroEnsure in Africa to offer life insurance to poor families. Basic products were given free to mobile subscribers, and consumer education helped upsell bigger products. The service was launched in India as well, where hospitalisation expenses can lead to absolute poverty for many patients.

Galanz in China innovated on creating low-cost microwaves for the Chinese market, and educated the market through newspaper articles and books. It is now one of the world’s largest home appliance companies, and has the world’s largest microwave R&D centre.

Haresh and Sajen Aswani of Tolaram launched Indomie noodles in Nigeria in 1998, and had to build infrastructure such as electricity, water treatment, and distribution. This made their products available, affordable and accessible, and eventually helped the company become a large player in manufacturing and logistics.

Building free toilets in India has not been a sufficient sanitation solution in a country where diarrhea is the leading killer of children. More community involvement is needed, as advocated by Kamal Kar’s Community-led Total Sanitation (CLTS). The Toilet Board Coalition aims to process human waste into fertilisers, and use digital systems to collect health data for consumer insights.

Aravind Eye Care in India provided affordable healthcare through measures like training its own medical personnel, and manufacturing its own lenses. Narayana Health ensures high utlisation of skilled medical staff, offers tiered services to patients, runs mobile labs in buses for remote communities, and has an insurance product called Yeshasvini. Such healthcare companies have spurred medical tourism in India, with more ripple effects.

These companies internalise risks through methods like vertical integration. Some of these cost centres can eventually become profit centres by selling the services to other companies.

Other notable examples cited in the book are M-Pesa in Kenya, mobile operator Roshan in Afghanistan, Nigeria’s Nollywood film industry (second only to Bollywood), Fyodor non-blood malaria test, and EarthEnable floor tiles in Rwanda.

There are also scalable examples cited from other parts of the world such as Mexico: Grupo Bimbo (the largest bakery in the world, which began locally with affordable bread in cellophane bags), Opticas Ver De Verdad’s low-cost eyeglasses and clinics, and Clinicas del Azucar’s one-stop diabetes treatment clinics.

Larger impacts of innovations

It is generally argued by many experts that developing nations first need infrastructure, rule of law, and anti-corruption measures before innovation can take off. But the authors counter this position by explaining that vibrant, home-grown market-creating innovations can spur these local requirements in a sustainable manner.

Institutions and best practices modeled in the West can’t simply be pushed onto emerging economies; they should evolve with local culture and values. It is the shared learning of innovation and transformation that lead to nuanced stability.

The authors cite Venice as an example in this regard. It rose to commercial success, thanks to risk mitigation institutions that functioned in a democratic manner and allowed larger numbers of small traders to participate. Financial innovations that arose here included joint-stock companies, bankruptcy laws, double-entry bookkeeping, and a reliable medium of exchange. But the laws were later reversed by some wealthy merchants, which led to the decline of Venice.

Another problem plaguing many of these countries is corruption. The authors define three kinds of corruption: overt and predictable (scandals are commonplace, eg. Venezuela), covert and predictable (eg. China), and transparent (eg. mature economies). Innovation at scale increases choice, trust and transparency, and can reduce corruption.

As economies develop through market-creating innovations, there is less need to resort to corruption as an option, the authors explain, pointing to South Korea as an example. The rise of Netflix and Spotify is another example of innovations that reduced the need for piracy.

The road ahead

“Every nation has the potential for extra-ordinary growth within it,” the authors emphasise. The key is to begin by reframing the problem and go beyond “compassion fatigue” and endless unsustainable “band-aid” solutions to embrace market-creating innovations.

The book ends with more examples and ideas of such innovations. For example, the marketplace IguanaFix aims to bring home contractors in Argentina into the formal economy, instead of operating in a gray zone.

MoringaConnect in Ghana is a platform for the market of moringa oils and powder. Tomato Jus is tapping local tomato farmers in Nigeria to reduced dependence on tomato paste imports. LifeStores Pharmacy is bringing affordable medicines to Nigeria.

IDCOL (Bangladesh) and APS (Africa) are working on home power solutions based on solar energy. The Harambe Entrepreneur Alliance is building a pan-African entrepreneur network (Andela was founded by one such entrepreneur). One Acre Fund provides training and market access services for farmers in six African countries.

Safi Sana has built a waste-to-energy factory in Ghana that has a community ownership model. An Indian company is developing washing machines that do not need electricity or connections to home plumbing systems. Other possibilities include creating electric cars for consumers who have not yet entered the car market, instead of targeting only existing car owners.

The authors also cite a number of examples of government initiatives to help market-creating innovation. The Philippine government has partnered with Ayala Corporation to form Manila Water, an organisation which provides water at affordable rates.

Singapore’s EDB courts foreign corporate investors to promote FDI in advanced tech sectors; the aim is to spur innovation, and not just jobs or exports. The Rwanda Development Board promotes ease of doing business. The Mexican government created Mercado de Trueque (Barter Market) where citizens can exchange recyclable trash for food vouchers.

In sum, the authors explain that though market-creating innovation is challenging, it provides the best chance to create sustainable prosperity. The book opens the door to further research on the macro-impacts of the startup movement around the world, the role of ecosystem players like accelerators and incubators, and the guiding role of entrepreneurship policies.

“Innovation really does change the world,’ the authors sum up.