Should the present development paradigm of government-funded programmes be replaced by a model that is purely entrepreneurial?
Economist Atif Mian believes that low or no domestic productivity growth is a major issue for Pakistan’s economy as a country’s long term growth is almost exclusively a function of its domestic productivity growth. A number of factors boost productivity growth; innovation is one of those.
Noted Harvard Business School professor, Clayton M Christensen, is the pre-eminent expert on the topic of innovation, having previously authored business classics such as The Innovator’s Dilemma and the New York Times bestseller How Will You Measure Your Life.
In his latest book The Prosperity Paradox- How Innovation Can Lift Nations Out of Poverty, Christensen has teamed up with co-author, Efosa Ojomo and Karen Dillon to investigate as to why investments aimed at economic development often fail to result in sustainable prosperity, and offer a counter-intuitive and solution for durable and lasting change. The right kind of innovation, they argue, builds not only companies but also countries.
Conventional wisdom dictates that a society must ‘fix’ itself - its courts, infrastructure, legislature, financial markets etc - before growth and innovation can take place. The book challenges this widely held view and proposes that innovation is the process by which a society develops - as innovations fund infrastructure, foster institutions and mitigate corruption. Stalling of a country’s prosperity, they argue, might not be a development problem but an innovation problem.
Innovation has been singled out as the unit of analysis. The authors examine how different types of innovation have radically different effects on economic and employment growth. The book states that there are three types of innovations: sustaining, efficiency, and market-creating. They impact economic and employment growth differently.
"Sustaining innovation" is the most common type: focusing on replacing old products, such as car models or iPhones, with new and better ones. As these innovations focus on existing customer base and are substitutive in nature, investments in sustaining innovations do not result in creating new jobs or net growth within the company.
"Efficiency innovation" is the second type; it helps companies to make and sell established products or services at lower prices. Walmart retail model, for example, sells products at 15 percent lower prices and half the inventory compared to traditional departmental stores and thus is a classic example of efficiency innovation, which improves cash flow by making capital more efficient. However, this model involves cutting jobs or outsourcing them to more efficient producers. Most of the foreign direct investments in developing countries or even oil-rich countries in the Middle East belong to the category of "efficiency innovation".
The most interesting and revolutionary type is "market-creating innovation." It transforms previously pricey and inaccessible products and services, bought by the wealthy, into products and services that are cheap enough and accessible enough to reach an entirely new population of customers. Model T Ford, personal computer, smartphones etc are all examples of market-creating innovations which radically transformed the marketplace by not only offering cheaper and easily accessible products to common people but also creating new growth and new jobs in areas such as supply chain, distribution, sales etc.
Development takes place when innovation, harnessed to the entrepreneur’s ambition, pulls in resources a society needs to become prosperous. The authors showcase many examples including one of Tolaram Group, a Singapore-based conglomerate that created the instant-noodle market in Nigeria- generating an annual revenue of almost $1 billion a year and producing around 4.5 billion packets annually.
The authors make their point by using successful examples from US companies Ford, Eastman Kodak, and Singer Sewing Machines, and demonstrate how similar models have worked in other regions such as Japan, South Korea, Nigeria, Rwanda, India, Argentine, and Mexico.
One obvious criticism of the book is that although it is rich in ideas, the examples or success stories it narrates suffer from Survivorship Bias- as there are as many, if not more examples, of entrepreneurial companies which have failed due to one reason or the other. Moreover, sometimes circumstances play an important role as in the case of Singapore, as Lee Kuan Yew mentioned in his book, the success story of phenomenal development took place at a time when Communist China was closed for business and therefore Singapore was lucky not to face tough competition.
Another relevant criticism is about the points that the authors make about good institutions not being necessary for innovation or corruption in developing countries not being a hurdle to innovation. If good institutions are not a requirement then what is the role of policy making in general and in spurring innovation or laying out initial conditions which improve the chances of successful innovation in particular?
The book downplays the impact of corruption on entrepreneurship and instead argues, by citing Indian software industry success story, that entrepreneurs can work their way around corrupt systems and still be successful. "Successful economies develop in spite of widespread corruption," the authors opine.
One has to disagree with the authors’ opinion about the lack of impact of corruption on entrepreneurship and economy. It is true that the increasing use of technology by entrepreneurs would expose them to less corruption officials as hitherto experienced. Moreover, at municipal or sub-national levels sometimes greasing the wheels can get the job done quickly. However, the cost of doing business is high in countries with high levels of corruption.
Corruption stifles development, shaves off growth, misallocates resources, distorts markets, reduces efficiency and deters private investment by hiking up the cost of doing business. It undermines the rule of law and generates grievances by stimulating socio-economic inequality.
Once it is well-entrenched in an economic system, corruption impedes investment and sustained growth in a number of ways -- foreign investors shy away due to uncertainty; cost of investment increases making it unattractive; significant resources earmarked for new projects end up in the pockets of government officials; higher input costs for goods and services result in erosion of competitiveness in international markets and, hence, hinder exports.
The book provides important insights for economic managers in Pakistan, as lack of increase in productivity is one of the most serious and least understood challenges to country’s prosperity and economic well-being. While India and China saw productivity gains of 30 and 60 percent respectively, Pakistan’s productivity has remained stagnant over the last two decades. The government must examine why significant investment in science and technology in general, and higher education in particular, has had no discernible impact on national productivity. Apart from investment in science, technology and human capital, there is a need to boost productivity by focusing on innovation through a generation of entrepreneurs not hooked on rent-seeking and by reducing regulatory barriers to ease business.
The Prosperity Paradox How Innovation Can Lift Nations Out of Poverty
Authors: Clayton M. Christensen, Efosa Ojomo and Karen Dillon
Publisher: Harper Business, 2019
Pages: 344 (Hardback)