05/28/2012
05/21/2012
Not Just Catching Up
Not Just Catching Up: Why Emerging Markets Companies May Shame the West When It Comes to Social and Environmental Responsibility
We're always interested when developing markets move ahead of their 'developed' market counterparts. From technology to beauty to banking this is starting to happen more and more, as companies and individuals in emerging markets make breakthrough innovations, and open up unexpected paths that western rivals are yet to explore. Recently we have started to see this pattern in a new field, as emerging market companies take an increasingly progressive approach to environmental and social responsibility. Rather than tacking on 'CSR' to the end of their business strategy, as many developed market companies are wont to do, they are making social responsibility integral to their businesses and seeing it increasingly as a route to competitive advantage.
This trend was highlighted recently in a report by World Economic Forum & Boston Consulting Group. It identified 16 growth market companies who are putting environmental and social responsibility at the centre of their strategy. The examples they give are wide-ranging, including: Florida Ice and Farm in Costa Rica, whose aim of reducing water usage significantly is successful not least because they link 60% of top managers' pay to meeting social and environmental targets; Masisa, a Chilean company who invite and incentivise employees to invent new business ideas that would appeal to poorer consumers; and Shree Cement in India, "which has long suffered from water shortages, developed the world's most water-efficient method for making cement, in part by using air-cooling, rather than water-cooling"- a good example of an emerging market company using resource-shortage as an impetus for innovation.
This makes good sense when we look at the context in which emerging markets companies operate. There are some very clear reasons why social and environmental responsibility does and will matter more to these businesses. Firstly, the shortage of resources like water in emerging markets already makes it harder for emerging market-based corporations to emulate the resource-heavy approach of their western peers. As Chandran Nair argues in compelling detail in his book Consumptionomics , emerging market companies have to be more innovative, because resource shortage and carbon targets prevent them from blindly following the western model. (Among the stark figures that Nair quotes we find that India's per capita renewable water fell by 7% between 2000 and 2005, China's by 5% during the same time, whilst The Earth Policy Institute estimate that globally we are already using up resources at 30% above the planet's sustainable capacity.)
Secondly, whilst many western companies have been able to treat social problems such as pollution or land displacement as 'externalities', which they can export and therefore often largely ignore, this is much harder for companies based in countries where these issues have taken a toll (whether pollution for Chinese citizens, rising water levels in South Asia, or people being displaced from land in India or South America). It will be increasingly hard, though sadly perhaps not impossible, for companies in emerging markets to ignore the social and environmental effects of their actions.
Thirdly, as we have seen in some of the examples above, companies in emerging markets have a greater motivation both to produce goods and services that address the basic needs of poor consumers (a thesis famously explored in CK Prahalad's Bottom of the Pyramid), and to fill in for missing social and environmental infrastructure (as argued by the Harvard Business School's Tarun Khanna and Krishna Palepu).
Lastly a growing numbers of companies, and governments, in emerging markets are increasingly alert to the potential of stealing a march on the developed world, by establishing themselves as leaders in new social and environmental fields. China's governmental decision to become a leader in alternative energy is already coming to fruition with Chinese companies overwhelming American competitors.
Before we get too carried away with this story, there are some caveats we should consider. Firstly, some of the examples cited of 'BRICA social innovation' strike us as catching up with, rather than going beyond, social and environmental responsibility in developed markets. (A number of the examples included for instance in the WEF and BCG report don't seem very different to a mainstream businesses in the west- e.g. Natura working with its suppliers to create a green plastic seems similar to Marks & Spencer's 'Plan A' efforts in the UK). Secondly, as an Economist review of the WEF/BCG report points out, the finding that successful emerging market companies are focusing on environmental and social responsibility does not necessarily mean that responsibility leads to success. It is possible that other factors are more critical to their success, and their social and environmental focus is a result of them having money to invest more. This leads to a third consideration, concerning how far these socially and environmentally innovative companies are representative of emerging markets companies as a whole? How far will these continue to remain outliers, and how far will they spread to the mainstream?
There is, we would argue, a clear risk of over-stating the case and of becoming rather idealistic in the way we see BRICA businesses evolving. However, there is also a risk in ignoring the signs we are seeing. If western companies are left behind, they are liable to appear irresponsible to the emerging market consumers on whom they are increasingly staking their future success. They may also be less able to serve their needs; they may find themselves paying more for increasingly expensive resources; and they are liable to miss out on the kinds of innovations we have seen can come from pursuing environmental and social responsibility. The risks of ignoring this trend seem greater than engaging with it.
It is striking that some western companies have already responded to this trend, finding that tackling the social and environmental problems facing emerging markets can lead them to greater innovation and improved running of their businesses. For instance, when Danone formed a partnership with Grameen to supply low-cost healthy products to consumers in Bangladesh, they realised that the adjustments they had to make to production and distribution actually helped them to re-think the methods they used in their businesses in the west. As with Shree Cement in India, solving a social problem in an emerging market setting led to an innovation that changed the way they did business globally.
How much entrepreneurialism is there really in emerging markets?
A Billion New Businesses? Myths and Realities of Entrepreneurialism in Emerging Markets
Emerging Markets are, it is often claimed, filled with entrepreneurial spirit and with entrepreneurs. It is a powerful and increasingly common story, from Tarun Khann’s ‘Billions of Entrepreneurs’[1], to Nobel winner Muhammed Yunus’ account of how Grameen Bank launched a wave of entrepreneurialism in Bangladesh and beyond[2], to the thousands of small scale innovators and entrepreneurs documented by India’s Honeybee network[3].
It also tallies with personal experience. Almost every research trip to Africa, Asian and Latin America brings encounters with innovative businesses: individuals renting on their wireless LAN connections to other members of the neighbourhood; families turning living rooms into video game parlours and DVD rental stores; groups setting up to revive traditional artisan skills to sell to foreign visitors.. Emerging Market Micro-Entrepreneurialism appears engrained, widespread and vibrant. The implications seem profound.
As western companies, how far should we be rethinking our products and services to cater for these millions, or billions of entrepreneurs – how different, for instance, would Microsoft or Blackberry be if their principal market was made up of hundreds of millions of micro-entrepreneurs? As marketers and social scientists, do western notions of leisure, entertainment or status make sense in societies that are much more structured around individual and family-based entrepreneurialism[4]? And on the broadest level, should we expect to see a different version of advanced capitalism emerging, one where small businesses play a much larger role in the overall economy?
The temptation is to dive into these questions, and start hypothesizing the changes that companies might need to make. But before we do, it might be best to pause and ask two questions. Is this picture of emerging market entrepreneurialism really true? And is it likely to endure?
These questions naturally overlap, but they are also, of course, questions of different order. The first we can try to gauge by assessing evidence, whilst the second is much more a judgment call[5].
Let’s focus then on the more straightforward question: what evidence is there of greater entrepreneurialism in emerging markets? This wouldn’t seem the easiest nut to crack, given that we are trying to identify and measure organizations that are informal, hidden and small. However, the research that has been undertaken suggests that entrepreneurialism is significantly more common in emerging markets, at least among the poorer sections of the population. A survey of data from studies across 18 developing countries found that 50% of the extremely poor in urban areas and 20% in rural areas operate a non-agricultural business This contrasts with just 12% of OECD populations (poor and rich, urban and rural) who class themselves as self-employed[6]. Similarly surveys of available data[7] show that in developing markets the informal economy, which of course includes many micro-entrepreneurs, is typically much larger than in developed markets, where formal employment is the norm. For instance, informal businesses make up 41% of the economy in Sub-Saharan Africa, 45% in India and 31% for Asia as a whole, 29% in Latin America[8] – compared with between just 8% and 20% in European and North American countries[9])
This data looks quite compelling. But what happens if we switch tack and look for counter-evidence? One of the most interesting critiques of the ‘Entrepreneurial South’ thesis also comes from Bannerjee and Dufflo’s “Poor Economics”. They query how deep the entrepreneurial potential of developing markets really goes by asking the following 3 questions.
Firstly, how often do developing market ‘entrepreneurs’ make an active choice to launch a business (i.e. would they be entrepreneurs if the formal economy grew and they could take a stable job)? Their own evidence suggests that in many developing countries, notably India, there is greater aspiration towards stable jobs in the formal economy, such as government posts. “Everywhere we have asked, the most common dream of the poor is that their children become government workers”. (p.226) There are even, they argue, many cases of very reluctant entrepreneurs: “Many of the businesses are run because someone in the family has (or is belieed to have) some time on hand and every little bit helps. This person is often a woman, and she typically does it in addition to her housework; indeed it is not clear that she always has much of a choice when the opportunity to start a business comes up”. (p.226)
Secondly, they ask how many emerging market micro-businesses are currently sustainable? A survey in Mexico with poor entrepreneurs found that 41% of the businesses identified in 2002 had disappeared by 2005. A survey in Indonesia found only slightly more positive results, with 1/3 of businesses owned by the poor surviving after a 3 year period.
Thirdly, they ask us to consider how many of the businesses that we identify as emerging market entrepreneurs are actually scaleable? I.e. how many have the potential to generate significantly higher profits and, or, grow much beyond their current 1 or 2 staff?[10] Bannerjee and Dufflo argue that many emerging market businesses have two fundamental problems that put a lid on growth, but which are often glossed over by enthusiastic commentators. The first is that a small target market; the second is that they lack any competitive point of difference. In addition, many of the micro-entrepreneurs we have met have businesses that are family owned and run. Increasing the size of these businesses and adapting them to engage with the formal economy can be harder when the business overlaps so greatly with family relationships and routines. To illustrate their argument, Bannerjee and Dufflo give the example of a visit to Guntur in South India, which is crammed with small businesses, side by side :
By our count, one particular morning, there was a dosa seller for every six houses. The result was that at any particular time, many of these women were just waiting around for customers. It seemed obvious that if they could have merged three of the businesses together, and sent the others on some other endeavor, they could have made more money. This is paradox of the poor and their businesses: They are energetic and resourceful and manage to make a lot out of very little. But most of this energy is spent on businesses that are too small and utterly undifferentiated”[11]
These objections and reflections are a useful check on another possible case of emerging market hyperbole. It is certainly true that many of the entrepreneurs that we meet have the two problems just identified: a small target market and a lack of a unique selling point, However, we would be wary of too readily dismissing the importance of Emerging Market Micro Entrepreneurs (EMME), and ignoring their potential to grow, rather than fade as emerging markets become more engaged with the global economy. As we move into the more difficult business of imagining the future, I would highlight five dynamics that point towards the opportunities for EMME to break some of the shackles that limit their growth.
The first is that digital technology is gradually helping micro-entrepeneurs to reach the larger markets that they have traditionally lacked. Whilst many are, like Bannerjee and Dufflo’s dosa sellers, still confined to tiny geographical intersections, fighting for a few customers, a growing number are able to use the web to find new buyers. A very visible example can be found in China, where the mammoth trading website Tao Bao has given rise to thousands of new small-businesses, allowing individuals even in remote areas to reach customers across China. On a smaller scale, we are meeting more and more emerging market entrepreneurs who are seeking to use technology in this way – from artists and artisans selling their work to audiences in the west, to internet café owners giving lessons remotely.
The second, gradual, way that digital technology is helping EMME is by making available cheap versions of the kinds of business tools that have normally been the preserve of major, formal companies. For example, in West Africa, SoftTribe have developed an automated payroll system that costs around $25 a month, bringing the kind of efficiencies normally reserved for formal businesses within the grasp of small business owners. On an even more informal scale, we have seen that many small businesses in East Africa are using mobile phone money transfers, such as M-Pesa, as ersatz versions of payroll and accounting systems. As more organisations see the opportunity to provide cut-price business services of this kind, it will become easier, slowly and marginally, for EMME to grow from small to medium-sized businesses
Thirdly, whilst it will remain hard for many EMME to scale up their businesses – grow from 1 or 2 people to 1 or 2 hundred – there are increasing opportunities for people to form networks, in which the individual businesses may remain small, but the network becomes a much more sizeable and powerful player in the economy. For example, in their book “Jugaad Innovation”, Navi Radjoy, Jaideep Prabhu and Simone Ahuja describe how India’s Solar Electric Light Company (SELCO) created and feeds off a network of rural micro-entrepreneurs, who buy solar panels from SELCO and then rent out the charged batteries to members of their community. This network “made SELCO’s solution affordable and accessible to scores of rural customers who couldn’t make an up-front investment in SELCO’s solution….Using this approach, SELCO was able to scale up the distribution of its solar lighting system to over 125, 000 households within a few years”[12]. A similar example is India’s network of water sellers, launched by….. In such instances, there are two kinds of growth occurring. The original micro-entrepreneur such as SELCO becomes a much larger company, whilst at the same time creating many more small businesses. The solar power sellers remain the ‘Mom and Pop’ concerns that Bannerjee and Dufflo envisage, but they are greater in number and play a bigger role in the local economy. Increasingly large companies are themselves trying to connect to or create networks of micro-entrepreneurs of this kind, such as Tata Motors who launched their very successful Ace mini-truck across rural areas by training local mechanics to be able to guarantee service on common problems. As Khanna and Palepu describe, “instead of building an expensive new network of service centers, the company trained local mechanics and gave them tools to take care of common problems.”[13]
A fourth, related, opportunity is for micro-entrepreneurs to supply elements of the infrastructure that are missing from many developing countries, often partnering with larger organizations to do so.[14]. For example, the success of M-Pesa, noted above, has gone hand in hand with the explosion of thousands of M-Pesa agents, whose ubiquity means that consumers know they are normally only minutes away from turning credit into cash, or cash into credit. This informal network has shot up so much quicker than any large business could have brought ATMs and formal banking services.
Lastly, changing social attitudes may also help more Emerging Market Micro-Entrepreneurs to flourish. We have seen in fieldwork that there can often be strong social constraints that close down the ambitions of micro-entrepreneurs, especially women. In India and Indonesia in particular, women have often found entrepreneurial plans curtailed by social expectations of ‘appropriate behaviour’. During fieldwork, for instance, we have met women who are permitted to teach children and other women from their home, but whose ideas to expand their educational businesses to take on new students, or to teach over the internet, are strongly discouraged by family and local elders. There are signs, however that, very gradually, this is changing, as family and elders come to see examples of pioneers who are making money for their families by pushing at these social boundaries[15]. As one respondent , a small-business owner in Rajastthan, described to us: “I couldn’t tell my husband’s family what I was doing to begin with…and when they found out they were angry, but now they’ve seen how hard I’ve worked over time and how much it has helped our family, they are much softer…I think even a little bit proud of me”. .
Thus whilst it seems sensible to question the Utopianism that can surround Emerging Market Entrepreneurship, there are reasons to believe in its potential. Estimates suggest that there are around a billion self-employed people in the developing world[16]. They are not all poised to launch dynamic, growing enterprises; but neither are they just treading water, waiting to be absorbed into the formal economy. Safe jobs in government posts or multinational companies may be appealing to many, but these jobs are arriving only gradually, whilst the opportunities for entrepreneurs, opportunities that I hope to have highlighted, are arriving rather fast. Emerging economies may gradually converge towards developed economies, with larger formal sectors, more corporations and more salaried jobs, but they are very unlikely to replicate them. Once again we are reminded of an important reality of emerging economies: they are not just ‘catching up’; they are travelling fast in their own unprecedented directions.
[1]“Today’s economic projections suggest that in less than a generation China and India will become the largest and third largest world economies, respectively…Billions of entrepreneurs will ultimately power this transition”. Tarun Khanna, “Billions of Entrepreneurs: How China and India are Reshaping their Futures and Ours”, (p.2)
[2] In Yunus’ words, “According to the textbooks, only a handful of people have the talent to spot business opportunities and the courage to risk their resource in developing these opportunities. On the contrary, my observations among the poorest people of the world suggest – and decades of experience by Grameen Bank and other institutions confirm – that entrepreneurial ability is practically universal” Muhammad Yunus, Creating A World Without Poverty, p.54
[4] For example, the idea of ‘me-time’ - a break from the everyday routine – is central for many western brands. Research often shows that it is much less relevant, however, in settings where work and leisure, family and individual aspirations merge far more completely.
[5] It is a kind of judgment call that we are continually having to make when researching emerging markets. Smart clients always want to ask whether emerging markets’ differences reflect their point on a journey (are consumers in East Africa, or India more entrepreneurial because of a current lack of state resources and formal economy jobs?) or a more fundamental, social difference, which is likely to endure as economic development continues.
[6] Abhijit B Bannerjee and Esther Dufflo, “Poor Economics”, p.210
[7] These differences reflect, as with so many things, the fact that one cannot talk in wholesale terms about ‘emerging markets’. China, for instance, with far greater centralized control and planning, tends to be less well-known for its grassroots entrepreneurs. In fact there has recently been some concern among Chinese policy makers and business-people about a lack of entrepreneurialism, with the government helping fund a wave of entrepreneurialism colleges, designed to develop the creativity required to launch new businesses.
[8] Kristina Flodman Becker, “The Informal Economy, Swedish International Development Cooperation Agency, 2004
[10] One way of putting this to the test is to examine what happens when micro-entrepreneurs are given investment grants, and the evidence Bannerjee and Dufflo report is not promising. Whilst small investment grants can improve micro-enterprises’ profitability by helping with the daily running of the business, larger investments do not have a proportionately significant effect, suggesting there is a limit to how far they can grow, even with significant support. For instance, in one study they cite businesses receiving a $500 grant did not see the same weight of uplift as those receiving a $250 one.
[11] Poor Economics, p.218
[12] Navi Radjou, Jaideep Prabhu and Simone Ahuja, “Jugaad Innovatino: Think Frugal, Be Flexible, Generate Breakthrough Growth”, p.89
[13] Tarun Khann and Krishna G Palepu, “Winning in Emerging Markets: A Road Map for Strategy and Growth” p.137.
[14] Hindustan Lever, Unilever’s Indian subsidiary, were one of the first companies to realise this potential, creating a network of hundreds of ‘Shakti Entrepreneurs’, who would sell and market Lever goods to get round the lack of formal stores in rural areas.
[15] Success stories, such as Grameen Bank and Grameen Telecom in Bangladesh, where women have been at the heart of distributing and marketing the service, have highlighted this potential
[16] Bannerjee and Dufflo, Poor Economics, p. 233
