Stimulating Entrepreneurship in Developing Markets

Entrepreneurship Needs a System

Is entrepreneurship in the developing markets the same as entrepreneurship in more established markets?

This seems to be a simple question but if we are trying to create a road map for new entrepreneurs we have to take cognizance of the fact that there is a certain basic infrastructure in place in established markets that facilitate the natural flow of goods and services and that the task of the entrepreneur is to grow in that market and offer a new set of products or services.

The needs in developing markets are simultaneously as advanced as in established markets while requiring the entrepreneur to have a wider view on the solution.

As a simple example – lets say that you want to sell a computer based product in a developing market vs an established market. In the developing market you may end up having to sell computers to effectively market your computer based product – a two step and possibly more complex buy. In the developed market the use of computers may be widespread and your product has an inherent value as it can leverage the basic infrastructure of computers.

This is a simple example but relates to whole supply chains which are simply to complex to build to ensure effective delivery of required goods and services in developing markets. This may be due to a number of reasons that could be explored in more depth that would include

Size of markets

Sophistication of buyers

Relative demand

Effective leveraging of existing capacities

Slowness of industries to transform to modern methods

Cost of capital for transformation

It can be argued that entrepreneurs should then focus on creating basic infrastructure in developing markets and that this would responding to the present need, while other needs would follow later.

The basic precondition that is put then is one of a certain “business climate” or business environment that is required to operate. The need for a business climate then implies a certain hierarchy of needs that may be expressed as a precondition to business that would include:

Basic infrastructure – roads, electricity, market places, capital goods manufacturers

Supply side services – basic raw materials conversion, packaging, distribution

The Market Context

Demand side services – road transportation e.g. cold chain, logistics, credit markets, rule of law, advertising mediums and effective distribution of messaging in markets

Business services including registration, taxation, accounting, trading licenses, secondary financial markets

A market mechanism – links between the supply side and demand side.

Where these do not exist it would then be a function of either government through enabling legislation or business through opportunity to create these effective mechanisms to operate and subsequently drive a market mechanism.

When one reads classical texts in the American and European traditions of entrepreneurship there is much emphasis given to the perspective of the entrepreneur and the psychological characteristics of what is required to be such an individual that transforms an aspect of society. The other perspective is one of “method entrepreneurship” where entrepreneurship is focused on a structure or methodology that has to be put in place by which the entrepreneur understands the market, product, sales process and delivery mechanisms of their new product.

It is proposed that a focus must be given to what it takes to be an entrepreneur in a developing markets context where there may not be certain base infrastructure in place and where the demand and supply mechanisms are inherently weak and ill formed.

Another way to state this question is to ask what is the minimal critical set of requirements to ensure a viable trading mechanism and to ask if there are efficient mechanisms by which to create these in a short space of time – so as to ensure a new entrepreneurship paradigm in developing markets.

The railway paradigm

The railways sector created a major transformation in America. The idea that communities were connected was exploited by makers of different products and services to use the relatively inexpensive mechanism of transport to connect makers of goods to households that could consume them. Communities traded their local produce to other communities and money was used as the neutral means for doing so. The need arose for general dealers to receive these goods and serve as a collection and a connection point for the delivery mechanisms. At the same time the railways widely used the telegram as a communication mechanism to connect previously disaggregated communities to each other in new ways. General dealers over time became aggregated and became today’s malls, chain stores and retail sector.

Communities stopped trading goods and rather traded money as a form of credit and this became the money supply and financial sector of today. Suppliers became more integrated into a complex manufacturing sector that exploit various efficiencies of supply chains. The railways evolved into an air and road transport network and a complex global supply chain that has a wide variety of mechanisms for transport and various predictive capabilities to match supply and demand. The telegram evolved into a wide set of communication technologies.

Is it a necessary and sufficient set of conditions to say that to create commerce we need

A buying community

A supply community

A means for delivery between the buying and supply community

A means of exchange (goods, services, money)

Capability Before Scale

A means for communicating the needs of the exchange

Application of some of the proceeds of commerce to enhance future exchanges

In this sense we often see that traditional entrepreneurship literature is focused on showing how to capture a slice of this community of buyers and sellers – while practical requirements for a developing markets approach would be to look at how to create these communities and then take it a step further and look at how your product fits into them.

Practical Scenario:

You are dropped in Rural DRC as a product consultant and you need to get to a point where people to buy your education service on mobile phones and computers.

A creative entrepreneur would soon realise that to understand the local market is important.

People have nothing other than basic shelter, clothing and food. They survive on agrarian production of self sustaining food. They effectively forage from local agricultural environments and only means of exchange for more complex service is through long journeys to markets where local agrarian production is converted to exchange for clothing, medical supplies and small elements of value.

Select something of value that is unique to this community and identify a target market. Let’s say it is plantain – a local type of banana that grows in this area and that can be processed to be a high value food source in other areas.

Use the transformation of plantain as a means to create a local community product that can be sold. Employ a local manager to collect, transform and prepare for selling large amounts of plantain in a storable form. Negotiate access to markets in which this is bought and sell it.

Make enough money to start stimulating local development.

Allow locals enough money / liquidity to start improving their set of needs to higher order goods and services. This may include upgrading dwellings, accessing electricity and running water. These goods and services are a necessary pre-condition to being able to run a complex requirement like mobile device or computer.

Introduce basic education for reading, writing and more complex communications.

Introduce the value of computers and communication technologies. Create access to these technologies through the infrastructure that has been put in place.

Introduce the value of education through your specific product.

Build new industries focused on building, supplying more complex goods and services and find ways to diversify away from plantain as the only source of income from the community.

Finance, Support and Discipline

The context of this example highlights a simplified situation that shows that creating product demand in a rural area may require a very different approach to an entrepreneur that wants to do the same in a more advanced market. We can however identify that the essential elements for the preconditions for commerce that have been identified above are all in place in this example.

The element that is highlighted practically is that for the commerce to advance, a portion of the value of the commerce created needs to go back into enhancing the actual system of commerce.

To a large extent this type of thinking is missing from the approach to local economic development.

Local economic development literature fails to identify the essential elements of enabling commerce and is typically focused around basic human rights. While it is acknowledged that this paradigm led the Romans out of squalor to a civilized society we must realise that this happened due to the commercial backbone that was created through effective road infrastructure, roman administration (communication mechanisms) and the use of currency for exchange in ancient time.

We must also realise that development creates a new set of needs and that as in the simple scenario presented above it is critical that the community must quickly find other sources of local economic production to create a move away from a single source of incomes as a primary means of production. There are a number of options over time and human services quickly fit into the picture as the primary needs, but this is highly dependent on the liquidity of the currency and the extent to which money supply is effectively regulated in a small economy such as the one being analysed. Without some form of external input money supply will be challenged over time as more money is “stored” in infrastructure and transfer is dependent on trading of facilities as containers of stored value.

More essential products and services will in time have a greater demand, supply and thus price will be more competitive and this will be traded for items with less supply but more demand which will be at higher prices. Raw materials from external to the local community will create comparative trade differentials and the whole basis for economics then starts coming in to play for this once small rural community.

We need to start thinking about economics in practical sense and entrepreneurship as a structural equation that potentially requires a different approach.

Too many entrepreneurs in developing markets cannot get past the fact that they need to secure some basic means and development parameters before they will be successful in a larger enterprise.

Subsequently the economic motivation for certain products e.g. playing in the financial services space is not focused on actually satisfying an inherent market need and is often aimed at making quick money based on business models that seem to satisfy needs in other markets, while it has not been structurally integrated in a local market.

This framework or methodology allows for an entrepreneur in a developing market to ask

Have I understood the basic economy in which my product will function?

Which element of that economy am I affecting through my product or service?

What evolution am I creating and how is this going to evolve over time.

How must I re-invest in creating the capacity for my product to be consumed more effectively?

From there the entrepreneur in a developing market can then progress to maximize the many other tools that are available to entrepreneurs – with the understanding that the entrepreneurship process would have been soundly grounded in a market reality while building towards building a healthy consumer community and the essential elements of a market structure.