What Tech Pioneers Can Learn From Emerging Markets
Industry pioneers could do a lot more to help the various parties in their nascent sectors think through and install the necessary rules.
Technology leaders are not shy about pushing the boundaries of their industries, and sometimes they go further — challenging the prevailing rules of society at large. Gene editing and stem cell treatments, for example, are advancing so rapidly that they threaten to redefine health and social norms. The eagerness of entrepreneurs to test limits isn’t surprising to Tarun Khanna, the Jorge Paulo Lemann Professor at Harvard Business School, who has spent more than two decades studying how business strategies play out in emerging markets.
Khanna has written several books on emerging market economics. His latest book, Trust: Creating the Foundation for Entrepreneurship in Developing Countries (Berrett-Koehler, 2018) argues that developing-world entrepreneurs need to build networks that compensate for weak public institutions — what he refers to as a web of trust composed of clients, workers, partners, and other stakeholders in society. While tech innovators and entrepreneurs in developing countries may seem like distinct breeds, Khanna, who cofounded a venture firm in Bangalore that supports early-stage companies, thinks the former can learn a lot from developing markets about how to design ecosystems and navigate unfamiliar terrain — skills that can provide long-term benefits both to their industry sectors and their own organizations.
MIT Sloan Management Review correspondent Frieda Klotz spoke with Khanna about the similarities and differences in navigating the two worlds. What follows is an edited and condensed version of their conversation.
MIT Sloan Management Review: You have written that technology innovation is similar to what happens in emerging markets with regard to the need to create their own surrounding ecosystems. What do you mean by this?
Khanna: We use the term emerging markets when we talk about developing countries, where basic standards and institutions are still being defined. But I would argue that you can have tech emerging markets too, where the ground rules for how to conduct business haven’t yet been specified. In the first case, society hasn’t set up the rules or they’re not being enforced. In the second, society hasn’t developed the intellectual understanding to specify and codify what it requires of innovative companies. In both instances, it’s a lawless frontier.
Personalized genomics offers a good example because science is advancing rapidly while society is still in the process of specifying and codifying acceptable norms and standards. The questions being asked today are about establishing laws and ethical boundaries and training people to make sure that even if they know — at least hypothetically — how to modify somebody’s genome, they have a clear understanding of what is acceptable and what we can allow.
Established markets have legal norms, and companies learn to operate within them or push against them. That’s very different from some of the most innovative and nascent fields, where few guidelines exist.
Khanna: That’s right. If I’m introducing a new retail format, the rules of the game are very well defined: There are zoning laws, disclosure norms, and in certain cases requirements around data to ensure that customer privacy is protected. The company’s freedom is constrained both in good ways and bad ways: good in the sense that the complexity of the game is reduced; bad in the sense that creativity is curtailed.
Tech pioneers have opportunities to create the rules themselves. This is where a mindset shift is essential. Part of building a good entrepreneurial venture involves helping the various parties think about what the key standards should be, about the actors and institutions that may be needed, and then working with society and the government to put them in place. As a pioneer, you can’t afford to just stay focused and on task. You may have to create the ecosystem.
As we’ve seen with social media platforms and also with personalized genomics and drones, the evolution of these new technologies is mostly driven by individual companies. As such, they are rewarded for prioritizing short-run shareholder value optimization and lack any incentive to work with regulators to agree on privacy norms or to build ecosystems of institutions that would rein in potential excesses. Needless to say, this can become a problem.
So how do companies address the problem?
Khanna: In almost all cases, the regulatory authorities in new industries are likely to be less informed than company leaders who are immersed in the problem. Entrepreneurs persuade regulators to establish norms, but the rules they come up with are often self-serving — they push their own agenda. Regulators know this, of course, and a complicated game ensues. We saw this in the U.S. biotech industry when the FDA banned 23andMe from disclosing health data because it didn’t provide error rates to would-be customers. Two years later, the FDA decided to let the company give customers some health data about their carrier status, and it relaxed its position even more in 2017, allowing the company to release information about users’ risk for genetic diseases. The rules have emerged relatively slowly, and they are continuing to evolve as regulatory experience accumulates.
In the developing world, it’s common for entrepreneurs to get involved in creating rules, even for things we might normally consider pretty standard. Take medical devices. In the United States, there are established protocols for things like what’s considered disposable, for sterilization, for the level of training people need to have before they’re allowed to operate equipment in a hospital setting. However, if you go to a hospital in a developing country, rules may exist, but they may be imprecise or improperly enforced. The ecosystems are not fully operational.
In my most recent book, I wrote about a friend, Dr. Devi Shetty, who is based in Bangalore and perhaps one of the world’s leading pediatric heart surgeons. He wanted to reduce the cost of heart surgery in India — for example, a coronary artery bypass graft — from the $70,000 to $80,000 it runs in the United States to $1,500. But to bring the price point down, he had to develop an entire ecosystem.
What did that involve?
Khanna: He had to think about not just the technical aspects of performing surgery but many related things as well — things like how to train personnel to compensate for the absence of skilled surgeons and how to source and encourage locally developed hospital materials like surgical scrubs and medical technology that perform just as well as more expensive products in the U.S. or Europe. In addition, he had to persuade the state-owned provider of satellite services to facilitate telemedicine so that he could perform diagnoses remotely before patients traveled to the hospital. He set up training for both doctors and nurses to compensate for lower levels of medical education and to foster the next generation of practitioners specialized in cardiac care. He even had to get involved in establishing medical insurance to offer the treatment at prices people could afford. The list was endless.
So he couldn’t just pay attention to the medical issues. He had to develop new skills and actually invest in building that ecosystem around the hospital?
Khanna: That’s right. He knew that if he focused only on surgery, the other parts of the ecosystem were never going to develop, and the venture would fail. He had to bring other people together to work with him, to coax the government to allow him to use satellite capacities, to convince the financial services regulator that they really should be developing mechanisms to enable local residents to acquire health insurance. Without these, the poor people in India who needed treatment wouldn’t have a prayer of being able to use even very cheap services.
There are plenty of examples from the business world, too. Take e-commerce in China. Until 10 or 15 years ago, people in China had a visceral distrust of buying new things online, which made it practically impossible for a company to get online commerce off the ground. Nobody wanted to click on a link and pay money for something they worried [they] would never see. So what did they do? Well, Alibaba, which today is the biggest retailer and e-commerce company in the world, had to invest in several things that were designed to build people’s trust. For example, the company developed escrow mechanisms that hold the buyer’s payment securely until the transaction has gone through. And it did other things, including setting up an instant message that enabled sellers and buyers to stay in touch, to reassure people that the goods they ordered would arrive.
It’s easy to see how this applies to emerging markets like India and China. But how would this approach be relevant in more developed economies?
Khanna: It’s true that most U.S. and European companies don’t have to think about building their own ecosystems. But companies working on the frontiers will have to start paying more attention to what is acceptable on the fringes of their industry, because the ethical boundaries and the norms acceptable to society are still unclear. Particularly with the emergence of AI and machine learning, many of the norms around privacy, cybersecurity, and commercialization of our personal data still need to be established. As companies such as Facebook and Google have evolved, their practices regarding data use and their use of insights from behavioral psychology are raising many new questions that we didn’t think about when they entered the market 10 or 15 years ago.
In earlier writing, I referred to the absence of these norm-establishing practices as institutional voids. By filling these voids — institutional, social, and other — entrepreneurs can enhance the credibility of their organizations. Industry associations can be a part of this. Entrepreneurs themselves can develop new models for data analysis that allow them to prove that they have responded to problems that had not previously been analyzed. Or they could go so far as to build new infrastructure or invest in existing infrastructure that others can use. In the developed world, with generally well-functioning governments, we’re conditioned to not invest in things that we think others will free-ride upon — those things are seen as the responsibility of the state. But partial provision of public goods might very well be in the interests of the private entrepreneur, even in developed economies. Just because someone else can also benefit from your investment doesn’t mean that you are not still better off for making that investment.
Currently, there is no mechanism to encourage entrepreneurs to pay attention to the longer-run need for creating supporting systems around them, other than facing battles in the courts or with regulators. That is what we’re seeing in Europe, where Google has been hit by large fines, and more recently in the United States, where the government is investigating anticompetitive behavior. In the short run, it might seem to be to their advantage to ignore that need. But as we’ve seen with Facebook and the litany of problems it has had to confront, companies can’t put off dealing with issues related to a still-developing ecosystem forever.
It sounds like, regardless of whether you’re in a developing or a developed market, you need to think about what you need to do to establish and maintain trust.
Khanna: Innovators encounter all sorts of ups and downs, so if you can reach a point where your employees or partners or customers trust you, you have the ability to take greater risks in innovating. With new technologies, you have to convince the regulators (and society more generally) of the efficacy and safety of what you’re attempting to do, and that could take more time than you’d planned on. It’s not unusual for the best-laid plans to go awry. If there is preexisting trust — that is, if you’ve invested in cultivating that trust before things happen — you’re more likely to ride out a temporary setback. Trust buys you a reservoir of goodwill that allows you to be much more creative than you could otherwise be. It’s something you should really think of in economic terms. It takes effort and resources to cultivate this mindset shift, but it pays dividends. It requires playing a stewardship role in nurturing the ecosystem.
Frieda Klotz is a freelance journalist and correspondent for MIT Sloan Management Review. She tweets @friedaklotz.
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