Monday, March 07, 2011
What's Worth Measuring? Rethinking the Narrative of Development
by Misha Lepetic
By now the scrappiness of the emerging economies’ entrepreneurial class has become a recognized trope of the folklore of globalization. Starting with Muhammad Yunus’s initial investments in the microfinance concept, to Tata Motors’ Nano, Western observers are being treated to an ever-increasing flow of news celebrating how doughty innovators are operationalizing elegant solutions to sticky problems that developed nations have, for many decades now, attempted to solve with boatloads of aid money, much of which was eventually misspent, misappropriated or outright stolen by its recipients, their governments and/or various inexperienced or misguided middlemen.
Now, augmented by the newly formulated war-cries of sustainability and climate change, these kinds of innovations and the drive behind them seem to be taking on even greater importance. In these neo-liberal, post-regulation end-times, the narrative tells us: Let a thousand flowers bloom. But what is it that we really see, and will we get what we expect?
Before we can understand what our expectations might be, we should ask about measurement, since what and how we choose to measure ultimately reflects back to us the criteria for its success. In the language of business and the capital markets, there are narrowly defined criteria that determine success factors, such as return on investment, cost of goods sold, and depreciation and amortization of tangible and intangible assets. Some of these criteria are little more than fictions spurred on by tax considerations, but each plays a crucial role in whether a firm decides to make an investment in new product development, how it may choose to commercialize this development, and most importantly, at what point it will consider the product a success, or withdraw it from the marketplace.
There are, of course, serious lacunae here. Currently accepted practices do not compel firms to take into account factors such as waste stream management, or greenhouse gas production, or carbon footprint. Nor do relevant regulatory bodies consistently provide incentives, such as tax write-offs or R&D subsidies, that would serve to introduce these exogenous costs into mainstream financial decisionmaking.
As a result, these exogenous costs have lead a contentious existence, and it has been left to civil society to pursue remedies in an unsurprisingly arbitrary fashion. Consider, for example, Greenpeace’s recent campaign to name-and-shame Apple into eliminating certain toxic materials from its production processes. Apple was singled out, not for the volume of its production, or the toxicity of its components – which would be a more rational choice for a legislator pursuing the same goal – but for its high visibility and trendsetting status. Nevertheless, these and other skirmishes, mostly pursued under the banner of “corporate social responsibility”, are fought, and oftentimes re-fought, due to the fact that the discourse of corporate financial decisionmaking has remained essentially unchanged. Intangible categories such as “goodwill” (whether as a balance sheet item or a public relations construct) are quantified opportunistically and modified to suit short-term circumstances. True reform of supply chain and manufacturing processes, for example to the extent proposed by William McDonough and Michael Braungart in Cradle To Cradle, may be technically possible and obviously desirable, but given the current idioms, their implementation becomes rather implausible. Even for opportunities where there is in fact a legitimate business case with a defined payoff, such as installing cogenerating facilities on top of waste stream disposal, it is difficult to persuade the relevant decisionmakers that the additional investment is desirable.
Another, subtler inheritance from this model is the conviction that growth, by which I mean scalability, is not only desirable but the very purpose of the development of any product or process. This rhetoric implies that firms must move swiftly from conceptualization to proof-of-concept to pilot plants, and then into full-blown production. The re-tooling of production lines and continuous innovation around the marginal costs of both materials and process lead to economies of scale that serve to dramatically increase the marginal profitability of the finished good or service. Additionally, negotiations for ever larger volumes of raw materials and workforce contribute to declining costs, and globalization has further abetted the process by allowing all kinds of arbitrage to occur, both geographically and financially, in terms of this procurement and the siting of plants. The final, driving ambition is to sell as much as possible of whatever optimized widget emerges from this long, error-prone and painstaking process. (Interestingly, one ought to admit that, as firms continue to squeeze costs in order to stave off margin collapse, they are becoming more interested in improvements to manufacturing processes whose benefits were trivial only a few years ago. In this way, costs that were prior considered to be exogenous become internalized, although perhaps not in the way intended.)
The consequences of these two paradigms are to a great extent responsible for the current state of the West’s prosperity, and simultaneously the perils that have accompanied it. It is entirely logical to assume, then, that as technological progress allows the developing world to leapfrog straight into advanced infrastructures of telecommunication and finance, the attendant innovation will follow much the same pattern.
As an example, consider microcredit. There will likely always be plenty of debate around its ultimate effectiveness. However, viewed through lens of capital markets, success is obvious: once a microcredit firm such as Mexico-based Compartamos executes an initial public offering, it gains tremendous financial advantages. Due to financial disclosure regulations of publicly listed firms, the firm’s valuation is made much clearer to a broader swathe of investors; its creditworthiness is evaluated by ratings agencies, and as a result Compartamos is now in a position to issue bonds underwritten by the quality of its assets and revenue streams. Doubtless, there are investment banks positively salivating at the prospect of securitizing and trancheing this debt, selling those tranches or, even better, insurance on those tranches to bondholders, and generally engaging in the sort of financial-engineering shenanigans that have lead to the parlous state in which we currently find ourselves. However, the difference – that the underlying assets are literally millions of small loans to the poor of debatable effectiveness – is quickly erased, as the consequences of growth and scalability become apparent (and the extent to which Compartamos becomes beholden to its bondholders to the detriment of its clients remains to be seen).
In the same way, the paradigms of financial accounting and forecasting have precluded much private sector involvement in the developing world. However, commentators such as the late CK Prahalad coined the term “Bottom of the Pyramid” and wrote copiously on strategies that would allow companies to reach a virtually untouched demographic. Prahalad’s work is fairly well known, so I will instead mention more recent work being done by Vijay Govindarajan, who has championed the idea of “reverse innovation”.
Govindarajan’s contention is that Western companies not only can derive great benefits from addressing emerging markets, but they must do so, now that the developing world has begun creating its own industrial powerhouses. Simply put, the intense local knowledge possessed by indigenous companies will trump the multinational incumbents in the race to serve these markets. Govindarajan’s insight, however, correctly identifies that the paradigms which made multinationals powerful are in fact liabilities. In an influential paper co-written with Jeffrey Immelt of General Electric (GE), he notes that the financial drivers, and therefore organizational formation, of a large firm like GE, preclude it from creating and maintaining channels of communication and development. Thus, managers in emerging markets, who are best positioned to identify, pitch and develop new product and market opportunities, must do so to a rigidly centralized and hierarchical institution, and have no means of institutional support, especially when those same managers are under great pressure to meet monthly sales targets. By creating and nurturing those channels, GE has been able to identify and respond to market demands with dramatically cheaper and more locally appropriate products, such as portable ultrasound units that are nearly one-tenth the price of their original, non-portable product. At the same time, GE retains its competitiveness vis-à-vis its new rivals, and now has a new selection of products which it can choose to bring into its more developed markets.
Fair enough. But we are still looking at this through the lens of firms’ responses to the evolving marketplace. While Compartamos climbed a well-established value chain to become a publicly listed company, and GE identified new opportunities to establish and consolidate its primacy in new, lucrative marketplaces, the perception of success – our means of measurement, and therefore our way of seeing the world – has not really changed.
In order to better understand what we might be missing, consider the concept of jugaad. Originally denoting any jerry-rigged motor vehicle created from a cart and a diesel motor or water pumpset, it has become the term of choice in India for any creative “hack” of one’s living situation through repurposing materials that are cheap and locally available. (For those readers in New York, there is an intriguing and problematic small show at the Center for Architecture leveraging precisely this indomitable human quality.)
If we can construe this as yet a further typology of innovation, jugaad innovation is one that is entirely outside the metrics of growth, scale and development as we have come to understand it. In fact, the original jugaad motor vehicles remain unregistered, and therefore not subject to India’s road tax, so it is impossible to estimate how many are on the road. It is this ambiguity that allows true, local innovation to remain almost entirely outside the frames I have described above. Does that mean that it is any less effective, or that the problems being solved by that local population are any less deserving of being solved, if only for that population itself?
Anil Gupta of the Indian Institute of Management has chosen to champion this type of innovation with scant regard for scale. In fact, he oftentimes considers this to be anathema to truly empowering individuals to address the problems they see in their communities. Importantly, this does not mean that the solutions are one-offs, or not viable as business models, but rather that they do not respond to the kind of product development and distribution paradigm with which we are familiar in the developed world – and neither does it respond to how the developed world chooses to address the perceived needs of the developing world. It simply accords the respect to local people and considers them entirely worthy of recognizing and addressing many of their own problems.
To his credit, Gupta takes the jugaad concept one step further: through the creation of the Honey Bee Network, a website devoted to cataloguing and disseminating local solutions, he hopes to pick up promising technologies, and devise pathways for entrepreneurs to formally register or patent those technologies, as well as gain access to manufacturing facilities and know-how that will allow their innovations to reach a wider audience. Throughout this process, however, he emphasizes that the point is not to create the next multinational corporation, as he recognizes that each innovation will be intrinsically bounded by its geography and material limitations.
This is not to say that certain inventions could (or should) not be licensed to larger firms, or that these same innovations might not make their way into developed markets. However, it is an acknowledgment that local ecosystems with seemingly intractable problems beyond the scope of free markets and development initiatives can in fact be served by their very own populations. Once that is recognized and encouraged, it might even emerge that what we are most interested in measuring is not profitability or growth, but human dignity itself.
Posted by Misha Lepetic at 12:15 AM | Permalink