A new book, Billions of Entrepreneurs, by HBS professor Tarun Khanna reiterates what microfinance organizations have been saying for decades: local-level entrepreneurship in India and China is thriving and will only become a larger force in their economies. Not just economic–local entrepreneurs are able to make a large social impact relative to the size of their investment. Local-level health or education initiatives are prime examples. In Bangladesh, an organization called Champions of Change are uncovering unnoticed innovative local-level initiatives. Donors are also beginning to take notice: in place of large greenfield investments hatched in their headquarters, they are beginning to toy with financing schemes that support locally-generated initiatives. Google.org, the philanthropic arm of the company, has just finalized its strategy of supporting the world’s “biggest, most imminent, least well-resourced problems”–and a good part of their attention is to support small, local entrepreneurs in developing countries.
In major emerging markets that have large populations, the importance of the local will only increase, even as globalization, the coming together of the world, continues apace.
One set of players remains largely outside this growth market: Western multinationals in the services industry. Market entry into India and China is a part of the strategic plan for most of them, but their entry in general is characterized by (i) acquisition of existing businesses, and (ii) geared toward the upper-middle classes as the customer base, mostly in urban areas. This makes some sense: these markets are more formal and easier to evaluate (even though credible business information is still scarce in China) and acquisition is the easiest way capture a customer base. This type of growth can also be planned better from headquarters. Short-term acquisitions in fast-growth economies can also be a good investment strategy.
But longer term success in those markets will depend considerably on what goes on outside the upper-middle class customer base. The insights, trends, preferences, and socio-economic impact of the vibrant local entrepreneurs in India and China will affect market conditions in the seemingly insulated upper-class urban bases. Local entrepreneurs are also benefiting from (and causing) economic growth, and although they are often unorganized, their combined economic clout is significant. Many of them see foreign investors as a threat, and also as entities that are not attuned to or supportive of their needs.
And most importantly, it is they who make or break governments, especially in democratic countries. Almost all large-scale political threats to foreign investment in India were sourced in local grievances. India’s BJP lost the last general elections mostly because its policies were seen explicitly to favor the upper-middle classes leaving the large majority neglected. Activists are often supported by local entrepreneurs, who now have the wherewithal, who have no shortage of innovative ideas, and who may some day number in the billions. Are foreign investors ready to go beyond number-crunching to qualitatively understand local market dynamics and risks?