Contents

Cover

TitlePage

Preface

Section1:ThePowerofMarket-CreatingInnovations

Chapter1:AnIntroductiontotheProsperityParadox

Chapter2:NotAllInnovationsAreCreatedEqual

Chapter3:IntheStruggleLiesOpportunity

Chapter4:PullVersusPush:ATaleofTwoStrategies

Section2:HowInnovationCreatedProsperityforMany

Chapter5:America’sInnovationStory

Chapter6:HowtheEastMettheWest

Chapter7:Mexico’sEfficiencyProblem

Section3:OvercomingtheBarriers

Chapter8:GoodLawsAreNotEnough

Chapter9:CorruptionIsNottheProblem;It’saSolution

Chapter10:IfYouBuildIt,TheyMayNotCome

Section4:WhatNow?

Chapter11:FromProsperityParadoxtoProsperityProcess

Acknowledgments

Appendix:TheWorldThroughNewLenses

Index

AbouttheAuthors

AlsobyClaytonChristensen

Copyright

AboutthePublisher

Preface

Ispent twoyears in theearly1970sservingasaMormonmissionary inSouthKorea,oneofthepoorestnationsinAsiaatthetime.InSouthKorea,Iwitnessedfirsthandthedevastatingeffectsofpoverty:Ilostfriendstopreventableillnessesand saw families routinely having tomake impossible choices among puttingfoodon the table, educating their children, or supporting the older generation.Sufferingwaspartofdailylife.IwassomovedbythatexperiencethatwhenIreceived aRhodes Scholarship to attendOxford, I decided to study economicdevelopment,withafocusonSouthKorea.IhopedthatmightleadtoapositionattheWorldBank,whereIcouldtrytohelpsolvetheproblemsIhadseeninmytime inSouthKorea.Theparticularyear Iwanted to join,however, theWorldBankwasn’thiringanymoreAmericans.Thatoptionwasclosed tome.So inthetwistsandturnsoffate,IendedupatHarvardstudyingbusinessinstead.Butthehauntingimagesoftheimpoverishedcountrystayedwithme.

I am happy to say that when I visit South Korea today, it bears noresemblancetotheSouthKoreaIremember.InthedecadessinceIlivedthere,SouthKoreahasnotonlybecomeoneof theworld’s richest countriesbuthasalso joined the respected ranks of theOrganization forEconomicCooperationandDevelopment(OECD)countries,andhasgonefromaforeignaidrecipienttoaforeignaiddonor.1AmericanjournalistFareedZakariahasgonesofarastocallSouthKorea“themostsuccessfulcountryintheworld.”2Icouldnotagreemore. South Korea’s transformation in just a few decades is nothing short ofmiraculous.

Unfortunately, such a dramatic transformation has not been possible formanyothernationsthatresembledSouthKoreaafewdecadesago.Bycontrast,Burundi, Haiti, Niger, Guatemala, and many other countries that weredesperately poor in the 1970s are still desperately poor. The questions thatoriginallyspurredmyinterestinhelpingSouthKoreayearsagohavecontinuedtonagatmefordecades.Whydosomecountriesfind theirwaytoprosperity,whileotherslanguishinprofoundpoverty?

Prosperity,itturnsout,isarelativelyrecentphenomenonformostcountries.Mostwealthynationshavenotalwaysbeenprosperous.Consider,forexample,theUnitedStates.WemayforgetjusthowfarAmericahascome.Nottoolongago,America, too,was desperately poor, rifewith corruption, and chaoticallygoverned.Byalmostanymeasure,Americainthe1850swasmoreimpoverishedthanpresent-dayAngola,Mongolia,orSriLanka.3 Infantmortalityat the timewas roughly 150 deaths per 1,000 childbirths—three times worse than sub-SaharanAfrica’s infantmortalityrate in2016.4Americansocietythen—withalackofstableinstitutionsandinfrastructures—lookednothinglikeitdoestoday.But that is exactly why the story of America offers hope to poor nationseverywhere.Findingapathoutofpovertyispossible.Thequestionishow.5

For decades, we have studied how to stem poverty and create economicgrowthinpoorcountries,andwehaveseensomerealprogress.Forexample,therate of extreme poverty globally decreased from 35.3 percent in 1990 to anestimated 9.6 percent in 2015.6 That represents more than one billion peoplebeingliftedoutofpovertysince1990.Butasdramaticasthatstatisticmaybe,itmightbepresentingafalsesenseofprogress.Oftheapproximatelyonebillionpeoplewho have been lifted out of poverty, themajority—approximately 730million—are from one country: China. China was able to reduce its rate ofextremepovertyfrom66.6percentin1990tolessthan2percenttoday.7Thatisindeedimpressive.Butinsomeregions,suchassub-SaharanAfrica,thenumberofpeople living inextremepovertyhasactually increased significantly.8Evenforthosewhoarenottechnicallylivinginextremepoverty,survivalisstillveryprecarious.

Althoughitistruethatwehavecertainlymadesomeprogress,thereseemstobenoconsensusonhowtoeradicatepoverty.Thesuggestionsrangefromfixingdismal societal infrastructure (including education, health care, transportation,and so on) to improving institutions, to increasing foreign aid, to boostingforeign trade, and many others.9 But even those who disagree on the rightsolutionwouldsurelyagreewiththeassessmentthatprogresshasbeentooslow.

Country 1960s 2015 %change1 Burundi $470 $315 -33%2 CentralAfricanRepublic $677 $339 -50%3 Malawi $412 $353 -14%4 Gambia $773 $384 -50%5 Madagascar $1,108 $393 -65%6 Niger $1,196 $403 -66%

6 Niger $1,196 $403 -66%7 Liberia $1,447 $469 -68%8 DemocraticRepublicofCongo $1,742 $478 -73%9 Togo $783 $578 -26%10 Afghanistan $698 $615 -12%11 Uganda $686 $625 -9%12 SierraLeone $1,128 $675 -40%13 Benin $802 $709 -12%14 Senegal $2,003 $935 -53%15 Zimbabwe $2,207 $1,037 -53%16 IvoryCoast $1,545 $1,319 -15%17 Ghana $1,632 $1,401 -14%18 Zambia $2,252 $1,576 -30%19 Venezuela $8,507 $4,263 -50%20 Kuwait $34,087 $29,983 -12%

Figure1:Percapitaincomefrom1960–1969wasaveragedtogeta1960spercapitaincomevalue.Valueswereadjustedforinflation.

Source:IMFWorldEconomicOutlookDatabase

Consider this.Since1960,wehavespentmorethan$4.3 trillion inofficialdevelopmentassistancetryingtohelppoorercountries.10Unfortunately,manyofourinterventionshavenothadtheimpactinpoorcountriesthatwe’dhopedtheywould. In fact, many of the world’s poorest countries in 1960 are still poortoday.Andevenworse,atleasttwentycountrieswerepoorerin2015thantheywerein1960(seeFigure1),inmostcases,evenafterbillionsofdollars’worthofaid.11

EfosaOjomo,mycoauthoron thisbookandoneofmy former students atHarvard, knows firsthand the pain of failing despitewell-intended efforts.Hisexperienceoffersinsightintothefrustrationsurroundingsomanyonce-hopefulprojectsdesignedtobringbetterlivingandworkingconditionstoimpoverishedeconomies. Efosa is originally fromNigeria, but he has spent the bulk of hisadult life living andworking in theUnitedStates.Sowhile he recognized thepoverty that plagued poor countries, itwas somewhat of a distant concern forhim,untilhefoundhimselfreadingthededicationinthebookTheWhiteMan’sBurden,NewYorkUniversity professorWilliamEasterly’s attack onWesternefforts to aid impoverished countries. In this book, Easterly told the story ofAmaretch,aten-year-oldEthiopiangirlwhoroseatthreeeachmorningtofetchfirewood.Shethenhadtowalkmilestosellthefirewoodinthemarkettohelp

provideforherfamily.Efosacouldn’tsleepthatnightafterhereadherstory.Nochilddeservedto

live such adifficult life.SoEfosa, togetherwith someof his friends, set up anonprofit organization, Poverty Stops Here, to raise money to build wells invariouspartsofhisnativeNigeria.“Thelackofwateristhefirstthingthathitsyouwhenyouvisitapoorcommunity,”Efosa later sharedwithme.“Water islife. It’swhy there are somanywater projects throughout theworld.We justneed togetpeoplewater.Everythingstarts there.” Inasimilarvein,whenyouvisit a poor country, the lack of quality education, unpaved roads, badgovernance, and other poverty indicators are painfully obvious. Isn’t itreasonabletoassumethattheanswertosolvingpovertyliesinprovidingoneorallofthosethings?

Efosamanagedtoraisemorethan$300,000andidentifiedfivecommunitiesin which to help build wells. The day Efosa and his supporters visited thosecommunitiestoturnonthewellsforthefirst timewasoneofunmitigatedjoy,forbothEfosaandthelocalresidents.Icanimaginetherearefewmoremovingsights than seeing plentiful, clean water coming from a well in a village thatpreviouslyhadnone.

But as it turned out,wells break down.About sixmonths after building anewwell,Efosawouldgetacall inhisWisconsinhome that thewaterwasn’tcomingoutanymore,andhewouldhavetofigureoutfromthousandsofmilesaway how to get someone inNigeria to go and fix it. Since all thewells hisorganizationbuiltwereinruralareas,findingaskilledtechniciantosourcepartsandgotothevillagewasalwayschallenging.Oneproblemwouldbefixedandanotherwouldspringup.Today,onlyoneof the fivewells thatPovertyStopsHereinstalledisstillfunctional.Efosaandhisfriends,whohadsoearnestlysetouttohelpthesevillages,reluctantlygaveuponbuildingadditionalwells.

PovertyStopsHere,however,isnotauniquestory.Therearemorethanfiftythousand broken wells across Africa alone, according to a study by theInternationalInstituteforEnvironmentandDevelopment.Insomecommunities,asmany as 80 percent of thewellswere broken.12 In one of the villages thatEfosatargetedforawell,henoticedthattherewasalreadyabroken-downwelljustafewhundredfeetfromtheonePovertyStopsHerebuilt,havingpreviouslybeeninstalledbyaninternationalaidorganizationbutthenabandoned.

TheexperiencewasprofoundlydishearteningforEfosa,whowassoeagertohelp alleviate suffering.His failure raised some difficult questions for him. Ifthese vexing problems couldn’t be solved by an injection of resources andgoodwill, thenwhatwouldhelpinstead?Whydosomeeffortssucceedandnotothers? Why do some countries fare better than others? Perhaps most

profoundly,Efosarecognizedthateasingpoverty—orthemostobvioussignsofpoverty—maynot solve the problem long term.Alleviating poverty is not thesameascreatingprosperity.Weneedtostartthinkingdifferently.Wehopethatthis book will change the way you think about the problem of economicdevelopment, the questions that you ask, and the solutions you develop forhelpingcommunitiesthatdesperatelyneedit.

*

Whatdowemeanby“prosperity”?Therearesomeobviousandcommonlyusedproxies for prosperity, such as access to education, health care, safety andsecurity, good governance, and so on. The Legatum Prosperity Index, whichranks148nationsinthesecategories,alsoincludesseveralothermetrics,suchasenvironmental efforts. Not surprisingly, countries such as Norway, NewZealand, and Finland are top performers while Sudan, Yemen, and CentralAfricanRepublicareatthebottomoftheindex.

Whilethesemeasuresareimportantinassessingthewell-beingofmembersofasociety,webelievethatanevenmoreimportantproxyisaccesstogainfulemployment andupward socialmobility.So for thepurposesof thisbook,wedefine“prosperity”as theprocessbywhichmoreandmorepeople ina regionimprovetheireconomic,social,andpoliticalwell-being.

Thisisanimportantdistinctionbecausewemightclassifysomecountriesas“rich” but not particularly prosperous, such as nations that are endowed withvaluable natural resources. Prosperity breeds increasing freedoms—economic,social, and political—and is less dependent on access to one or two singularresources, likeoil.Andso,whilesomecountriesare richandhavefiguredoutways todistribute their riches tosomeof theircitizens,wewouldnotconsiderthem prosperous because their riches have not bred a culture of inquiry,innovation, and a diversity of markets. They have not led to socioeconomicmobility forall.And those resourceshavenot led toanenvironment inwhichprosperitywillbecomesustainableafter thosenaturalresourcesrundryor losetheirvalue in the future.This illustrates the importanceofunderstandingwhatcreatespoverty.

And somy coauthors, EfosaOjomo and formerHarvardBusiness Revieweditor Karen Dillon, and I have set out to investigate how poor nations canbecomeprosperous.

To make this book easier to read, we’ve written in the first person (myvoice), but the thinking captured here is very much the product of our jointcollaboration.EfosaandKarenhavebeencoauthorsineverysenseofthatword,

andI’mgratefulfortheirpartnershipandpassionfortryingtomaketheworldabetterplace.Weknowmanyofyoushareourgoals.

Wehavewrittenthisbookwithfourstakeholdersinmind.First, we wrote this book for those in the development industry who are

workingdiligentlytoridtheworldofpoverty.Weapplaudyoureffortsandhopethattheapproachwepresentinthisbookwillhelpyouthinkdifferently,perhapsevencounterintuitively,abouttheproblemsyouaretryingtosolve.

Second,wewrotethisforinvestors,innovators,andentrepreneurslookingtobuildsuccessfulenterprisesinemergingmarkets.Yourworkplaysacriticalroleincreatingprosperityinlow-andmiddle-incomecountries.Theworldneedsyounowmore than ever. But our ideas here aren’t built to drive you to invest inthese countries purely out of a sense of civic responsibility—they’re built onseeingpotentialopportunitiesthatothersmightmiss.

Third,wewrotethisbookforthepolicymakersseekingtoinstitutepoliciesthatspurdevelopment in theircountries.Therearefewjobs in theworldmoredifficult than that of a public servant in an under-resourced country.Wehopethat,byprovidingamodelfordevelopmentgroundedintheory,wewillenableyou to translate these ideas into development policies that are appropriate foryourcountry’suniquecircumstances.

Lastandmostimportant,wewrotethisbookfortheten-year-oldchildrenallover the world, like Amaretch, who deserve a better life. This book is forresidents of the villages in Nigeria that celebrated the gushing water fromEfosa’swells,onlytowatchthembreakdownmonthslater.Thisbookisforthefathers andmothers whowork tirelessly to provide for their families, but areunabletoriseabovealifeofsubsistence.Andfinally,wewroteTheProsperityParadox for the increasing number of youthwho,with each passing day, feeltheirhopesextinguishingbecausetheirworldseemsdevoidofopportunity.Wehope that this book reignites their confidence and optimism; a better futureawaitsthem.Abetterfutureawaitsusall.

NOTES1. OECDstandsforOrganizationforEconomicCooperationandDevelopment,andisagroupofthirty-five member nations, including the United States, France, Germany, and several of the world’s mostdeveloped countries. “About the OECD: Members and Partners,” OECD, accessed January 16, 2018,http://www.oecd.org/about/membersandpartners/#d.en.194378.

2. Fareed Zakaria, “Give South Korea a Gold Medal,” Washington Post, February 8, 2018,https://www.washingtonpost.com/opinions/give-south-korea-a-gold-medal/2018/02/08/76be5e7e-0d1a-11e8-8890-372e2047c935_story.html?utm_term=.ac6f9aa492cf.

3. For example, in today’s dollars, America’s annual income per capita in that erawas approximately$3,363,Angola’stodayis$3,695,Mongolia’sis$3,694,andSriLanka’sis$3,844.Unlessotherwisestated,GDPpercapitanumbersarebasedon2016figuresandareretrievedfromtheWorldBank.“GDPpercapita(current US $),” Data, The World Bank, accessed February 5, 2018,https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=AO-MN-LK.

4. MichaelHaines,“FertilityandMortalityintheUnitedStates,”EconomicHistoryAssociation,accessedJanuary16,2018,https://eh.net/encyclopedia/fertility-and-mortality-in-the-united-states/.

“Mortality rate, infants (per 1,000 live births),” The World Bank, accessed February 21, 2018,https://data.worldbank.org/indicator/SP.DYN.IMRT.IN.

5. Muchhasbeenwrittenabout thequestionofhow theWestbecameprosperousand,moregenerally,howpoorcountriescanbecomeprosperous.Werecognizethatthereisalargebodyofimportantworkinthis field. Several books and papers provide very important insight to these questions. The fundamentalwork is Joseph Schumpeter’s The Theory of Economic Development: An Inquiry into Profits, Capital,Credit,Interest,andtheBusinessCycle(1934,translatedfromtheoriginal1911Germantranscript).Inthisbook, Schumpeter helps us see clearly the role of innovation and the entrepreneur in economicdevelopment.Asentrepreneursinnovate,orcreatenewproductsornewmethodsofproduction,theydisturbthe“circularflow”inaneconomy,aprocesswhichdescribesastateofequilibriuminsociety.Althoughthisperpetual “disturbance”—a process marked by new innovations—does come with some measure ofinstability and uncertainty, the end result is often a more prosperous society. For example, the cardestabilizedthehorseandcarriageandelectricrailcars,buthasmadeusmoreprosperous.ForSchumpeter,entrepreneurs—theHenryFordsoftheworld—arethestarsintheeconomicdevelopmentstory.Asyou’llreadthroughoutthisbook,wecertainlyagree.

Inthelasthalfcentury,must-readsforthoseinterestedintheascendencyoftheWestincludeDouglassNorth and Robert Thomas’s The Rise of the WesternWorld: A New Economic History (1973), NathanRosenberg’s and Luther E. Birdzell’sHow the West Grew Rich: The Economic Transformation of theIndustrialWorld(1986),andDavidLandes’sTheWealthandPovertyofNations:WhySomeAreSoRichand Some So Poor (1999). David Landes provides rich economic history and stresses several factors,includinggeographyandculture,thathelpedEuropeprosper.NorthandThomassummarizetheirargumentas follows, “Efficient economic organization is the key to growth; the development of an economicorganizationinWesternEuropeaccountsfortheriseoftheWest.”Inessence,theyhelpedbringtolighttheimportanceofinstitutionsandpropertyrights.

Inaddition, several seminalpapershave shed lighton this topic.For instance,wehave learned fromRobertLucas’sMakingaMiracle(1993),RicardoHausmannandDaniRodrik’sEconomicDevelopmentasSelf-Discovery (2002), and RichardNelson and Edmund Phelps’s Investment in Humans, TechnologicalDiffusion, and EconomicGrowth. In their ownway, each of these economists have helped simplify, invaryingdegrees,thecomplexityinherentinthetopicofeconomicgrowthanddevelopment.Thishashelped

usbetterunderstandsomeoftheingredientsnecessaryforsustainedeconomicgrowth.RobertLucashelpsusunderstandtheimportanceofon-the-job“learningbydoing”inincreasingtheproductivityofeconomies.LucasadditionallyexplainsthatthemainfeaturesoftheEastAsianmiracleshaveall“involvedsustainedmovementoftheworkforcefromlesstomoresophisticatedproducts,”beyondincreasedefficienciesintheproductionofexistingproducts.HausmannandRodrikexplainthat,whileitisimportantforentrepreneurswithinacountrytolearnwhatthey’regoodatmaking,thesocialreturnsoftenoutweightheprivatereturns.Thisisbecause,onpaper,firmsthatlearnhowtodevelopinnovationsthatcansolveasocietalproblemcanbeeasilycopiedby“second-entrants,”whichhastheeffectofstronglydilutingaprioriincentivestotakeonthearduousworkofdevelopingtheinnovationinthefirstplace.Assuch,thismakesinvestmentsinthekind of learning that leads to structural economic change difficult. In these circumstances, developmentprofessionalsandpolicymakerscanplayasignificantrole.NelsonandPhelpsfocusonhumancapitalandtechnology diffusion. In effect, they hypothesize that “in a technologically progressive or dynamiceconomy,productionmanagementisafunctionrequiringadaptiontochangeandthatthemoreeducatedamanageris,thequickerhewillbetointroducenewtechniquesofproduction.”

In thisbookwefocuson the impact thatmarket-creating innovationshaveoncreatingandsustainingeconomic prosperity. In Chapter 2, we provide both a definition and a categorization for the wordinnovation,andexplainhowdifferenttypesofinnovationimpacteconomies.

6. Press Release, “World Bank Forecasts Global Poverty to Fall Below 10% for First Time; MajorHurdles Remain in Goal to End Poverty by 2030,” The World Bank, October 4, 2015,http://www.worldbank.org/en/news/press-release/2015/10/04/worldbank-forecasts-global-poverty-to-fall-below-10-for-first-time-major-hurdles-remain-in-goal-to-end-poverty-by-2030.

7. In someways, China’smeteoric development over the past fifty yearswon’t come as a surprise tostudents of history. The wheelbarrow, soil science, cardboard, the magnetic compass, deep drilling fornatural gas, knowledge of circulation of blood, paper and printing, gun powder, and hundreds of otherinventions are attributed to theChinese. Itwas theEuropeanswhowere playing catchup in theMiddleAges.Inthe1500sforinstance,China’seconomyaccountedfor25%ofglobalGDP.Butby1950,itwasonly5%.Today,however,asChinaismakingacomeback,itsshareofglobalGDPhoversaround19%.

Still,China’srecenteconomicgrowthisspectacular,especiallyconsideringthehundredsofmillionsofpeoplewhohavebeenliftedoutofpoverty.TheconventionalstoryofChina’sgrowthisthatdiscontinuitiesinpolicy initiatedbyDengXiaopingin the late1970sunleashedthepreviouslydormanteconomicgiant.This is certainly true to a point. However, it is not possible to tell the story of China’s rise withoutemphasizingtheinitiativeofentrepreneursandothercitizens.MIT’sYashengHuangexplainsthatChina’seconomicpolicy in the1980sactually favoredentrepreneurshipandmarket-drivensolutionsaswesawasignificant rise in Town andVillage Enterprises in the country.He calls the 1980s “the EntrepreneurialDecade.”However,bythe1990s,thecountry’seconomicpolicyshiftedmoretowardastate-led,top-downapproachwiththeriseofmanystate-ownedenterprises.Whiletheeconomystillgrew,HuangexplainsthatthistypeofgrowthwasnotasrobustandinclusiveasChina’sgrowthinthe1980s.

Eventhen,westillseeChinaontheascent.Justrecently,theWashingtonPostpublishedapiecetitled“China increasingly challenges American dominance of science.” The authors note that an increasingnumberofscientistsinsomeofthemostprestigiousinstitutionsintheUnitedStatesareleavingtosetuplabsinChina.AlthoughtheUnitedStatesstillspendsroughlyhalfa trilliondollarsonscientificresearchannually,ChinaisclosebehindandisontracktosurpasstheUSbytheendof2018.Andforthefirsttime,in 2016, annual scientific publications from China outnumbered those from the United States. China’seconomyisafarcryfromwhereitwasinthe1960sand1970s,andseemstobereturningtoitsdominanceintheyesteryears.

YashengHuang,CapitalismwithChineseCharacteristics:EntrepreneurshipandtheState(NewYork:CambridgeUniversityPress,2008).

BenGuarino,EmilyRauhala,andWilliamWan,“ChinaincreasinglychallengesAmericandominanceof science,” Washington Post, June 3, 2018, https://www.washingtonpost.com/national/health-

science/china-challenges-american-dominance-of-science/2018/06/03/c1e0cfe4-48d5-11e8-827e-190efaf1f1ee_story.html?noredirect=on&utm_term=.99a54422d595.

Philip Auerswald, “China’s sudden fall and slow recovery,” New York Times, August 11, 2008,https://www.nytimes.com/2008/08/11/opinion/11iht-edauerswald.1.15175911.html.

8. In1990,therewereapproximately282millionpeoplelivinginpoverty,representingabout55percentof sub-Saharan Africa’s population. In 2013, that number was 401 million, roughly 42 percent of thepopulation.“Povertyheadcountratioat$1.90aday(2011PPP),”Data,TheWorldBank,accessedMarch13,2018,http://povertydata.worldbank.org/poverty/region/SSF.

9. Deirdre McCloskey’s Bourgeois series provides a detailed overview of economic history and ananalysisofthemanysuggestedcausesofeconomicgrowth.Inthesecondofthethree,BourgeoisDignity:WhyEconomicsCan’tExplaintheModernWorld,McCloskeydetailsmanyofthewidelyheldtheories—institutions, transportationinfrastructure, foreigntrade,slavery, thrift,capitalaccumulation, theProtestantwork ethic, expropriation, humancapital (education), geographyor natural resources, science, and a fewothers—on what might have caused the economic transformation brought about by the IndustrialRevolution and suggests that they allmiss themark. This particular 592-page volume explainswhy, asinterestingandplausibleasalltheseexplanationsseem,theyarenotresponsibleforbringingustoilets,airconditioners, automobiles, andmobile phones. DeirdreMcCloskey,Bourgeois Dignity:Why EconomicsCan’tExplaintheModernWorld(Chicago:UniversityofChicagoPress,2010),34–35.

10. Thisamountdoesnotincludeprivatefundsspentbysomeoftheworld’sheavilyendowedfoundationsand organizations, such as the Bill and Melinda Gates Foundation, the Skoll Foundation, the OmidyarNetwork,andmanyothers.

“ODA 1960-16 Trends,” Official Development Assistance 2016, Compare Your Country, accessedFebruary1,2018,http://www2.compareyourcountry.org/oda?cr=20001&lg=en&page=1#.

11. Many of the countries in the above table have received official development assistance for povertyeradicationprogramsfromtheWorldBankandseveralotherdevelopmentinstitutions.Niger,forinstance,hasreceived$2.9billionworthofWorldBankaidsince1964,butin2015itspercapitaincomewaslessthan half what it was in the 1960s. “Urban Water and Sanitation Project,” The World Bank,http://www.worldbank.org/projects/P117365/urban-water-sanitation-project?lang=en.

12. JamieSkinner,“Whyeverydropcounts:tacklingruralAfrica’swatercrisis,”IIEDbriefing,accessedFebruary1,2018,http://pubs.iied.org/pdfs/17055IIED.pdf.

Section1

ThePowerofMarket-CreatingInnovations

Chapter1

AnIntroductiontotheProsperityParadox

It’snotaneasythingtobelaughedatbyseriouspeople.AndseriouspeoplelaughedatmewhenItoldthemIwantedtobuildatelecommunicationsnetworkinAfricatwentyyearsago.Theytoldmeallthereasons theprojectwouldneversucceed.SomehowI justkept thinking, Iknowtherearechallengesbutwhycan’ttheyseetheopportunity?

—MOIBRAHIM

TheIdeainBrief

Starving children on street corners. Slums without adequate clean water andsanitation. Hopeless prospects for employment amid a growing youthpopulation.Mostofusaremovedbythepainfulsignsofpovertyweseeinpoorcountries all around theworld. According to theWorld Bank,more than 750millionpeoplestillliveinextremepoverty,survivingonlessthan$1.90aday.Weallwant tohelp.Butwhatmight seem tobe themost obvious solution tothese problems—directly assisting poor countries by investing to fix thesevisiblesignsofpoverty—hasnotbeenassuccessfulasmanyofuswouldlike.Youonlyhavetolookatthebillionsofdollarsthathavebeenchanneledtotheseproblemsovertheyearswithrelativelyslowprogresstoconcludethatsomethingisnotquiteright.Withtheseefforts,wemaybetemporarilyeasingpovertyforsome—butwe’renotmovingtheneedleenough.

Whatifweconsideredthisproblemthroughadifferentlens?Whatif,insteadof trying to fix the visible signs of poverty, we focused on creating lastingprosperity?Thismayrequireacounterintuitiveapproach,butonethatwillcauseyoutoseeopportunitieswhereyoumightleastexpectthem.

*

Inthelate1990s,whenMoIbrahimfirstconceivedofsettingupamobilephone

companyinAfrica,peoplesaidhewas,well,nuts.“EverybodysaidAfricaisabasket case,” he recalls now. “It’s a dangerousplace, it’s full of dictators, it’sfullofcrazypeople. . . .whoareallcorrupt.”Infact,peoplelaughedwhenhesharedhisidea.

Ibrahim,theformertechnicaldirectorforBritishTelecom,whowasrunninghisownsuccessfulconsultingfirm,plannedtodevelop,fromscratch,amobilecommunicationsnetworkinsub-SaharanAfrica—wheremostpeoplehadneverused aphone, let aloneownedone.TheAfricancontinent,which ranges fromthebazaarsofMoroccotothebigbusinesscomplexesofJohannesburg,ishometo fifty-four countries.The total population ofmore than one billion is spreadover 11.7million squaremiles—more than three times the size of theUnitedStates.Thevastmajorityof this territoryhadnoexisting infrastructure foroldlandline telephones, let alone the cell towers necessary for a mobile phonecompanytofunction.Atthetime,mobilephoneswereseenasanexpensivetoyfortherich,aluxurythatthepoorcouldnotafford,and,moreimportant,didnotneed. When many, including Ibrahim’s clients and former colleagues at themajor telecommunication companies, assessed the opportunity in Africa, theynoted the levelofpoverty, lackof infrastructure, fragilityofgovernments,andevenlackofaccesstowater,healthcare,andeducation.Theysawpervasiveandpalpablepovertypermeatingeveryaspectofsociety,notfertileterritoryfornewbusiness.

But Ibrahim, to his credit, saw things differently. Instead of seeing justpoverty,hesawopportunity.“Ifyoulivefarawayfromthevillagewhereyourmother livesandyouwant to talk toher,youmighthavetomakeaseven-dayjourney,”Ibrahimrecallsnow.“Ifyoucouldjustpickupadeviceandspeaktoher instantly,whatwould be the value of that?Howmuchmoneywould yousave?Howmuch time?”Notice that Ibrahimdidnot sayHowwillmillionsofAfricans,forwhomthreemealsadayisoftenaluxury,affordamobilephone?orHowcanyoujustify theinvestmentsininfrastructureforamarket thatdoesnot exist? He focused on the struggle to accomplish something important forwhich there were few good solutions. For Ibrahim, struggle representedenormouspotential.

This struggle often presents itself as “nonconsumption”—where would-beconsumersaredesperatetomakeprogressinaparticularaspectoftheirlives,butthere’snoaffordableandaccessiblesolutiontotheirproblem.Sotheysimplygowithout, or developworkarounds, but their suffering continues—usually undertheradarofconventionalmetricsusedtoevaluatebusinessopportunities.Butinthatnonconsumption,Ibrahimsawthechancetocreateamarket.Sowithverylittlefinancialbackingandjustfiveemployees,IbrahimfoundedCeltel1withthe

goalofcreatingapan-Africanmobiletelecommunicationscompany.The obstacles were enormous. Creating the necessary cellular network

infrastructure was a mind-boggling undertaking—done without relying onsupport from local governments or frommajor banks. Raising capital was sodifficultthatevenafterhe’dprovedhisbusinessmodelandreachedpredictablecash flow in the millions of dollars, banks still refused to lend him money.Ibrahim had to fund Celtel entirely with equity financing, “a first in thetelecommunicationsindustryforacompanyofoursizeandscale,”heexplains.Butthat,andthemanyotherchallengeshefaced,didn’tdeterhim.Wheretherewas no power, he provided his own power;where therewere no logistics, hedeveloped his own;where therewas no education or health care, he providedtrainingandhealthcare forhis staff;andwhere therewereno roads,heeitherbuilt makeshift roads or used helicopters tomove equipment around. IbrahimwasfueledbythevisionhehadoftheimmensevalueofmillionsofAfricansnolonger having to struggle to keep in touch with one another. Eventually, hesucceeded.

In just six years, Celtel built operations in thirteen African countries—including Uganda, Malawi, the two Congos, Gabon, and Sierra Leone—andgained 5.2million customers.At the openings ofmany of Ibrahim’s stores, itwasn’t uncommon to see eager customers line up by the hundreds. Ibrahim’sCeltelwas so successful thatby2004, revenueshad reached$614millionandnet profits were $147 million. In 2005, when Ibrahim decided to sell thecompany,hedidsoforahandsome$3.4billion.Insuchashorttime,Ibrahim’sCeltel unlocked billions of dollars’ worth of value from some of the poorestcountriesintheworld.

But Celtel was just the tip of the iceberg. Today, Africa is home to asophisticatedmobiletelecommunicationsindustry,withnumerousmobilephonecompanies(includingGlobacom,MarocTelecom,Safaricom,MTN,Vodacom,Telkom,andothers)providingmorethan965millionmobilephonelines.Thesecompanieshavenotonlyraisedbillionsofdollarsindebtandequityfinancing,butby2020, the industry is forecast tosupport4.5million jobs,provide$20.5billionintaxes,andaddmorethan$214billionofvaluetoAfricaneconomies.2Mobile phones have also unlocked value in other industries, such as financialtechnology, where companies now use phone usage records as a proxy forcredit-worthiness, extending credit to millions of credit-worthy people whohistoricallycouldnotreceiveit.

It may seem obvious now that mobile phones are ubiquitous all over theworld—andalloverAfrica—butrememberthattwentyyearsago,Ibrahimsawwhatothersdidnot.

The market Mo Ibrahim built, and the difficult and seemingly unlikelycircumstances in which he built it, represents a solution to what we call theProsperityParadox.Itmaysoundcounterintuitive,butourresearchsuggeststhatenduringprosperityformanycountrieswillnotcomefromfixingpoverty.Itwillcome from investing in innovations that create new markets within thesecountries.3Trueandlastingprosperity,wehavefound,isnotreliablygeneratedthrough the flood of resources we are directly pouring into poor countries toimprove poverty indicators such as low-quality education, subpar health care,badgovernance,nonexistent infrastructure,andmanyother indicators inwhichan improvement would suggest prosperity. Instead, we believe that for manycountriesprosperitytypicallybeginstotakerootinaneconomywhenweinvestin a particular type of innovation—market-creating innovation—which oftenserves as a catalyst and foundation for creating sustained economicdevelopment.

ContrastMo Ibrahim’s approach to buildingCeltelwith Efosa’s efforts tobuild wells through his nonprofit organization, Poverty Stops Here. PovertyStopsHere is significantlysmaller insize,but it isemblematicof the thinkingbehind many of the efforts undertaken to help poor countries today. Forexample, just 18.2 percent of Official Development Assistance goes toward“economicinfrastructure”projects,whilethebulkfundseducation,health,socialinfrastructure,andotherconventionaldevelopmentprojects.4 Inaddition toaidfromOECDcountries representingavastmajorityof foreignaidexpenditures,thepatternofexpenditurealsohasasignalingeffecttomanyotherswhodonateand fund projects in poor countries. In a sense, it’s what inspired Efosa’sprojects, thebelief that ifwejustchannelresources intoan impoverishedarea,wecanfixpoverty.

Butwhatmighthappenifweflippedtheemphasistoinnovationandmarket-basedsolutionsratherthanconventionaldevelopment-basedsolutions?Ortoputitanotherway,whatifwefocusedlessonEfosa-typeprojectsandmoreonMoIbrahim–type ones? Efosa wanted to fund and build more wells as a way ofsolving a problem. Ibrahim figured out how to solve problems by creating amarketthattargetedpeoplewhowerewillingtopayforaproduct.They’renotthesamething.Andasourresearchhasdemonstrated,theyhaveverydifferentlong-termeffects.

UnderstandingtheProsperityParadox

I’mnotanexpertonevery low-andmiddle-incomeeconomy,butmypersonaltoolboxforsolvingdifficultchallengesreliesontheory,whichhelpsusgettothecoreofaproblem.Goodtheoryhelpsusunderstandtheunderlyingmechanismdrivingthings.

Consider, for example, the history of mankind’s attempts to fly. Earlyresearchers observed strong correlations between being able to fly and havingfeathersandwings.Storiesofmenattemptingtoflybystrappingonwingsdatebackhundredsofyears.Theywerereplicatingwhattheybelievedallowedbirdstosoar:wingsandfeathers.

Possessing these attributes had a high correlation—a connection betweentwothings—withtheabilitytofly,butwhenhumansattemptedtofollowwhattheybelievedwere“bestpractices”ofthemostsuccessfulfliersbystrappingonwings, then jumping off cathedrals and flapping hard. . . . they failed. Themistakewas that, although feathers andwingswerecorrelatedwith flying, thewould-beaviatorsdidnotunderstandthefundamentalcausalmechanism—whatactuallycausessomethingtohappen—thatenabledcertaincreaturestofly.

The real breakthrough in human flight didn’t come from crafting betterwingsorusingmorefeathers,eventhoughthosearegoodthings.Itwasbroughtabout by Dutch-Swiss mathematician Daniel Bernoulli and his bookHydrodynamica, a studyof fluidmechanics. In1738,heoutlinedwhatwas tobecome known as Bernoulli’s principle, a theory that, when applied to flight,explainedtheconceptoflift.Wehadgonefromcorrelation(wingsandfeathers)tocausality(lift).Modernflightcanbetraceddirectlybacktothedevelopmentandadoptionofthistheory.

But even thebreakthroughunderstandingof thecauseof flight stillwasn’tenoughtomakeflightperfectlyreliable.Whenanairplanecrashed,researchersthenhadtoask,“Whatwas itabout thecircumstancesof thatgivenattempt toflythatledtofailure?Wind?Fog?Theangleoftheaircraft?”Researcherscouldthen define what rules pilots needed to follow in order to succeed in eachdifferentcircumstance.That’sahallmarkofgoodtheory.Itdispensesitsadvicein“if/then”statements.

Asabusinessschoolprofessor,I’maskedhundredsoftimesayeartoofferopinionsonspecificbusinesschallengesinindustriesororganizationsinwhichIhaveno special knowledge.Yet I’mable toprovide insightbecause there is atoolbox of theories that teachme notwhat to think, buthow to think about aproblem.GoodtheoryisthebestwayIknowtoframeproblemssothatweasktherightquestionstogetustothemostusefulanswers.Embracingtheoryisnottomireourselves inacademicminutiaebut,quite theopposite, tofocuson thesupremelypracticalquestionofwhatcauseswhat—andwhy?Thisapproachis

atthecoreofthisbook.So how, then, does theory relate to our quest to create prosperity inmany

poorcountriesandultimatelymaketheworldabetterplace?Theappealofmanythings that correlate with prosperity—of strapping on wings and feathers—isincrediblyalluring.Whoisn’tmovedbythesightofanewlydugwellprovidingcleanwatertoadeprivedcommunity?Butinreality,nomatterhowmanygoodeffortsweinvestin,ifwearen’timprovingourunderstandingaboutwhatcreatesandsustainseconomicprosperity,wewillbeslowtomakeprogress.

In our study of the path to prosperity, examining progress (or the lackthereof)inavarietyofeconomiesaroundtheworld—includingJapan,Mexico,Nigeria,Russia,Singapore,SouthKorea,theUnitedStates,andseveralothers—wehavefoundthatdifferent typesof innovationshavevastlydifferent impactsonthelong-termgrowthandprosperityofanation.

We must be clear, however, that the process we will describe here, andthroughout this book, does not explain how every prosperous country hasemergedfrompoverty.Forexample,somecountries,suchasSingapore,startedout with a government that prioritized economic development and wealthcreation, while others, like the United States, began their march towardprosperityalongtimeago,andmoregradually.Allgoodtheoriesmustbeusedincontext—theyareonlyuseful incertaincircumstances.Everycountry in theworldisdifferentinsize,population,culture,leadership,andcapabilities.Thosecircumstancesplayaroleintheirdestiny.

But overall, we have found that investing in innovations, and morespecificallymarket-creatinginnovations,hasprovenareliablepathtoprosperityfor countries around the world. This book draws on the histories of now-prosperouseconomiesinordertoillustratethekeyelementsofourtheory,whichdescribestheprocessbywhichthecreationofnewmarketsimpactsasociety.Itisthroughthisprocessthatsomeofthepoorestcountriesintheworldwereabletocreatebillionsofdollars’worthofvalueandmillionsofjobsfortheircitizens.

AnOverlookedPathtoProsperity

Ourthinkingfocusesonwhatwehaveidentifiedascriticaldriversforcreatingand sustaining prosperity for many countries: finding opportunity in struggle,investinginmarket-creatinginnovations(which,amongotherthings,createsthejobs that help grow a local economy), and executing a “pull” strategy ofdevelopment (inwhich thenecessary institutionsand infrastructures arepulled

intoasocietywhennewmarketsdemandthem)—whichwewilldiscussinmoredetailthroughoutthisbook.Alloftheseideasandthemesareessentialtosolvingthe Prosperity Paradox, and you will see them repeated and examined fromdifferentperspectivesthroughtheinnovationsandthestorieswesharehere.

Whenwetalkaboutinnovation,wedon’tjustmeanhigh-techorfeature-richproducts. Our definition of innovation refers to something rather specific: achange in the processes by which an organization transforms labor, capital,materials, and information into products and services of greater value.5“Market-creating innovations” transform complex and expensive products andservicesintosimpleandmoreaffordableproducts,makingthemaccessibletoawholenewsegmentofpeopleinasocietywhomwecall“nonconsumers.”

Everyeconomyismadeupofconsumersandnonconsumers.Inprosperouseconomies,theproportionofconsumersformanyproductsoftensurpassesthatof nonconsumers. Nonconsumers are people who are struggling to makeprogressinsomeway,buthavebeenunabletodosobecausehistoricallyagoodsolutionhasbeenbeyondreach.Thisdoesnotmeanthereisn’tasolutiononthemarket,butoftennonconsumersareunable toaffordexisting solutionsor lackthetimeorexpertiserequiredtosuccessfullyusetheproduct.

Market-creating innovations can ignite the economic engine of a country.Successfulmarket-creating innovations have three distinct outcomes. First, bytheir very nature, they create jobs as more and more people are required tomake,market,distribute,andsellthenewinnovations.Jobsareacriticalfactorinassessingtheprosperityofacountry.

Second,theycreateprofitsfromawideswatheofthepopulation,whicharethen often used to fund most public services in society, including education,infrastructure,healthcare,andsoon.

Andthird, theyhavethepotential tochangethecultureofentiresocieties.Aswewillshow,manyprosperouscountriestodaywereoncepoor,corrupt,andbadlygoverned.Buttheproliferationofinnovationsbeganaprocessthathelpedtransform these economies. In theUnited States, for instance,market-creatinginnovationsliketheSingersewingmachine,EastmanKodak’sfilmcameras,andFord’sModelT(innovationswediscussindetaillater)helpedcultivateacultureofinnovationthatdrasticallychangedAmericansociety.Oncenewmarketsthatserve nonconsumers are created, these markets “pull” in other necessarycomponents—infrastructure,education,institutions,andevenachangeinculture—toensurethemarket’ssurvival,aswe’llexplainindetailthroughoutthisbook.Thisishowasociety’strajectorycanbegintochange.

ElementsofourmodelcanbeseeninwhatIbrahimdidwhenhebuiltCeltel.First, in the most unlikely of circumstances, he developed an innovation that

made a historically complex and expensive product more affordable so thatmillionsofpeoplecouldmoreeasilyhaveaccess.Andinsodoing,hecreatedavibrantmarket that not only directly created thousands of jobs for people, butalso enabled the creation of other industries, such as financial services andmobile health. Second, Ibrahimpulled in the resources he needed to build hiscompany.Becausehepulledonlytheresourcesheneededintoanew,large,andprofitablemarkethewascreating,thethingshebuiltwereabletobesustained.This is a theme we will keep coming back to because of its importance inhelpingusmakesmartinvestments.Third,Ibrahim’sCeltelwasalsodevelopedwith a focus on local citizens. For example, instead of developing a businessmodelwhere customers had to paymonthly cell phone bills, as is the case inwealthiercountrieswithcitizenswithhigherearningpower,Ibrahimintroducedprepaidcards.Newcustomerscouldpurchasethesecardsforaslittleas25UScents, resulting inmanymorepurchases. In addition to that, 99percentof thejobshecreatedwereheldbynativeAfricans.

While Ibrahim’s efforts may seem anomalous, especially today, when weexpect poor-country governments to take care of many of the things Ibrahimtookcareofasisthecaseinmanyprosperouscountries,wewillshowthathiseffortsarelittledifferentfromthoseofmanyinnovatorsresponsibleforignitingtheflamesofprosperityintheircountries.

Certainly, for nations to sustain long-term prosperity, they ultimately needgood governments that foster and support a culture of innovation. Market-creating innovators can, however, light the fire, and governments can fan theflame.We believe that by understanding howmarket-creating innovation canigniteandcatalyzegoodgovernance—apatternweobservedinmanyoftoday’sprosperouscountries—wecanhelpcreatelong-term,sustainableprosperity.6

AGuidetoThisBook

What might seem hopeless on the surface is often actually an opportunity tocreate new and thriving markets. This insight is not only important for thestakeholders actively trying to make things better, such as governments andNGOs (non-governmental organizations) and others in the developmentindustry, but for innovators and entrepreneurs who might not have seenopportunitybeforenow.Forinstance,insteadofseeingtheroughlysixhundredmillion people in Africa who don’t have electricity as only a sign of theirimmense poverty, we should see them as a vast market-creation opportunity

waitingtobecaptured.Itshouldbeacalltoinnovate,notaflagofcaution.Itisinthatspiritthatweofferyoutheideasinthisbook.

We understand we are wading into complicated territory in writing abouteconomicdevelopment,butwehopethatthemodels,stories,andcaseswesharehere provide you with fresh perspective. We have written this book in foursections, detailed below, to help you follow our thinking and its practicalapplicationsintheworld.

In Section 1, we explain the importance of innovation in creatingprosperity in an economy.We detail how a particular type of innovation—market-creating—serves as a strong foundation for generating and sustaininglastingprosperity.

In Section 2, we illustrate our model by providing examples of howinnovation, and the culture it creates, have impacted the United States,Japan,SouthKorea,andMexico.

In Section 3, we focus on the perceived barriers to development. Wediscuss the relationship between market-creating innovations and thedevelopment of good institutions, the reduction of corruption, and theconstructionandmaintenanceofanation’sinfrastructures.

InSection 4,we discuss the importance of turning the prosperity paradoxintoaprosperityprocessandreviewsomekeyprinciplesofthisbook.

In the Appendix, we profile several new-market opportunities anddevelopment efforts by entrepreneurs, governments, and NGOs to change thegame in different parts of the globe.Wehope this helps thoseof you seekingopportunity to think differently about where and how you might spend yourpreciousresourcestocreatewealthandgenerateprosperity.

Weknowthattherearefewissuesmorecomplexthancreatingprosperityinpoorcountries,andwewadeintothisdebatewiththehopethatourthinkingwillspurnewwaysoftacklingtheseentrenchedandheartbreakingproblems.Atthecore, this book is about celebrating the power and potential of innovation tochangetheworld.Butitis,wehope,justthestartofaworthwhileconversation.

NOTES1. NowpartofBhartiAirtelLimited.

2. “Number of unique mobile subscribers in Africa surpasses half a billion, finds new GSM study,”GSMA, accessed February 1, 2018, https://www.gsma.com/newsroom/press-release/number-of-unique-mobile-subscribers-in-africa-surpasses-half-a-billion-finds-new-gsma-study/.

3. By“market,”wemeanasystemthatenablesthemaking,buying,andsellingofaproductorservice.

4. “Aid at a glance charts,” Development Finance Statistics, OECD, accessed April 23, 2018,http://www.oecd.org/dac/stats/aid-at-a-glance.htm.

5. ClaytonChristensen,TheInnovator’sDilemma:WhenNewTechnologiesCauseGreatFirms toFail(NewYork:HarperCollinsPublishers,2000).

This definition is consistent with Schumpeter’s writing in The Theory of Economic Developmentdefining innovation as taking an invention and placing it firmly into amarket, a processwhich leads todevelopment or the production of new combinations. In Chapter 2, Schumpeter writes, that “to producemeanstocombinematerialsandforceswithinourreach.Toproduceotherthings,orthesamethingsbyadifferentmethod,meanstocombinethesematerialsandforcesdifferently”(65).Thisisimportantbecauseinnovation is often mistaken for invention, or something entirely new. For the purpose of economicdevelopment, this isn’t the case. According to Schumpeter, one of the illustrations of this process ofcombination is “the opening of a new market, that is a market into which the particular branch ofmanufactureofthecountryinquestionhasnotpreviouslyentered,whetherornotthismarkethasexistedbefore.”Inessence,itdoesnotmatterthatsomethingexistedinanothercountryinsofarasitisnewtothecountrywhereitisbeingintroduced,itisboundtohavedevelopmentimpact.

RicardoHausmannatHarvardandCésarHidalgoatMITprovidedatashowingthattheprosperityofaneconomyisdirectlycorrelatedwiththeamountofknow-howinthenation.Intheirresearch,theyrefertothisconceptas“economiccomplexity,”whichisa“measureoftheamountofcapabilitiesandknow-howthatgoesintotheproductionofanygivenproduct.Productsarevehiclesforknowledge.[Their]theoryandsupporting empirical evidence explain why the accumulation of productive knowledge is the key tosustained economic growth.” But accumulating productive knowledge is not easy, and is often quiteexpensive. Inaddition,knowledgeaccumulation isnotenough, itmustbedynamicaccumulation.SidneyWinterattheWhartonSchoolofBusinessattheUniversityofPennsylvaniahaswrittenextensivelyabouttheevolutionoforganizationalcapabilities.Hisresearchhelpsexplainthatoneofthereasonsforbusinesssuccess isanorganization’sability todevelopdynamiccapabilities.Buthealsoexplains thatdevelopingthose capabilities is no easy feat. See Toward a Neo-Schumpeterian Theory of the Firm (1968),Understanding Dynamic Capabilities (2003), and Deliberate Learning and the Evolution of DynamicCapabilities(2002).

JosephA.Schumpeter,TheTheoryofEconomicDevelopment:AnInquiryintoProfits,Capital,Credit,Interest,andtheBusinessCycle(Cambridge:HarvardUniversityPress,1934),65.

RicardoHausmann et al.,TheAtlas of EconomicComplexity:MappingPaths toProsperity, 2nd ed.(Cambridge:MITPress,2013).

6. We delve intomore detail about this in Chapters 8 and 9, which tackle institutions and corruptionrespectively, but consider howMancurOlsonput it in his book,PowerandProsperity: “Whenwe shiftfromwhat is best for prosperity towhat isworst, the consensuswouldprobablybe thatwhen there is astronger incentive to take than to make—more gain from predation than from productive andmutuallyadvantageous activities—societies fall to the bottom.” Olson then goes on to highlight the virtues andimportance of entrepreneurship, due to the unpredictable nature of society. He writes, “Because

uncertaintiesaresopervasiveandunfathomable,themostdynamicandprosperoussocietiesarethosethattrymany,manydifferent things.They are societieswith countless thousands of entrepreneurswhohaverelativelygoodaccesstocreditandventurecapital.Thereisnowayasocietycanpredictthefuture,butifithas awide enough span of entrepreneurs able tomake a broad enough array ofmutually advantageoustransactions,includingthoseforcreditandventurecapital,itcancoveralotoftheoptions—morethananysingle person or agency [or government] could ever think of.” In effect, if we harness the power ofentrepreneurstodevelopmoreandmoremarket-creatinginnovations,thiscan—andindeeddoes—leadtobetterandbettergovernance.

Mancur Olson, Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships (NewYork:BasicBooks,2000),1,188-189.

IqbalQuadir,whofoundedtheLegatumCenterforDevelopmentandEntrepreneurshipatMIT,putsitthiswayinhisarticleintheInnovationsjournal,“WesternintellectualsfromAdamSmithtoGeorgSimmelto Max Weber have recognized that commerce has positively transformed governments, cultures, andbehaviorbymakingpeoplemorerationalandmutuallyaccountable.”

Chapter2

NotAllInnovationsAreCreatedEqual

Oneofthethingsthatpeopledon’tunderstandisthatmarketsarecreations.Theyarenotsomethingwhichwecan[just]find.Amarkethastobecreated.1

—RONALDCOASE,1991NOBELLAUREATEINECONOMICS

TheIdeainBrief

Manyofusunderstandthevalueofbuildingstronginstitutionsanddevelopinganation’sinfrastructure.However,theroleofinnovationisn’tquiteasclear.Weknowit’s important,butbecause innovationmeansdifferent things todifferentpeople,what’snotwidelyrecognizedishowdifferenttypesofinnovationscanimpact an economy. In this chapter, we will describe how we categorizeinnovation into three types—sustaining, efficiency, and market-creating—andexplainthedifferentimpacteachhasonanorganizationandaneconomy.Whileall innovations are important to keeping an economy vibrant, one type inparticular—market-creating innovation—plays a significant role, providing astrong foundation for sustained economic prosperity. When a country’sprosperity isnot improving, inspiteofwhatmightseemtobea lotofactivitywithin its borders, the countrymight not have a growth problem. Instead,webelieveitmighthaveaninnovationproblem.

*

EversinceIpublishedTheInnovator’sDilemma,inwhichIexplainedhowgreatcompanies are sometimesblind to the threat posedbyupstarts, I haveworkedwithhundredsof corporations tohelp them tackle their owndilemmas.At thecoreofthatworkismytheoryofdisruptiveinnovation,2whichdescribeshowacompanywithfewerresourcesisabletochallengemoreestablishedbusinesses

byintroducingsimpler,moreconvenient,andmoreaffordableinnovationstoanoverserved or overlooked segment of customers, ultimately redefining theindustry.

InthedecadessinceIpublishedmythinking,thetheoryhastakenrootinthebusiness community andothers, including education andhealth care.As such,I’mregularlypepperedwithquestionsaboutmytheoryandhowitappliestoonespecificindustryoranother.WhileIknowthatIwillneverbeanexpertoneveryindustry, Ihavefound that Icanconsistently turn tomy toolboxof theories tohelppeopleseethroughadifferentsetoflenses,toviewproblemsinanewway.

A few years ago, after I gave a talk at a CEO summit at Innosight, theconsultingfirmIcofounded,anexecutivemadeanobservationthatremindedmeof the importance of putting on the right set of lenses to begin to solve aproblem. “At our company, we categorize everything in the research anddevelopmentgroupas‘innovation,’”shesaid.“Butbasedonyourpresentation,Ican see that there are different typesof innovation.And they seem to achievedifferentgoals.WeneedtorestructureR&Datmyorganizationtoreflectwhatwe’rereallytryingtoaccomplish.Ifwe’reevergoingtotrulygrowthroughourinnovation,wecan’tthinkofitasjustoneuniformthing.”

The executive was right. Not all innovations are created equal. Over theyearsourresearchhasfoundthattherearethreetypesofinnovation:sustaininginnovation, efficiency innovation, andmarket-creating innovation.Noneof thetypesofinnovationisinherentlybadorgood,buteachtypeplaysauniquerolefororganizationstryingtosustaintheirgrowth.3

AsIthoughtabouttheexecutive’sobservationaboutchoosingtherighttypeofinnovationtosecurehercompany’sfuture,Irealizedthattheinsightappliedmuchmorebroadly.We tend todo the same thingwhenwe talkaboutall theinnovation activities happening within an economy. We often categorize allinnovation activities in the same way. We use proxies, such as patentapplications, investment in research anddevelopment, andqualityof scientificresearch institutions, to assess the innovation prowess of a country.4 But ifdifferenttypesofinnovationaffectorganizationsdifferently,doesn’titstandtoreason that different typesof innovationswill impact economiesdifferently aswell?5

Economies, after all, are largely defined by the firms (public and private)withinthem.6Andinnovation—aswedefinedinthelastchapterasachangeintheprocessesbywhichanorganizationtransformslabor,capital,materials,andinformationintoproductsandservicesofgreatervalue—iswhatmostfirmsdo.Note that innovation is not the same thing as invention, which describes the

process of creating something entirely new that has never existed before.Innovationsareoftenborrowed,fromonecountrytoanotherandfromonefirmto another, and then improved upon. Thus, we take as our unit of analysis,innovation, and seek to understand how the type, scale, and impact on acompanyinfluencesthebroadereconomy.7

Isthisjustanacademicdistinctionthatdoesn’tmatterintherealworld?Notatall.Inmyclassroom,myfocusisalwaysontheimportanceofunderstandingwhatcauseswhattohappen—andwhy.

Tomake that point tomy students, every semester I stand in front ofmyclasswithapenorapieceofchalkinmyhand,andthenIdropitandjustwatchitfalltothefloor.AsIstoopovertopickitup,Igrouse,“Youknowwhat,Ijusthategravity.Butgravitydoesn’tcare.Italwayspullsyoudown.”Thepointis,whetherweconsciously thinkabout itornot,gravity isalwaysatwork.But ifwedoconsciously thinkabout itand learnhowgravityworks,wecanharnessgravity for our owngoals.The same thinkingholds true for innovation. Ifweunderstandwhattypeofinnovationcauseswhattohappen,wecanharnessitforourowngoals.Knowingthesedifferencesisacrucialfirststepinunderstandingwhatleadstosustainableeconomicdevelopment.8

SustainingInnovations

Sustaininginnovationsareimprovementstoexistingsolutionsonthemarketandare typically targeted at customers who require better performance from aproduct or service. My friends who work in the consumer-packaged goodsindustriescallthis“SKUSfornews”—whentheycreatenewflavorsorcolorsorfeatures of an existing product so they can generate some excitement inconsumers who are already purchasing their product. Think about Unilever’sLiptonteabrand.Today,therearealmostasmanyLiptonteaflavorsastherearepeopleontheplanet.Oratleastitfeelsthatway.FromflavorssuchasMatchaGreenTeaandMinttootherslikeGreenIcedTea,thebrandisdevelopingnewand exciting products to capture more and more of an existing tea-drinkingmarket—or at least retain its market share. These are sustaining innovations.They are not designed to pull in new tea-drinking customers per se; they aresubstitutive in character. They are important for the Lipton brand and forcustomerstoknowthecompanyisnotstale,butthenewBerryHibiscusflavorwillnotnecessarilycreateamarketofentirelynewteadrinkers.9

Sustaining innovations are often sold for more money and at a higher

margin.Heatedseatsinourcarsareagoodidea,especiallyiftheautomakerscansell us the cars formoremoney, but they are usually targeted at existing car-buying customers. They aren’t what made people stop using horses fortransportation.

Sustaining innovations are all around us and, in effect, are a criticalcomponentofoureconomies.Theyareimportantforcompaniesandcountriestoremaincompetitive.Buttheyhaveaverydifferentimpactonaneconomythantheothertwotypesofinnovations—market-creatingandefficiency.Companiesrarely need to build new sales, distribution, marketing, and manufacturingengineswhen theydevelopsustaining innovations inamaturemarket,becausethey are selling to a relatively known segment of the population in a largelyestablishedway.Asaresult,whencomparedwithmarket-creatinginnovations,sustaining innovations have a very different effect on job creation, on profitgeneration,andonchangingthecultureinaregion.

Considerthethreeconcentriccircles,witheachcirclerepresentingadifferentmarketcomposedofdifferentmembersofasociety.It’sasimpleillustration,butwe hope itmakes our point easy to follow.MarketA represents the smallest,wealthiest, andmost skilled consumers.Market B represents a larger but lesswealthy and less skilled set of consumers.And similarly,MarketC representsthe largest segment but also the least wealthy and least skilled. Sustaininginnovationsinanyoftheconcentriccircles—nomatterthesizeofthemarket—aretypicallyconcernedwithsellingmoreproductstothesamecustomersinthatparticularmarket.

ASIMPLEILLUSTRATIONOFMARKETS

Figure2:Sustaininginnovationsimproveexistingproductsandtargetpeoplewhocanalreadyaffordtheproductinaparticularsegmentoftheeconomy.Whenthatsegmentgetssaturated,sustaininginnovationsoftenhaveasubstitutiveeffectonconsumption.

Understandably, many companies are drawn to selling to the wealthiersegments of the economy because they hope that by adding new features andbenefitstoanexistingproduct(orservice),theywillbeabletocontinuetosellmore,andmoreprofitably.Sustaining innovationsdo leadtosomegrowthandthey do enable development, but as you can see, the impact of this growth islimitedbythenumberofconsumersinthesegmenttargeted.Also,competitionforcustomersinthewealthiersegmentisveryfierce,asmanyothercompanieswill be vying for these consumers, too. From time to time, a sustaininginnovation might attract a new customer, but it is usually incidental, ascompanies typically need to develop a different strategy for customers in adifferentsegmentorcircle.10

Letusconsideradetailedillustrationbelow.

The Sustaining Innovation Strategy of America’s

BestsellingCar

FewcarshavesoldbetterinAmericathantheToyotaCamry.Atthetimeofthiswriting, theCamryhadbeenAmerica’sbestsellingcar fornineteenof thepasttwenty years.11 But even with the Camry’s remarkable success, sales of theCamryhave remained relatively flat since2000.While the innovationsToyotahas made in its Camry over the past twenty years have kept the companycompetitive, relevant, and profitable, these innovations have not had a grandimpacton theCamry’sgrowth.In1997,Toyotasold394,397Camrys.Twentyyears later, in2017,Toyotasold387,081Camrys. (2007was thebestyear fortheCamry,whenToyotasold473,108units.12)

Sustaining innovations for the Camry are very important to Toyota; that’swhathelpedkeeptheCamryasthebestsellingcarinAmericafornineteenofthepasttwentyyears.ButsteadyCamrysalesdonotrepresentanewgrowthengineforToyota.Nordo theyrepresentmajorgrowthfor theeconomy.Camrysalesare targeted at “the consumption economy”—customers Toyota, and othercarmakers,canalreadysee,count,andreachwithexistingdistributionchannels.Camry sales generate steady revenue year after year, often by retaining anexisting customerwho simply traded up to a bettermodel of a car he or shealreadyowned.

Butevenasareliablebestseller,Toyotadoesnotnecessarilyneedtobuildanew manufacturing plant and hire entirely new staff every time it decides toreleaseanewversionoftheCamry.Italsodoesnothireanewsalesforce,builda new distribution channel, or invest in an entirely new design team whenworking on a new model. The company, as do most companies, simplyrepurposesitsexistingresources.Asaresultofthisrepurposing,Toyotadoesnotneedasmuchcapitalorasmanypeople todevelopnewmodelsof theCamry.Nonewfactoriesarebuilt;fewnewworkforcesareemployed.

SustainingGrowthinaMatureandEstablishedMarket

TheCamry’sinnovationtrajectoryisnotanunusualstory.Mostinnovationsaresustaining in nature.And that’s actually a good thing for a company—and itscustomers,whomightwantabetterproductorservice.Examplesofsustaininginnovations range from fasterprocessors inourcomputers tomorememory inourphones.TheoriginaliPhonewasamarket-creatinginnovation,catalyzinga

new market for smartphones and corresponding apps, but the iPhone X is asustaining innovation. The vast majority of iPhone X customers, people whowereable toshellout$1,000,weresimply tradingup,andnowhaveaccess tofacial recognition, a super Retina display, and an OLED screen. Or considerTaylorMade’s new P790 golf club, which the company promises will helpgolfers experience “feel, forgiveness, andworkability unlike any other iron ofthiscaliber.” It retails for$1,299.99.SurelyTaylorMade’sP790golfclubsarenot bringing vastly more consumers into the sport, and as such, not creatingmanynewjobsrelativetoitsexistingjobnumbers.Butjust liketheiPhoneX,theyarecertainlymakingTaylorMademoremoney,makingthecompanymorevibrant, and stamping their place as a relevant player in their industry. Wecannotoverstatetheimportanceofsustaininginnovations.

Sustaining innovations don’t refer only to product innovations; they oftencome in the form of services aswell. For instance, at least once amonthmybanksendsmeanewofferforacreditcard,aninnovationthathasexistedsince1950. It’s already an enormous market: America’s credit card debt currentlystands at just over one trillion dollars—an amount larger than the GDPs ofMexico,Turkey, andSwitzerland.Mybank isn’tnecessarily trying to create anewmarketforcreditcards;insteaditistryingtomakemoremoneybysellingmeextraservices,suchastravelinsurance,warrantyextensions,andcashbackonwhateverIspend.Thesamethinghappenswhenmymobilephoneprovidertries to sellme larger and larger data plans. Those are sustaining innovations,designedtosellmoreservicesandgetmoremoneyfromcustomerslikeme.

EfficiencyInnovations

Efficiencyinnovations,asthenameimplies,enablecompaniestodomorewithfewerresources.Inotherwords,ascompaniessqueezeasmuchaspossiblefromexistingandnewlyacquiredresources,theirunderlyingbusinessmodelandthecustomers they are targeting with their products remain the same. Efficiencyinnovationsarecrucialfortheviabilityofcompaniesasindustriesbecomemorecrowded and competitive. Typically, efficiency innovations are processinnovations—they focus on how the product is made. With efficiencyinnovations,companiescanbecomemoreprofitableand,critically,freeupcashflow.

Efficiency innovations exist in every industry and are a critical part ofmanaging the levers of improving profitability and retaining customers in any

organization.Butefficiency innovations,whilegood for theproductivityofanorganization, are not always good for existing employees. Think of the plantsthat have shut down or been relocated as a result of outsourcing, one of themarkersofefficiencyinnovationsatplay.Bythemselves,efficiencyinnovationstendnot tocreate jobs. (That is,unless thecapital these innovations freeup isfunneledbackintodevelopingmarket-creatinginnovations.Moreonthislater.)

Consider the resource extraction industry, a sector that thrives oninvestments in efficiency innovations.13 Due to the fact that oil, gas, gold,diamonds, and many of the other resources we extract and process arecommodities,thetypicalmanagerinthisindustryisalwayslookingforwaystoimprove efficiency and decrease cost, a process that frees up cash flow andimprovesmargins.Allyouneedtodoislookatanynationwithavastresourceextractionsectorandassesswhetherthosesectorsareconsistentlyaddingmoreandmore jobs to the economy even as they extractmore resources. Take theUnitedStatesforexample.

In 1980, there were approximately 220,000 employees in the oil and gasextractionindustryresponsibleforproducingroughly8.6millionbarrelsofoil.14By2017,thenumberofemployeesinthesectorhadfallenbymorethanathirdto about 146,000, but production had increased to over 9.3 million barrels aday.15ThefiguresarenotmuchbetterforNigeria,oneoftheworld’slargestoilproducers.According todata fromNigeria’sNationalBureauofStatistics, theoil and gas sector employs only about 0.01 percent of theNigerianworkforceeven though the oil and gas sector accounts for more than 90 percent ofNigeria’s export revenue andmore than70percent of government revenues.16Efficiency innovations free up cash flows, but they rarely add new jobs to aneconomy.Inmostcases,theyeliminatemorethantheycreate.Becausetheverynature of resource extraction is efficiency driven, countries such as Nigeria,Venezuela, SaudiArabia, SouthAfrica,Qatar, and others that rely heavily onresource extraction cannot depend on that sector for job creation for theircitizens.

We can’t stress this enough. Neither efficiency nor sustaining innovationsare inherentlybad foracountry. In fact, theyaregood foroureconomies,buttheyplayverydifferentrolesinfosteringsustainableeconomicgrowthandjobcreation.While they keep our economies competitive and vibrant, freeing upmuch-needed cash for future investments, neither efficiency nor sustaininginnovations inmaturemarkets seed new growth engines. That is the result ofsomethingcompletelydifferent,whatwecallmarket-creatinginnovations.

Market-CreatingInnovations

Market-creatinginnovationsdoexactlywhatthenameimplies—theycreatenewmarkets.Butnotjustanynewmarkets,newmarketsthatservepeopleforwhomeither no products existed or existing products were neither affordable noraccessibleforavarietyofreasons.Theseinnovationstransformcomplicatedandexpensive products into ones that are somuchmore affordable and accessiblethatmanymorepeopleareabletobuyandusethem.Insomecases,theyevencreateentirelynewproductcategories.MoIbrahim’sCeltelmadeapreviouslyexpensive solution—mobile telecommunications—simple and affordable tomillionsandmillionsofnewcustomers.Inasense,market-creatinginnovationsdemocratizepreviouslyexclusiveproductsandservices.

Although the scale of the impact of a new market depends on thecharacteristics of the innovation being democratized—for example, not allinnovationswill have the impact that democratizing a car has—the impact ofmarket-creatinginnovationsissignificantwhencomparedtothatofothertypesof innovations.Market-creating innovations collectively serve as a foundationformanyoftoday’swealthyeconomies,andhavehelpedliftmillionsofpeopleoutofpovertyintheprocess.17

This type of innovation not only creates markets, but jobs, too. This isbecause as new markets with new consumers are born, companies must hiremorepeople tomake,market,distribute, sell,andservice theproduct.Market-creating innovationshave thepotential tocreatewhatwecall local andglobaljobs.

LocalandGlobalJobs

Localjobsarejobsthatmustbecreatedinordertoservethelocalmarket.Theyarealsojobsthatarenotaseasilytransferableoroutsourcedtoothercountries.Forexample,jobsindesign,advertising,marketing,sales,andafter-saleservicetypically fall into this category. They are often higher-paying jobs whencomparedwithglobal jobs.Global jobs,while also important, aremore easilymovedtoothercountriestotakeadvantageoflowerwages.Manufacturingandsourcingofrawmaterialsareperhapsthebiggestculprits.Withtheadvancesinglobalsupplychainmanagement,globaljobsareoftenatriskofmovingacrossnationalboundariestothenextmost“efficient”—orlow-cost—labormarket.By

contrast,localjobsareessentialtosupportmarket-creatinginnovations;theyarelessvulnerabletotheallureoflowerwageselsewhere.18

Wheninnovatorscreateanewmarket,targetedatalargepopulationthathashistorically been unable to afford the product—nonconsumers—the innovatormusthiremanymorepeoplenotonlytomaketheproductorservice,butalsotoget it to the new customers. The bigger the nonconsumption, the bigger thepotential market. And the bigger the market, the bigger the impact. Thisdedication to market-creating innovations often establishes the underlyinginfrastructure, including education, transportation, communications, andinstitutionssuchasgovernmentpoliciesandregulations,andothercomponentsofmany of today’s thriving societies. This activity creates a virtuous cycle ineconomiesthatfurtherfostersthedevelopmentofmorenewmarkets.

THEDEMOCRATIZINGEFFECTOFMARKET-CREATINGINNOVATION

Figure3:Market-creatinginnovationsmakeproductsavailabletocustomersinanewconcentriccircle.

Anothervirtueofinvestinginmarket-creatinginnovationsisthatwhenlocalentrepreneurs develop innovations and reap the rewards from the innovation’ssuccess,thereturnsaremorelikelytofundfutureinnovationslocally.Considerthis:ofthemorethan$70trillionworthofglobalassetsundermanagement,lessthan$2 trillionare targetedat foreigndirect investments (FDI).19Mostmoney

stayshome.

HOWAPRODUCTCREATESJOBS

Figure4:Market-creatinginnovationsgeneratelocaljobsthataremoresustainable.

In Chapter 1, we explained that investing in market-creating innovationsdoesnotdescribehoweveryprosperouscountrytodaydeveloped.Countriesaretoodifferentinsize,capabilities,andotherparametersandwedon’tassert thatthere is only one strategy for development. Market-creating innovations,however, do provide us with one of the most viable strategies for creatingprosperityintoday’spoorcountries.

5KeystoTargetingMarket-CreatingInnovations

Becausemarket-creating innovations rely on having the foresight to see whatothers cannot, it’s always easier to identify market-creating innovations inhindsight than to have the foresight to develop them. Before cars, computers,andbank accounts became thenorm formost of us, entrepreneurs first had tocreateanewmarketfor theseproductsandservices.WhatIhavefoundis thatmostnewmarketsdonotmakesenseattheonsetoftheirformation,especiallyto experts in the particular industry. In 1939, for instance, aNew York Timesreportercoveringthe1939NewYorkWorld’sFairreportedthat“[the]TVwillneverbeaseriouscompetitor for radiobecausepeoplemust sitandkeep theireyesgluedonascreen; theaverageAmericanfamilyhasn’t timefor it.”20Wemaysnicker(orsighindespair)athowwrongthatpredictionwas,butmostofuswouldlikelyhaveagreedwiththatassessmentatthetime—muchthesamewaymanypredictedtwentyyearsagothatmobilephonesinAfricawereexclusivelyfortherichandwouldnevertakeroot.

Sohowdoyougoabouttargetingmarket-creatinginnovations?Theyhavetobeevaluatedthroughtherightlens,bothforentrepreneurswhoseepotentialtobuildsomethingfromscratch,andforexistingorganizationswhowanttodrivemarket-creatinginnovationsintotheirinnovationportfoliomix.Hereisahelpfulframe of reference for five attributes that entrepreneurs and managers shouldlookforastheyconsidercreatingnewmarkets.

1. BUSINESS MODELS THAT TARGET NONCONSUMPTION—A majority of theinnovations and business models that exist today are targeted at existingconsumers—those who can already afford products on the market. Whenanalysis and consumer reports use terms like rising middle class, increasingdisposable income, anddemographicdividend,oftentimes theyare referring toexistingconsumptionpatterns.Nonconsumptionisdifferent.It’stheinabilityofawould-beconsumertopurchaseanduse(consume)aproductorservice.Frominception,Mo Ibrahim’sCeltel focused itsbusinessmodelonnonconsumptionofmobilephonesinAfrica,asopposedtotargetingthemoreaffluentpopulation.

2. AN ENABLING TECHNOLOGY—An enabling technology is one that providesimproving levels of performance at progressively lower cost. A technology isany process within an organization that converts inputs of lower value intooutputs of greater value. Enabling technologies such as the Internet,smartphones,theToyotaProductionSystem,orevenanefficientdistributionandlogistics operation can provide a competitive edge to companies as they buildnewmarkets.Celtelleveragedtherapidlychangingwirelesscellulartechnologynetwork in order to provide a service to many that had historically relied onwiredconnections.

3.ANEWVALUENETWORK—Avaluenetworkiswhatdefinesacompany’scoststructure.Forexample,beforeaproductgoesfromfarmtogrocerystore,itmustfirstbeharvested,processed,stored,transported,packaged,marketed,andsoon.Thisnetworkofactivitiesconstituteswhat’scalledtheproduct’svaluenetwork,with each adding a little bit of cost to the price of the final product. Becausemostbusinessesaretargetedatexistingconsumers,theircoststructurespreventthem from targeting nonconsumers. Creating a new value network enablescompaniestoredefinetheircoststructuresothattheirsolutionscanbeaffordedbynonconsumers and profitable at the same time.One of thewaysCeltel didthiswasbychanginghowpeoplepurchasedcellphoneminutes.Thecompanynot only developed “scratch cards” (cards that enabled people to purchaseminutesoftalktime),butitalsoleveragedtheinformalretailnetworkallacross

thecontinent.ThishelpedCeltelredefineitscoststructure.

4.ANEMERGENTSTRATEGY—Whencreatinganewmarket,innovatorstypicallyuseanemergent(orflexible)strategybecausetheyaregoingaftermarketsthatare not yet defined, and somust learnmuch from their soon-to-be-customers.Deliberate (or fixed) strategies are typically used when companies know theneedsof themarket.Managersandentrepreneursmustbewilling to learnandmodify their intended strategies based on the feedback they get from the newcustomerstheyaretryingtoserve,asCelteldidindifferentcountries.

5. EXECUTIVE SUPPORT—Businesses that attempt to create a new market areoftenunpopularbecausenotonlydo they targetamarket that technicallydoesnot yet exist, but also they often require more resources than sustaining andefficiencyinnovations.ThisiswhynobankslenttoMoIbrahimattheonset.So,inordertosurviveinexistingorganizations,market-creatinginnovationsrequiresupportfromtheCEOorsomeonehighupintheexecutiveteam.

TheModelTEffect

Perhaps the clearest example of the potential power of market-creatinginnovationscanbefoundintheinnovationoftheModelT.Aboutacenturyago,cars in America were toys and status symbols for the rich. Fewer than tenthousandcarswereregisteredinAmericain1900,andthesewerecustom-madecarsthatwereboughtasmuchforstatusasfortheirpracticalutility(notunlikethemarket for private jets today).Therewere fewpaved roads onwhich carscould be driven, few gas stations where they could be refueled, and fewAmericansrichenoughtoaffordacar.HenryFordwouldchangeallthat.

In fact, somanyAmericans purchased cars—annual productionwent fromtwentythousandin1909tomorethantwomillionby1922—thattheautomobileboom led to a major cultural revolution in the country. Americans changedwhere and how they lived,worked, and played; schools and suburbs began todevelop.Thetransportationofagriculturalproductsbecamemoreefficient,andnewbusinessesandindustries—tourism,hotels,fastfood,autorepairshops,autoinsurance,gasstations,andsoon—emerged.Manyotherindustrieswerecreatedto provide supplies directly to automakers, such as steel, oil, paint, lumber,cement, glass, and rubber.Schoolsbegan tooffer programs that taught peoplehowtomakeandservicecars.Andourpublicinstitutionsbegantorespondby

buildingnewroadsandcreatingnewlawsthatmadedrivingsaferforAmerica.Thecar,andthemarketFordhelpedcreate,however,camefirst.

InadditiontotheModelTcreatinganewmarketthatgeneratedsignificantemploymentand tax revenue, the innovationhadmajordownstreameffectsontheAmerican economy.Asmore people continued to purchaseModelT cars,competitors arose, making the industry even more efficient, vibrant, andmainstream. Americans loved their cars, and the government had to keepresponding by buildingmore roads. All this continued the virtuous cycle thatFord started—from 1909 to 1927, the company built fifteenmillionModel Tcars.Carsledtomoreroads,whichledtomoresuburbs,whichledtomorejobs,which—researchtellsus—leadtolesscrime.21

THEMODELTEFFECT

Figure5:ImpactofFordModelT

Ford’sinnovation,however,wasnotsimplyacar.Itwasanentirebusinessmodelbornoutofhisvisiontocreateanentirelynewmarketfortheautomobile.As was true for the Model T, market-creating innovations are less about theactualproductbeingsoldandmoreaboutthevaluenetworkandbusinessmodelaninnovatordevelops.ForFordtosellhiscartomillionsofAmericans,henot

onlyhadtomakeaproductthatwassimpletodriveandaffordabletopurchase,buthealsohadtoinvestinmanyotherthings,suchasgasandservicestations,railroads to help him transport his product, and an aggressive advertisingcampaigntargetedataverageAmericanswhohadneverownedacar.

ButassuccessfulastheModelTandthenewmarketitcreatedwere,Fordwas slow to invest in sustaining innovations. To illustrate the importance ofsustaining innovations, consider the following. In 1921, FordMotorCompanycommandedadominant60percentoftheautomarketintheUnitedStates.Butthe company’s failure to invest in sustaining innovations caused it to lose itsposition, and by 1936 FordMotorCompanywas number three in themarket.GeneralMotors,whichgavecustomers such thingsasnewmodelseveryyear,theabilitytopurchasecarsoncredit,anddifferentcolors,becamenumberoneinthemarketwith43percentshare,whileChrysler leapt to thenumber twospotwith 25 percent share. As we described earlier, sustaining and efficiencyinnovationsareimportanttokeepcompaniesandeconomiesvibrant,butmarket-creatinginnovationsprovidetheplatformuponwhichfuturegrowthiscreated.

TheForceofMarket-CreatingInnovations

Whileeach typeof innovationhasa role toplay inaneconomy,becauseeachcreates or keeps markets vibrant, market-creating innovations are especiallypowerful because they often target large swathes of the population with asolutionthathelpsthemmakeprogresswithastruggle.Andsinceeachmarketisa functionofboth thevalueof theproductbeing soldand thequantityof thatproduct, a market that targets nonconsumption has the potential to createsignificant gains for investors, for innovators, and for society.Thinkof it likethis: every successful newmarket that is created, regardless of the product orservice being sold, has three distinct outcomes: profits, jobs, and the mostdifficult to track, but perhaps most powerful of the three, cultural change.Together,thesecreateasolidfoundationforfuturegrowth.

For amarket to be created and then sustained, itmust createprofits or atleasthavetheprospectofprofitgenerationinthefuture.Profitsprovidethefuelforfurthergrowth.

Jobs, the second output ofmarkets, are created in order for themarket todeliveronitspromiseofmaking,distributing,selling,improving,andprovidingsolutionstoitsnewcustomers.Ihavealwaysfeltthatthecreationofajobisfarmoreimportantforasocietythanthesimplecalculationofeconomicvalue.Jobs

give people dignity and build self-esteem. Jobs enable people to provide forthemselvesand their families.Researchhasrepeatedly toldus thatpeoplewhoareemployedhavelesstime(orinclination)toengageincrime.22

The third and perhaps most important output of a market is the culturalchange the new market triggers and reinforces. In addition to democratizingproductsandservicessothatmanymorepeopleinsocietyhaveaccess,market-creating innovations also democratize the benefits of successful new marketsthat are created. These benefits aren’t limited to just jobs, but also ownershipopportunities that are often offered to investors and employees. When manypeople in a region understand that they can begin to solve many of theirproblems(fendfor themselvesandtheirfamiliesandgainstatusanddignityinsociety) inaproductivemanner—that is,byparticipatingin thenewmarketasinvestors,producers,orconsumers—theyaremorelikelytochangethewaytheythinkabouttheirsociety.Thisisoneofthewaysnewmarketsbegintochangeasociety’s culture, which can make all the difference for a country looking toprosper.

WhenAllIsSaidandDone

The lateNobel laureateMiltonFriedmanonce stated, “Thegreat virtueof thefreemarket, of theprivatemarket, [is that] it enables people . . . to cooperatetogether economically.”23We have foundmarkets to be a powerful force thathastheabilitytopullintosocietiesmanyofthecomponentsthatmakesocietiessafer,moresecure,andmoreprosperous.Thisiswhyunderstandingthecriticalroledifferenttypesofinnovationsplayisvitaltoeconomicdevelopment.

By investing in market-creating innovations, investors and entrepreneursinadvertently engage in nation-building. These innovations create a viablemarket thatservesnonconsumption—typicallythemajorityofpeopleinapooreconomy—thereby creating jobs and profits that can fund other importantelementsofadevelopedsociety,which,inanicevirtuouscircle,arepulledinbytheinnovationforittosucceed.

Whilemarket-creating innovations are about developing simpler andmoreaffordableproductssothatmanymorepeoplethanbeforecanaffordthem,theyalsobegintolaythefoundationsnecessarytobuildaneconomy.Oncethesenewmarketsarecreated, theeconomybecomesmoreresilient,as itgeneratesmoreincometofundschools,roads,hospitals,andevenbettergovernance—aprocesswewillexplorelaterinthisbook.Obviouslynotallmarket-creatinginnovations

willhavethesameimpactthatFord’sModelThad,butourresearchshowsthateven small innovations can begin to transform countries economically andculturally.

NOTES1. Ronald Coase, “Address at Markets, Firms and Property Rights: A Celebration of the Research ofRonaldCoaseConference,”publishedonApril 20, 2012, video, 25:40, https://www.youtube.com/watch?v=ZAq06n79QIs.

2. Christensen,Raynor,andMcDonald(2015)offeraconcisesummary:“Disruptiondescribesaprocesswhereby a company with fewer resources is able to successfully challenge established incumbentbusinesses. Specifically, as incumbents focus on improving their products and services for their mostdemanding(andusuallymostprofitable)customers,theyexceedtheneedsofsomesegmentsandignoretheneedsofothers.Entrantsthatprovedisruptivebeginbysuccessfullytargetingthoseoverlookedsegments,gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents,chasing higher profitability inmore-demanding segments, tend not to respond vigorously. Entrants thenmove upmarket, delivering the performance that incumbents’ mainstream customers require, whilepreserving the advantages that drove their early success.Whenmainstream customers start adopting theentrants’offeringsinvolume,disruptionhasoccurred.”Thetypeofinnovationmostlikelytobedisruptiveismarket-creatinginnovation(aswe’llseeinexamplesthroughoutthisbook).

See also ClaytonM. Christensen, The Innovator’s Dilemma: When New Technologies Cause GreatFirmstoFail(Boston:HarvardBusinessSchoolPress,1997).

3. In a 2017WorldBank publication titledThe Innovation Paradox:Developing-CountryCapabilitiesand theUnrealizedPromise of TechnologicalCatch-Up, authorsXavierCirera andWilliamF.Maloneysuggestthat“innovationcapacityappearstobethemorecriticalpolicypriorityforeconomicdevelopment.”The reportgoeson to suggest that “equating innovationpolicy to frontier science and technologypolicywillleadtofrustrationandwasteifthefirmdimensionisneglected...withoutacorpsofcapablefirmstotake these ideas tomarket, these investmentswill yield little in terms of growth.”Our hope is that thecategorizationweofferherehelpsfurther theBank’sworkandhelpsusbetterunderstandhowimportantfirmsaretoeconomicdevelopment.

XavierCireraandWilliamF.Maloney,TheInnovationParadox:Developing-CountryCapabilitiesandtheUnrealizedPromise of TechnologicalCatch-Up (Washington,DC:WorldBank), doi:10.1596/978-1-4648-1160-9.License:CreativeCommonsAttributionCCBY3.0IGO.

4. TheWorldEconomicForumpublishesanannualreporttitled“GlobalCompetitivenessReport,”wherethe organization ranks countries based on their competitiveness. One of the metrics used to measure acountry’scompetitiveness is its“innovation.”Institutions, infrastructure,health,andeducationareothers.For assessing a country’s innovation, the report measures things such as investment in research anddevelopment,patentapplications,andacountry’sabilitytoprovideneworuniqueproducts.

Alex Gray, “These are the ten most innovative countries in the world,”World Economic Forum,October11,2017,http://www.weforum.org/agenda/2017/10/these-are-the-10-most-innovative-countries-in-the-world/.

5. Understanding how different types of innovations impact an economy is critical because there areseveral distinct actors in an economy.My friend Lant Pritchett, a highly respected formerWorld Bankeconomist and professor of International Development at Harvard’s Kennedy School of Government,providedmewith a helpful conceptual framework for thinking about why poor economies have such adifficulttimebreakingoutoftheireconomicrut—andwhereinnovationmightmakeaprofounddifference.Pritchett identifies four primary entities in an economy: what he calls “rentiers,” “magicians,” “powerbrokers,”and“workhorses.”

Rentiers are resource extraction or agricultural firms thatmainly export toworldmarkets. They are

oftensubject to regulatory rents.Thinkoilcompaniesanddiamondminers.Magicians areexporters thatoperate in highly competitiveglobal industries.Thinkof the factoryowners thatmake commoditizedT-shirts and jeans.Powerbrokers are those firms thatwork in the domestic sector, but are also subject to“regulatoryrents.”Thesearethebigconstructioncompanies,thehotelierswhoownormanageexpensivehotels, the port operators, and the electricity providers.And finally, theworkhorses. These are the less-than-glamorousfirmsthatoperateinthehighlycompetitivedomesticenvironments.Fromthepettytraderonthesideoftheroadtothehairdresserinherhome,thesemakeupamajorityoftheworld’spoor.Theyareworkhorses.

“Regulatoryrentsaredefinedasthosederivedfromsomediscretionaryactionofgovernment,suchas:offering licenses for commercial use of a resource (e.g. mining); bestowing firm-specific (rather thanindustry-specific)taxadvantages;marketexclusivity;orapplicationofapplicableregulations.Itcouldalsobe derived from deliberate government inaction, such as permitting monopolies to charge pricessignificantlyabovemarginalcost,ornotenforcinganti-trustlaworpursuingcompetitivemarketswhenitwouldbeappropriateforconsumerwelfare.”

LantPritchett,KunalSen,andEricWerker,DealsandDevelopment:ThePoliticalDynamicsofGrowthEpisodes(Oxford:OxfordUniversityPress,2018).

6. Wevieweconomicsasanestedsystem.Theglobaleconomycontainsnationaleconomies,whicharecomposedofindustries,whichinturncontaincorporations.Corporationsarecomposedofbusinessunits,whichareorganizedaroundteams,whichdefinehowemployeescoordinatetheirwork.Employees,inturn,makeandsellproductsandservicestoconsumers,whohavepreferencesthatdefinewhattheywillandwillnotdo.Scholarsinthetwotraditionalbranchesofeconomics—macroandmicro—buildmodelsofhowtheglobalandnationalsystemsworkontheoneend,andattheotherendhowindividualsprioritizeandmakedecisions. However, most economic activity actually occurs somewhere between these two ends of thenestedsystem:namely, incompanies.Asidefromwelfarepaymentsandpeopleemployed ingovernmententities,companiesessentiallyaretheeconomy.Companiescreateandeliminatejobs,andpaywagesandtaxes.Theyimplementgovernmentpolicy.Theychoosetoinvestornotinvest.Theyrespondtochangesininterest rates. Companies build economies’ infrastructure, and in many ways companies are ourinfrastructure.

7. Economistshavelongunderstoodtheimportanceofinnovation,orwhattheyoftenrefertoastechnicalchange, in spurring economic growth. For example, in 1956, Stanford economist Moses Abramovitzpublished a landmark paper, “Resource and Output Trends in the United States Since 1870,” thathighlighted the link between innovative activity and long-term economic development. In his paper,Abramovitz analyzed the United States’ growth from 1870 to 1950 and found that capital and laboraccountedforroughly15percentofthegrowth.Productivityorwhatisnowcalledtechnology,innovation,ortechnicalinnovation,heasserted,accountedfortheremaining85percent.Abramovitzwrotethat“sinceweknowlittleaboutthecausesofproductivityincrease,theindicatedimportanceofthiselementmaybetakentobesomesortofmeasureofourignoranceaboutthecausesofeconomicgrowthintheUnitedStatesandsomesortofindicationofwhereweneedtoconcentrateourattention.”

MosesAbramovitz,“ResourceandOutputTrendsintheUnitedStatesSince1870,”NationalBureauofEconomicResearch(1956),http://www.nber.org/chapters/c5650.pdf.

Inparallel,MassachusettsInstituteofTechnology’sRobertSolowalsoreachedasimilarconclusionasAbramovitzwhileusingdifferentmethodsandanalyzingdifferenttimeperiods.AmongSolow’sworksisa1957article, “TechnicalChange and theAggregateProductionFunction,” that sheds light on the impactthat technological innovation can have on economic growth. Solow was awarded the Nobel Prize inEconomics in 1987 for his contributions to the world’s understanding of economic growth. After thisinsight, thequest tofurtherunderstandhowtechnological innovationimpactedeconomicgrowth,andthebeliefthatitdid,tookoff.

RobertSolow,“TechnicalChangeandtheAggregateProductionFunction,”TheReviewofEconomicsandStatistics39,no.3(August1957),312–320,https://faculty.georgetown.edu/mh5/class/econ489/Solow-

Growth-Accounting.pdf.Economists have traditionally looked at growth through the lens of productivity: aggregating all the

assets in an economy and multiplying that by a production (or an innovation) function. Whilemathematically valid, thinking about growth through the benchmarkof productivity is less helpfulwhenthinkingaboutpoliciesandprogramsforeconomiesthataremadeofpeoplewithvaryingcapabilitiesandcultures,andlivingindifferentcontexts.

8. Inmostpoorcountries, thedistributionofmoney,power,andinfluencetipsdisproportionatelytotherentiersandpowerbrokers.Theyruntheeconomiesandhavelittle tonoincentivetochangethesystem.Themajorityofthepoor—theworkhorses,inPritchett’slanguage—inourworldtoilandlaborincessantlyonlytofindthemselvesperpetuallylivingalifeofstruggleandsuffering.Thequestionthenbecomes,howdowegivemorepowerandinfluencetotheworkhorses?

Ormaybeabetterquestiontoaskishowdowefindandnurture,toborrowPritchett’smetaphor,afew“thoroughbreds”amongtheworkhorses—companiesthathavethepotentialtocreateanewmarketthroughinnovationandscale?Wecallthem“thoroughbreds”becausetheyaretheindividualsororganizationsthatcandevelopmarket-creatinginnovationswiththepotentialtochangethedynamicsofaneconomy.

9. ThisisunlikewhatSirThomasLiptondidin1890whenhepurchasedateagardeninmodern-daySriLankaandbeganproducingtea.SirLiptonthoughtthepriceofteawastoohighandthathecouldofferitforlessmoneytomanymoreteadrinkers.

10. There are instanceswhencompanies include features in anewproduct, chargemore, but findmanynewconsumersreadytopullsaidproductintotheirlives.Thistendstohappenwhenthenewfeaturehasthepotentialtoupendordisplaceanexistingproductonthemarket.Forexample,whenAppleaddedtheglobalpositioningsatellite(GPS)featuretoitsphones,thecompanyeffectivelyrenderedtheuseofstand-aloneGPSdevicesobsolete.

11. “Toyota Camry Awards,” 2018 Camry Overview, Toyota, accessed February 16, 2018,https://www.toyota.com/camry/awards.

12. Itisimportanttonotethat,atonepoint,modelsoftheToyotaCamryweregrowingexponentiallyintheUnitedStates,butovertimethemarketsaturatedandsalesbegantolevelout.Inotherwords,theCamryfilledouttheconcentriccirclewhereitwastargetingnewcustomerswhocouldafforditsproduct,andnowitstrugglesformarketsharewithotherbrandssuchasHonda’sAccordorHyundai’sSonata.

“MonthlyandannualsalesfiguresfortheToyotaCamryintheUS,”ToyotaCamry,Carsalesbase.com,accessedFebruary16,2018,http://carsalesbase.com/us-car-sales-data/toyota/toyota-camry/.

13. The“resourcecurse”—aphenomenonthatexplainshowmanynationsendowedwithnaturalresourcessuchasoil,gas,gold,diamonds,andmanyothersoftenendupwithlessdemocracy,lesseconomicgrowth,and effectively less prosperity than nationswithout these natural resources—has beenwidely studied ineconomics. It is sometimes referred to as the “paradox of plenty.” In using resource extraction as anexample here,we don’t focus on the alreadywidely studiedmacroeconomic effects of natural resourcesendowments. Instead, we focus on the profit-maximization and cost-reduction incentives of a typicalmanagerinthisindustrywhofindsherselfsellingcommoditiesforwhichtheglobalmarketsetsaprice.Formoreontheresourcecurse,seeJeffreyFrankel’spaper,TheNaturalResourceCurse:ASurvey(2010).

14. “U.S. Field Production of Crude Oil,” Petroleum and Other Liquids, U.S. Energy InformationAdministration, accessed April 6, 2018, https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=A.

15. “Employment, Hours, and Earnings from the Current Employment Statistics Survey (National),”Databases, Tables & Calculators by Subject, Bureau of Labor Statistics, accessed April 6, 2018,https://data.bls.gov/pdq/SurveyOutputServlet.

16. MichealEboh,“Unemployment:Oilsectoremploys0.01%ofNigerianworkforce,”Vanguard,June3,

2014,http://www.vanguardngr.com/2014/06/unemployment-oil-sector-employs-0-01-nigerian-workforce/.

17. IqbalQuadirofMITexplains it thisway:“Every innovationspursacomplexchainof reactions,butentrepreneurs push consistently toward lower costs and larger markets. This saves known resources orcreatesnewones,putspricepressuresonexistingproducts,andengagesmorepeopleintheeconomy.”Helater goes on to write that “today’s innovationsmay show up in unexpectedways and places, but theyfollow the same pattern and are no less spectacular than they were in Henry Ford’s day.” In effect, asentrepreneursmakeproductssimplerandmoreaffordable,moreandmorepeopleinsocietynotonlybuyandusethem,butalsoareemployedintheircreation.Thisprocessleadstoamorevibrantandprosperouseconomy.

IqbalQuadir,“InclusiveProsperityinLow-IncomeCountries,”Innovations9,no.1/2(2014):65-66.

18. Apple’siPhoneisoftenpointedtoasanexampleofthevulnerabilityofglobaljobs—there’sevenaninscription on the back of every iPhone:Designed byApple inCalifornia. Assembled inChina.But theiPhoneactuallyprovidesabetter illustrationof the importanceof local jobs that can’tbeeasily shoppedaroundtothelowestbidder.“Designed”actuallyencompassesanarrayoflocaljobsthathavetobedonenearApple’shomebase inCalifornia. It includes theworkof thousandsof engineers and scientistswhoscourtheglobedevelopingnewmaterials;theproductmanagers,whoconductmarketresearchandgenerateproduct requirements; and the retail staff trained to introduce and explain thedevices to end consumers.“Applecreatesvalue,andthusU.S.jobs,throughthedesignanddevelopmentofitsproducts,notbecauseofwherethey’rebuilt,”arecentanalysisinBloombergBusinessweekconcluded.“AlltheseaspectsarepartoftheiPhone’sproductdesign,andexplainhowApplecanchargesignificantmark-upsandtakethelion’sshareoftheindustry’sprofits.Its38percentgrossmarginputstherestofthesmartphonemarkettoshame.”

19. According to data from the World Bank, global net foreign portfolio investments (FPI) wereapproximately $173 billion. These investments are more short-term, liquid, and volatile. FPIs targetequities,bonds,andotherfinancialassets.Theabsolutevalue(inflowsandoutflows)totaledjustunder$2.4trillion. So, even if we accounted for the shorter-term FPI, it is clear that the amount of cross-borderinvestmentsisaverysmallpercentageoftheglobalassetsundermanagement.

20. MattHarding,“Op-Ed:TheInternetwill failandtheTVwillnevercompetewith theradio,”DigitalJournal,April25,2010,http://www.digitaljournal.com/article/291152.

21. A study conducted by Christopher Blattman at Columbia University and Jeannie Annan of theInternationalRescueCommitteesuggests thatproviding job trainingandemploymentopportunitiescouldhelpcurbcrimeinaregion.Onthesurface,itmakessense.Themorelegitimateopportunitiespeopleinacommunityhavetosolvetheproblemsthatengagingincrimeenablesthemtosolve,suchasprovidingtheresourcesnecessary to live a comfortable life, the less likely they are to engage in crime. If you lookatsomeofthemostcrime-infestedareasinourworld,evenintheUnitedStates,theyareoftenareaswheremanyaredevoidofopportunity.Whilethisisnottheonlyreasonpeopleengageincrime,itisoftenamajorone.Thestudyfoundthatawageboostofaslittleas40centsadaywasenoughtoenticeformerLiberianmercenary soldiers to shiftmore time toward their new (honest) occupation and away from violence orothercriminalactivities.Andtheassurancethatmoreearningswouldarriveinthefuturewasparticularlyeffectiveincombatingillegalactivity.

Gillian B. White, “Can Jobs Deter Crime?,” The Atlantic, June 25, 2015,https://www.theatlantic.com/business/archive/2015/06/can-jobs-deter-crime/396758/.

22. Ibid.

23. Milton Friedman, “Milton Friedman on Charlie Rose,” video, 53:57,https://charlierose.com/videos/19192.

Chapter3

IntheStruggleLiesOpportunity

Therealvoyageofdiscoveryconsistsnotinseekingnewlandscapesbutinhavingneweyes.

—MARCELPROUST

TheIdeainBrief

Youmaybe thinking that it’sone thing tosaymarket-creating innovationsareimportant to creating prosperity, but how in the world do you spot theseopportunities,muchlessgoafterthem?Ifitweresoeasy,wouldn’teveryonebedoingthisalready?Theproblemis,itisverydifficultto“see”whatyou’renotlooking for. Many of our economic forecasts don’t necessarily help—theytypically focus on what we call the “consumption economy,” the part of theeconomy that is most visible through conventional metrics. But they do notfactorinwhat’slessobvious,andperhapstherichestveintomineforgrowth—the “nonconsumption economy.”1 To see opportunity in nonconsumption, youhavetochangewhatyou’relookingfor.

*

In his first job,working in the insurance industry in London,Richard Leftleywas fascinated and puzzled by two tables in the annual statistical analysispublished by Swiss Re, the leading global reinsurer. The first one was thenumber and location of people who died as a result of natural disasters. Thesecondwasthetotalcostofinsurancepayoutsinthoseareas.“Therewasatotalmismatch between the two lists,” Leftley recalls now. “The human toll wasenormous in places like Bangladesh, Pakistan, and India. But those countrieswere never even on the ‘total payouts’ rankings.” It made no sense, Leftleythought,thatthepeoplewhoneedinsurancemostintheworldareleastlikelyto

haveit.A few years later, using his two-week vacation to do volunteer work in

Zambia,Leftleysawanopportunitytochangethat.Hewasplacedinthehomeofawidowandherchildinapoorvillage,aspartofhisvolunteerexperience.Leftleywasunpreparedforjusthowpainfulherdailylifewas:shelivedhand-to-mouth, at best. But Leftley learned during that stay that her life had notalwaysbeensobleak.ShehadpreviouslylivedinLusaka,thecapitalofZambia,working as a schoolteacher while her husband made his living as a securityguard.Theyhadrisenabove theirpoorchildhoodeconomiccircumstancesandwerelivingalifeofrelativecomfort,withadecenthomeandamotorcycletogetaround. In what Leftley calls the “chutes and ladders” of life, her husbandcontracted HIV at the height of the epidemic in Zambia, and the family’sdownward spiralbegan.Notonlywashe too ill towork,but they spent all oftheirsavingsonmedicine—bothlegitimateand“hocuspocus”thatofferedfalsehope—and,eventually,onhisfuneral.Broken,sheandherchildreturnedtothevillagetostartagain.

Leftleywasprofoundlymovedbythewidow’sstoryandreturnedtoLondondeterminedtofindawaytousehisprofessionalexpertisetohelppeopleinpooreconomieswhomostneededit.Whenhestartedtellinghisinsurancecolleagueshisideaforanewtypeofbusiness,muchlikeMoIbrahimadecadebefore,hewasgreetedwithguffaws.“Theylaughedatme,”herecallsnow.“Iwastalkingabout going to Zambia and selling insurance to peoplewho hadHIV. PeoplethoughtIhadlostmymarbles.”

They’re not laughing now. As of this writing,MicroEnsure, the companythatLeftleywentontofound,hasregisteredmorethanfifty-sixmillionpeoplefor insurance in emerging economies (eighteenmillion in 2017 alone), payingout$30millioninclaimsbyfindingenormousopportunityinnonconsumption—andradicallyinnovatingtheinsurancebusinessmodeltomakethatpossible.Thecompany, which has been awarded theFinancial Times/IFC TransformationalBusinessAwardfourtimesinrecentyears,isalreadyprofitablein80percentofthemarkets it has entered.More than 85 percent ofMicroEnsure’s customershadneverpurchasedaninsuranceproductuntilMicroEnsurecametothescene.

This is what sets market-creating innovators apart—the ability to identifyopportunitieswherethereseemtobenocustomers.“It’sdifficulttorunarulerover things you can’t see,” Leftley says now.But Leftley and his team had arevelationthatcompletelychangedhowtheyapproachedtheirinnovation.“Werealized we weren’t competing with giant insurance companies; we werecompetingwithapathy.”Apathy,itturnsout,isafiercecompetitor.Butawell-thought-out innovation that responds toa struggle thatpotentialconsumersare

facing can eventually win out. Therein lies some of the greatest potential tocreatemarketsthatwill leadtoprosperity—firstfortheentrepreneur,andthen,overtime,fortheregion.

ATaleofTwoEconomies

I have often wondered how we can better describe economies in a way thatpoints to their potential for growth and development. To many of us, the“economy”issimplyanabstracthodgepodgeofmoneyandbusinesses,productsand advertisements, laws and regulations, and buyers and sellers that interactwith one another in some fashion.We typically categorize countries and theireconomiesasmonolithicentities.Assuch,manyoftheprojectionsandanalyses,such as GDP growth, per capita income growth, and even sector-specificstatistics,offerahigh-levelviewofwhat’sgoingonintheeconomyasawhole.Althoughthesesortsofanalysesareinformativeanduseful,theymaynotalwaystellthewholestory.

From an innovation point of view, we see the world a bit differently:countries are made up of consumers (the “consumption economy”) andnonconsumers (the “nonconsumption economy”), a distinction that helpsidentifyfertileterritoryformarket-creatinginnovations.SeeinganeconomythiswayhelpscutthroughthenoiseofGDPgrowthandahostofothermetricsthatwetendtousetodetermineaneconomy’shealthandpotential.

Theconsumptioneconomyiscomposedofcustomerswhohavetheincome,time, and expertise to purchase and use existing products or services in themarket.Itisthepartoftheeconomythateconomists,forecasters,andmarketingmanagers often use to predict the growth of a product or a region.2 Themostcommon type of innovations, sustaining innovations, are targeted at theconsumption economy because it’s relatively easy to see the potential forgrowth.Whenyoualreadyknowwhoyourcustomersare,youcanfindwaystomakeyourproductsorservicesbetterforthemsothey’llspendmorewithyou.3

Notsurprisingly,capital,beingrisk-aversebyitsverynature,tendstochasesustaining innovations in hopes of a predictable return on investment (ROI)because it can more easily see and understand the potential using existingfinancialtoolsandtheories.Toappreciatethedegreetowhichcapitalchasestheconsumption economy, consider the global Foreign Direct Investment (FDI)flows.In2016,approximately$1.1trillionofthetotal$1.5trillionofglobalFDIflowed to the richest countries in the world, that is, the thirty-five member

countries in the Organization for Economic Cooperation and Development(OECD).4Inotherwords,morethan73percentofglobalFDIwenttojust35ofthe196countriesintheworld.Orconsiderthebillionsofdollarsofinvestmentsthat flowed to the mobile telecommunications industry in Africa after MoIbrahimcreatedamarketandturnedmillionsofnonconsumersintoconsumers.

Aswe’ve noted, the potential ofmarket-creating innovations is significantrelative to even the most robust efficiency or sustaining innovations. Butinnovating for amarket thatdoesnotyet exist can feel risky.Thinkabout theconventional art of product development, which focuses on segmentation:identifyinggroupsofcustomersthataresimilarenoughthatthesameproductorservicewill appeal to all of them.Since investments are necessary to developandmarketproducts, investmentdecisionsare typicallymadebasedonsimilarsegmentationdecisions.Questionslike“HowmuchdisposableincomedopeopleinCountryAhave?”or “What is the average expenditure on entertainment inCountryB,andisthatnumbergrowingorshrinking?”typicallydriveinvestmentdecisions.Marketers,researchanalysts,andinvestorsoftensegmentmarketsbyproducttype,bypricepoint,orbythedemographicsandpsychographicsoftheindividualsorcompanieswhoaretheircustomers.Thisisaboutfocusingontheconsumptioneconomy—theopportunitywecanmosteasilyseeandsegment.

But thismethodleavesbillionsofpeopleoutofconsiderationbecausetheyaredeemed toopoor, toouneducated,or toouninteresting todevelopproductsfor. History has shown us time and again that that way of thinking is verylimiting.

Consider,forexample,howAT&Tmissedthechancetoleadamobilephonerevolution.Justafewdecadesago,AT&Taskedaprominentconsultingfirmtoestimatehowmanycellphones therewouldbe in theworldat the turnof thiscentury.Theconsultingfirmestimatedjustunderonemillion.AndsoAT&Tdidnotinvestsincethemarketwouldnotbebigenoughtowarrantitsinvestment.5All the existing data AT&T had access to pointed to “low opportunity.” Cellphones at the timewere heavy, bulky, and expensive.Most people could notaffordthem.Notinvestingmadesense,atleastonpaper.

Fast-forwardto thepresentdayandit’s impossible to imagineanyplace intheworldwithout them.By the year 2001, therewere almost one billion cellphones in the world. Today, there are more than 7.5 billion cell phonesubscriptionsglobally.6JusttrymakingeyecontactwithyourfellowpassengersonaNewYork—orNewDelhi—subway.It’simpossible.You’llfindpeopleofall agesanddemographicbackgrounds lookingdown, transfixedby somethingontheirphones.

Nonconsumptionoffersapowerfulcluethatthereisenormouspotentialforinnovation.Butspottingnonconsumptionrequiresputtingonanewsetoflensestoseewhatothersmightbemissing.

IdentifyingtheBarriers

Howdoyougoaboutidentifyinghigh-potentialpocketsofnonconsumption?IntheirbookThe Innovator’sGuide toGrowth:PuttingDisruptive Innovation toWork,mycolleagueScottAnthonyandhiscoauthorsdedicateawholechapterto how to identify nonconsumption. There are primarily four barriers orconstraints that prevent people from consuming a solution thatwill help themmakeprogress.Theyare: skill,wealth, access, and time.Sometimes, solutionsonthemarketexhibitsimilarconstraintsthatpreventwould-beconsumersfromconsumingthoseparticularsolutions.Letusexploreeachbriefly.7

SKILL:Often,nonconsumersdonothave theskillsnecessary toconsumeexistingsolutionson themarket, even though they would benefit from doing so. For example, fifty years ago, computersrequiredimmenseskill tooperate,andthosewhousedthem,mostly techniciansat largeuniversitiesand big corporations, had to be able to operate a very large and complexmachine.This created anextrabarriertoconsumption,inadditiontothepricetag.

WEALTH: Wealth is usually the most easily identifiable constraint. This is when nonconsumerscannoteconomicallyaffordexistingsolutionson themarket thatwouldhelp themmakeprogress, ifthey exist. For example, most Americans could not afford a personal computer until Apple, IBM,Microsoft,andIntel,innovatingovertime,madeaccesstocomputingmoreaffordablefortheaveragenonconsumer.Today,mostofushavecomputersinourpockets.

ACCESS: Access is when nonconsumers would benefit from a particular solution, but existingsolutions are not within reach in their particular location or context. Remember the photocopyingcentersinmanylargeorganizations?Thosebigandcomplicated-to-usemachineswereincentralizedlocations,andifyouwerenotconnected tooneof them,youwerenotable toprint.ButCanonandRicohdevelopedsmaller, simpler,andmoreaffordableprinters thatwenowhave inourhomesandoffices.Theirinnovationremovedtheaccessbarrier.Todaywecanprintthousandsofpagesfromourmobilephonesconnectedtowirelessprintersinourhomes.

TIME:Time-relatedconstraintsarewhennonconsumerswouldbenefitfromusingasolution,butthetimerequiredisprohibitive.Inmysixty-fiveyearsoflife,Ihaveyettomeetapersonwhojustloveswaiting,orwastingtime.ClinicasdelAzúcar,aMexicanchainofclinicsthatprovidesanintegratedsolution for the treatment of diabetes (which we will discuss in detail in chapter 7), developed itssolution with this barrier inmind.Many existing solutions to treating diabetes inMexico requiredpatients to go to different hospitals or clinics, and visit with different specialists—this required asignificantamountoftimejusttraveling.ClincasdelAzúcar’ssolutionisdifferent.Patientsvisitoneclinic,wheretheyseeseveraldifferentspecialists ina timelymanner.Becausethemorepatients theclinic sees themore revenue it generates, there is an incentive for the clinic to be efficientwith its

treatment.

TheStruggleIsReal

Identifying thebarriers that lead tononconsumption isavitalclue,but it’snotthe only thing innovators should be looking for. People are nonconsumersbecause they’re struggling to accomplish something, but none of the availablesolutionsisagoodoptionforthem.

We believe that innovation is too often hit-or-miss because it relies onexisting data about the consumption economy—using information about whatcustomershavedoneinthepasttopredictwhatthey’lldointhefuture.Butthatdataismissingsomethingfundamental.Itdoesn’texplainwhypeoplemakethechoices they do—and it doesn’t necessarily predict what they will do in thefuture. And it doesn’t capture why someone has chosen to not purchase aproductorserviceatall—whichiswherethenonconsumptioneconomyexists.

Instead,thiscanbeexplainedbytheTheoryofJobstoBeDone,whichwebelieveexplainswhypeoplemake thepurchasingchoices that theydo.8Manymarketers focus on identifying demographics or putting prospective customersintosegments,butwebelievethismisseswhatfundamentallycauseseachofustomakeachoicetobuyaproductorservice.There’ssomethingelsegoingonthatdemographicscan’texplain.

EverydayjobsariseinmylifethatIneedtogetdone.Somearelittle jobs,some are big ones. Some jobs surface unpredictably. Some are an everydayaffair.Whenwerealizewehavea job todo,wereachoutandpull somethingintoourlivestohelpusgetthejobdone.Whenwebuyaproduct,weessentially“hire”something tohelpus solve that job. If theproductwehiredoes the jobwell, when we are confronted with the same job again, we hire that sameproduct.Andiftheproductdoesacrummyjob,we“fire”itandlookaroundforsomethingelsewemighthiretosolvetheproblem.

Letme illustratewhat Imean. Imight choose to buy theNewYorkTimesnewspaperonmywaytoworkonemorning.Iamsixty-fiveyearsold,I’msixfeeteightinchestall,andmyshoesizeissixteen.MywifeandIhavesentallourchildrenofftocollege.IdriveanSUVtowork.Ihavealotofcharacteristicsandattributes, but none of them has caused me to go out and buy the New YorkTimes.Myreasonsforbuyingthepaperaremuchmorespecific.ImightbuyitbecauseIneedsomethingtoreadonaplaneandIdon’twanttobeforcedtochatwith the gabby passenger beside me. I might be buying it because I’m a

basketballfanandIwanttolookinthesportssectionandteaseoneofmysonsabout his favorite team’s chancesofmaking it to theplayoffs.Marketerswhocollect demographic or psychographic information about me—and look forcorrelationswithotherbuyersegments—arenotgoingtocapturethosereasons.Theywon’thaveunderstoodtheJobIwashiringthenewspapertodothatday.OrifIdon’tpurchaseanewspaperonagivendaybecauseIwon’thavetimetoreadit,therewillbenodataaboutmychoiceatall.

Until you understand the Job your customers are hiring your product orservicetodo,inallitsrichcomplexityandnuance,youcanneverbecertainthatyour innovations will be successful. Successful market-creating innovationsemergefromunfulfilledJobstoBeDone;theysolveproblemsthatformerlyhadonlyinadequatesolutions—ornosolutionatall.Celtel’sMoIbrahimknewthatsomeonewhowantedtotalktohismotherinavillagefarawaywouldhavetotravel for days to make contact. For most people, that was an inadequatesolution. MicroEnsure’s Richard Leftley knew that people who desperatelywanted to protect their families from unforeseen difficulties had few options.Neitheroneofthoseopportunitieswouldhavebeenapparentthroughthelensoftheconsumptioneconomy.

Peoplewould rathergowithout anyproduct—stayasnonconsumers—than“hire”aproductorservicethatsolvestheirJobinanunsatisfactoryway.Thisiswhat happened when Leftley realized that his insurance product was notcompetingwithother insuranceproductsonthemarket. Itwascompetingwithapathy.Hisproductwasactuallycompetingwithnothing.OnceyouunderstandtherealJobpeoplearelookingtogetdone—andinthecaseofnonconsumption,thatpeoplearechoosing togowithout rather than solve that Jobwithexistingoptions—themarketsuddenlyseemsfullofpotential.Nonconsumptionissimplyacluethatthereisenormouspotentialtosolveastrugglewithinnovation.

“NoOneWakesUp in theMorning andWants to BuyInsurance.”

Innovatorsneedtowalk in theshoesof theirprospectivecustomers tocreateaproductthatissomuchbetterthantheexistingalternativesthatpeoplehireit—evenwhenthecompetitionisnothing.OnceinnovatorsunderstandtheJobtoBeDone well enough, they will be able to create a solution that will causenonconsumers to“fire”apathyorwhateverworkaround theyhavecreated,andhiretheirsolutioninstead.Thatmightseemeasyonthesurface(isn’tsomething

better thannothing?), but a customer’sdecision-makingprocess aboutwhat tofireandhirefortheirJobiscomplicated.Therearealwaystwoopposingforcesbattlingfordominancewithinusinthatmomentofchoice,andtheybothplayasignificantroleinourdecisionto“hire”something.

THEFORCESCOMPELLINGCHANGETOANEWSOLUTION:Firstofall,the“push”ofthesituation—thefrustrationorproblemthatacustomeristryingtosolve—hastobesubstantialenoughtocausethemtowanttotakeaction.Aproblemthatissimplynaggingorannoyingmightnotbeenoughto trigger someone to do something differently. Secondly, the “pull” of an enticing newproduct orservicetosolvethatproblemhastobeprettystrong,too.ThenewsolutiontotheirJobtoBeDonehastohelpcustomersmakeprogressthatwillmaketheirlivesbetter.

THEFORCESOPPOSINGCHANGE: There are two unseen, yet incredibly powerful, forces atplay at the same time thatmany innovators often ignore: the forcesholding a customerback.First,“habitsofthepresent”weighheavilyonconsumers.I’musedtodoingitthisway,orlivingwiththeproblem. I don’t love it, but I’m at least comfortable with how I deal with it now. This is wherenonconsumers tend to live, stuck in the habits of the present—the thought of switching to a newsolution isalmostoverwhelming.Stickingwith thedevil theyknow(in thiscase simply livingwiththeirstruggle)isbearable.Irefusedtoupgrademymobilephoneforyears,inspiteofallthewhizbangthingsmyassistantassuredmethenewphonecoulddo,becauseIwascomfortablewiththeoneIhad.Thisislargelybecause—asNobelPrizewinnerDanielKahnemanhasshown—theprincipalallureoftheoldisthatitrequiresnodeliberationandhassomeintuitiveplausibilityasasolutionalready.Lossaversion—people’stendencytowanttoavoidloss—istwiceaspowerfulpsychologicallyastheallureofgains,asfirstdemonstratedbyKahnemanandAmosTversky.9

Ontopofthat,anxietiesthatcomeintoplaywithhiringanewsolutionarepowerful:anxietyaboutthecost,anxietyoflearningsomethingnew,andanxietyoftheunknowncanbeoverwhelming.I’mguessingyouprobablyhaveatleastoneoldmobilephonegatheringdust in a junkdraweror closet somewhere inyour home. You’re not alone. Many consumers hang on to their old mobilephones,evenwhentheymightgetsometrade-invaluetowardanewone.Why?Anxietyaboutthenewsolution.Whatifthenewonefailsatsomepoint?WhatifI find myself in some kind of unanticipated situation where I need a backupphone? What if . . . Innovators all too often focus exclusively on the forcespushing for change—making sure that the new solution for resolving acustomer’s struggle is sufficiently alluring to cause them to switch, but ignorethepowerfulforcesblockingthatchange.

MicroEnsure’sLeftley found thisout thehardway. It tookLeftleyandhisteam a few tries to get their offering right. Initially MicroEnsure focused ontryingtodrawpeopleinsimplybyofferinginsurance.MicroEnsuredoesn’tfundtheinsuranceitsells,butratherworksasamiddlemanbetweenthemobilephonecompanies andmainstream insurers. The companymakesmoney by getting asmall cut fromnewand existingmobile phone subscriberswho spendup to a

certain amount ofmoney purchasing cell phoneminutesmonthly. In addition,when insurance companies want access to new customers, they sometimescontractoutconsultingandproductdevelopmentservicestoMicroEnsure.Thismeans the burden is onMicroEnsure to understand the prospective customersandfindawaytoappealtothem.Attheoutset,MicroEnsurecreatedprogramsthatallowedmobilephonecompaniestoofferfreeinsurancetocustomerswhospentabitmoretoppinguptheirprepaidmobileminutes.Allacustomerneededtodotosignupforinsurancewasprovidehisorhername,age,andnextofkin.Just three questions stood between a potential customer and “free” insurance(“free”asabonusforbuyingmoremobileminutes).Itshouldhavebeenaslamdunk.

Butitwasnot.Evenafterspendinglotsofmoneyonadvertising,forafreeproduct (the company would hope to make its money upselling once it hadregisteredcustomers),thecompanyhadonlyrecruitedtenthousandcustomersinmore thanayear,a tinydent in themarket.Even thoughMicroEnsure tried tomakeitsimpletosignupforinsurance,theproductitselfmadelittlesenseinthecircumstances in which many customers found themselves. It wasn’t solvingtheirJobtoBeDone.Itwasessentiallytraditionalinsurance,justpricedforanemerging market economy. “I had to print brochures that said things like‘Skydiving and water polo are excluded,’” Leftley recalls of the insurer’srequirementthathespecificallyexcludeparticipatinginexpensivesportsthatthenonconsumerstheyweretargetingwouldneverevencontemplate.“Itwasmad.”

SeeingthroughthelensofwhatJob thesenonconsumerswerereallytryingtodocausedLeftleyandhisteamtorethinknotonlywhattheywereselling—buthow.“Noonewakesupinthemorningandwantstobuyinsurance,”Leftleyrealized,buttheydowakeupworryingaboutwhatcouldpossiblygowrongthatdaythatcouldruintheirlives.Riskofgettingsickthatdayandnotbeingabletowork.Riskoftheirmarketstallburningdown.Riskofbeingrobbed.Riskofafloodwipingoutalltheirsupplies.Riskofthecrueltiesoffateswipingthemofftheboardaltogether.TheJobtoBeDonewasnot“sellmeinsurance”;theJobwas something like “helpme continue to earn a living formy family—inmyparticularcircumstances—withoutworryingaboutthingsoutsideofmycontrol.”Theirstrategyatthisstagehadtobeemergent,notdeliberate.Theyhadtolearnhowtofirstcreatethemarketbeforescalingtheirsolution.

Torespondtowhattheywerelearning,MicroEnsurehadtochangevirtuallyeverything about the traditional insurance model. Even asking three simplequestions to get customers to sign up was toomuch. “We could track wherepeoplegaveupintheprocess,”Leftleyrecalls.“Thosethreequestionscaused80percent of the people to not complete the process.” In many lower-income

countries, questions such as age andnext of kin are not simple—people don’toften know or care somuch about their age, and choosing a next of kin in acomplexfamilystructureisdifficult.SoMicroEnsurehadtoradicallyinnovateits business model to address the forces opposing change in prospectivecustomers’minds.

What would happen if they didn’t ask customers anything? At all.MicroEnsureanditspartnerinsurerswouldonlyhaveonepieceofinformationaboutacustomer:hisorhermobilephonenumber.Andwiththatonepieceofinformation, insurance companieswould agree to provide insurance andmakepaymentsdirectlytothatphonenumberwithoutpaperwork,questions,orproofof anything. “This was very freaky for insurance companies,” Leftley recalls.Not knowing a customer’s age, in an industry built on data, forecasting, andpredictableactuarialtables,wasatrulyradicalthought.Butwiththatinnovation,“Buying insurance became as simple as signing up for a ringtone.”Now freeinsurance became a powerful marketing tool—once a customer was educatedabout the concept of insurance, itwas easier to upsell and cross-market otherinsuranceproducts.

“We had cracked the code,” Leftley says. So much so that MicroEnsuresigned up one million customers on the first day they offered a new lifeinsurance product in India—one that had no age limit and no exclusions, andonly required amobile phone number. The companywasn’t prepared for justhowsuccessfullytheyhadcrackedit.Inthenextthreemonths,anothernineteenmillioncustomersfollowedsuit.“Wehadn’tbuiltsystemsthatcoulddealwiththatkindofvolume!”Leftley recounts. “Wewereplugging inharddrivesandthumbdrives,andwererightontheedgeofwhatwasphysicallypossible.”

That’snottosaythatMicroEnsure’ssuccesscameeasily.Creatingmarketsin emerging economies is difficult. MicroEnsure actually began as a not-for-profit organization before Leftley and his team realized that they couldn’tpossibly keep upwith the growth relying on donated funds and grants in theglacial process bywhich they are often bestowed.MicroEnsure came close tofoldingseveral timeswhile theywaitedforgrants tobeapproved.By the timeMicroEnsurewassigningupmillionsofcustomerseveryweek,itwasclearthatrelying on funderswas not a strategy for long-term growth and sustainability.“We’d think about approaching a major foundation, for example, and goingthroughthatwholeprocess.Ifwewerelucky,sixmonthslaterwe’dgetacheck.Butinsixmonths,wemightbeoutofbusiness.Wecouldn’twaitthatlong.”

Withaclearmarketanduntoldpotentialopportunity,Leftleyandhis teamwere eventually able to attract a consortium of backers, including AXAinsurancecompany,Sanlam,Omidyar,IFC,andTelenorandconvertedtoafor-

profit venture. The company could now afford to experiment and create newproductsandservicesinmarketsthatotherinsurancecompaniessimplycouldn’tsee. In each location,MicroEnsurewould hire and set up a local team to runoperationsontheground,creatingabatteryofnewlocaljobs.

Tobeclear,it’snotthatexistingcompaniesaren’tlookingforopportunitiesto grow. They are, but, unfortunately, they are often blinded by their existingbusinessmodelsandthemarketresearchtoolstheyuse.Thiscausesthemnottosee opportunity in the struggle of millions of people. The vastness of thenonconsumptioneconomyinmanyregionsinourworldissimplyanindicationthat, while major struggles exist for hundreds of millions of people, anentrepreneurhasyettobuildaviablebusinessmodeltoaddresstheseparticularstruggles.The interesting thingaboutdevelopingabusinessmodel that targetsthis struggle is that, once done successfully, all of a sudden, the opportunitylooksobvious.

ConsiderthecaseofappliancemakerGalanz.

Just Because You Can’t See It, Doesn’tMean It’s NotThere

LiangZhaoxian, founderofGalanz,builtwhathasbecomeoneof theworld’slargesthomeappliancecompanies.Barelyabliponanyone’sradartwenty-fiveyearsago, today, roughlyhalf themicrowaveovenssoldgloballyaremadebyGalanz.That’salotofmicrowaveovens.ButZhaoxiandidn’tbuildthatempirebyfocusingprimarilyonexploitingChina’slowwagestocreateexportsfortheworld.HefocusedfirstonthestrugglehesawinChina.

Thiswasanopportunityhiscompetitors initiallycouldn’t see. In1992, forexample, only two hundred thousandmicrowave ovenswere sold in China, amajorityofwhichwere sold in cities.Theaveragepriceof amicrowaveovenwasaround3,000yuan(approximately$500atthetime),wellbeyondthereachoftheaverageChinesecitizen.MostChinesepeoplesawthemicrowaveovenasaluxurytheydidn’tneed,andsodidmanymicrowavemanufacturerswhosawtheaverageChinesenonconsumeras“toopoor” toevenconsiderpurchasingamicrowave oven. The largest producers of microwave ovens for the localChinesemarkethadannualsalesofaround120,000units.

ButGalanz’sfoundersawsomethingelse:hesawpeoplewholivedin tinyapartmentbuildingswitheithernostovesorcumbersomeones.Manyusedhotplates, which often heated up their small and cramped apartments. He saw a

growingnumberofChinesepeoplewhowere,nowmorethanever,pressedfortime.He also saw that the last thing anyone living in a small apartment,whodoes not own an air conditioner and is pressed for time,wants to do is cook,therebyemittingmoreheatintotheroom.Zhaoxiansawthisstruggleasahugemarket-creatingopportunity.

GalanzchosetofocusonthemicrowaveovenmarketinChinaforpreciselythesamereasonsmanyrecognizedglobalbrandschosetoignoreit.Tothem,theexistingdemandwassmall,microwaveovenswereexpensive,and theaverageChineseconsumercouldnotaffordone.

SoGalanzdevelopedabusinessmodelthatfocusedoncreatingamarketinChina.EventhoughGalanztookadvantageoflowerlaborcostsinChina,asdidmany other brands and manufacturers, it would be incorrect to suggest thatGalanzwas just a low-costmanufacturer ofmicrowave ovens. Galanz startedfromscratch,withtheaverageChinesecustomerinmind.

In order to successfully target the average Chinese customer, companyexecutives at Galanz had to think differently than other microwavemanufacturersinChina.Forexample,inthemid-1990s,thecapacityutilizationrate for most microwave manufacturers in China was around 40 percent, butGalanz ran its plants 24/7 in order to maximize its asset utilization.10 Whileother manufacturers advertised their products on TV, Galanz opted fornewspapers, where it introduced “knowledge marketing.” With “knowledgemarketing,” companies provide consumerswith information about how to usetheir products and include details about newmodels. This strategy drasticallyreduced Galanz’s advertising and marketing costs as companies with similarsalesvolumeswerespendingalmosttentimesasmuchasGalanzonadvertising.

Anarticle inChinaDaily, a popularEnglish-languageChinesenewspaper,creditsGalanzwitheducatingmanyfirst-timeconsumersinChinaonhowtousemicrowaveovens.“In1995, thecompany [Galanz]popularized theknowledgeof the use ofmicrowave ovens nationwide. It started running special featuressuchas‘AGuidetoMicrowaveOvenUsage,’‘ATalkonMicrowaveOvensbyan Expert’ and ‘Recipes for Microwave Oven Dishes’ in more than 150newspapers.Itspentnearly1millionyuan($120,481)inpublishingbookslike‘How toChooseaGoodMicrowaveOven,’” thearticle stated.11Theseeffortsnot only educated the Chinese population aboutmicrowaves, but also createdbrandawarenessforGalanz.

Galanz also developed new capabilities that other contract manufacturersfocused primarily on low-wage exports did not need to develop. Where thecompanyneedednewengineers,salespeople,andmarketingexperts,itrecruited

them;where it needed new distribution channels, it developed them;where itneedednewoffices,factories,orshowrooms,itbuiltthem.InordertoservetheChinese market, Galanz had to create many local jobs. Just two years afterGalanzbeganproduction, thecompanyhadanational salesnetworkofalmostfivethousandstores.12

Today,Galanzhastheworld’slargestmicrowaveresearchanddevelopmentcenter. In addition, the company actively seeks partnerships with researchinstitutions andR&Dcenters in several countries, including theUnitedStates,Japan, and South Korea. Galanz now has distribution centers in nearly twohundred countries and regions around the world. If Galanz had focusedexclusively on exporting low-costmicrowave ovens, itwould not have had tomakemanyoftheseinvestments.13

With Galanz, we can begin to see the development impact of targetingnonconsumption.Forinstance,in1993,Galanzhadtwentyemployees;by2003,ithadgrowntomore thanten thousand.Fromaproductionstandpoint,Galanzwas producing approximately four hundred units per day on a single line in1993;by2003,Galanzwasrunningtwenty-fourlines,producingfiftythousandunits a day. About a decade later, Galanz was producing approximately onehundredthousandmicrowaveovensaday.

Galanzhadbeensosuccessfulthatthecompanypostedover$4.5billioninrevenuesandemployedmorethanfortythousandpeoplein2013.Thecompanynow enjoys greater than 40 percent market share in the global microwavemarket,anditsfounder,LiangZhaoxian,issittingcomfortablyonForbes’slistoftheworld’srichestpeople,worthawhopping$1.01billion.Zhaoxian’swealthandGalanz’s success, however,were built on a foundation ofmarket-creatinginnovations,inChina,forChina.AftersuccessfullytargetingnonconsumptioninChina,Galanzwaswellpositionedtogoafterglobalmarkets.

NonconsumptionEverywhere

Armed with the understanding that there is vast opportunity in creatingbusinessesthattargetnonconsumption,itispossibletodevelopmarket-creatinginnovations in the same way these entrepreneurs below have done. As aconsequence, many of the innovators who build companies that address thestrugglesofmillionsinourworldwillbegintotransformtheirlocaleconomiesintheprocess.

“Seeing”WhatCannotBeSeen

Conventional wisdom suggests that we look for growth and prosperity in theconsumptioneconomy.That is certainlywhereamajorityofcapital spends itstime, chasing new and exciting growth opportunities. Understandably, theseopportunitiesareeasiertoassesswiththemarketresearchtoolscompanieshavecometorelyon.Butfocusingonnonconsumptionprovideswhatwebelievetobe the best opportunity to ignite new growth engines for companies. In turn,thesenewgrowthengineshelpcommunitiesprovide jobs and income,bothofwhichultimatelyhelppeoplemakeprogressintheirlives.

Organization/Innovation NonconsumptionandImpactSafaricom/M-PESA—amobilemoneyplatformthatenablesthestorage,transfer,andsavingofmoneywithoutowningabankaccount

Nonconsumption:Morethan85percentofKenyansdidnothaveaccesstobankingservicesbeforeM-PESA.IttooktheKenyanbankingsystemmorethanonehundredyearstobuildroughly1,200bankbranchesinthecountry.Impact: More than twenty-two millionKenyanshavepulledM-PESAintotheirlivessince its release in 2007. The servicecurrently transacts upward of $4.5 billionmonthly.More thanforty thousandM-PESAagents now exist across Kenya, increasingtheirincomesasaresult.MillionsofKenyanscan now access other financial servicesproducts,suchas loansandinsurance.Theseproducts were historically unavailable tothem.

Tolaram/Indomienoodles—atasty,inexpensive,andeasy-to-cookmealthatcanbepreparedinlessthanthreeminutes

Nonconsumption:WithtensofmillionsofNigerianslivingonlessthan$2aday,theabilitytoaffordthreemealsadayisdifficultformanyinthecountry.Impact: Tolaram now sells more than 4.5billion packets of noodles in Nigeriaannually. The company runs thirteenmanufacturing plants, has enabled tens ofthousands of jobs, has invested over $350million in Nigeria, and contributes tens ofmillions of dollars to theNigerian economyannually. Before the company began sellingnoodles inNigeria, fewNigerianshadheardofthefood.

Celtel/mobiletelephony—apay-as-you-gomobilephoneservicethatenablescustomerstopurchasecellphoneminutesforaslittleas25cents

Nonconsumption:In2000,oftheeighthundredmillionpeoplewholivedinAfrica,approximately2.5percent,fewerthantwentymillion,hadmobilephones.TheDemocraticRepublicofCongo,forinstance,withapopulationofmorethanfifty-fivemillionpeople,hadonlythreethousandphones.TherewerefewerthanonemilliontelephonelinesforNigeria’s126millionpeople.Impact: The telecommunications market inAfrica today addsmore than $150billion totheAfricaneconomyannually.By2020, theindustry is forecast to support 4.5 millionjobs, provide$20.5billion in taxes, and addmore than $214 billion of value to Africaneconomies.14 The proliferation of mobiletelephony has also enabled othertechnologies, such as M-PESA’s mobilemoneyplatformandMicroEnsure’sinsuranceservices. It is now being leveraged as aneducation platform and used to providemobilehealthservicesaswell.

Galanz/microwaveovens—aninexpensivemicrowaveoven(~$45)fortheaverageChinesecitizen

Nonconsumption:Intheearly1990s,therewerefewerthanonemillionmicrowaveovensinChina.China’spopulationthenwasover1.1billionpeople.Impact: From fewer than one millionmicrowaves in the early 1990s in China,todaymore than thirteenmillionmicrowaveovensaresolddomesticallyinChina.Galanzhas a 43 percent market share of themicrowave oven market. The companyemploysmorethanfortythousandpeopleandhas now ventured into air conditioners,refrigerators,washingmachines,dishwashers,andseveralotherhouseholdappliances.AsaresultoftheproliferationofmicrowaveovensinChina, the frozen foods industry has alsoboomed. Some estimates suggest it hasreached more than $10 billion. Think aboutallthejobs,productivity,income,regulations,anddevelopmentthatsupports.

FyodorBiotechnologies/urinemalariatest(UMT)—anonbloodmalariatestthatcostslessthan$2andgivesresultsinlessthantwentyminutes

Nonconsumption:Morethantwohundredmillionpeopleannuallycontractmalariaglobally.Intheregionsstillsusceptibletomalaria,whenevermostpeoplegetafever,theyimmediatelyassumeitismalariaandtakemalariamedications.Inordertoproperly

diagnosethedisease,sickpatientsmustvisitadoctorforabloodtest,somethingmanycannotafford.Annually,overfivehundredmillionlaboratorybloodtestsareperformedglobally.Impact: The Fyodor UMT solves thisproblem by providing a simple noninvasivewaytodiagnosemalariasothatpeopledon’tfalsely medicate fevers that don’t end upbeing malaria. Even though Fyodor is newandrecentlyreleasedtheUMT,thecompanyis already ramping up the production anddistribution of this test so it can reachmillionsofpeopleforwhomasimplemalariatestisnotpossible.

FordMotorCompany/FordModelT—anaffordablecarfortheaverageAmerican

Nonconsumption:In1900,therewereonlyeightthousandcarsregisteredintheUnitedStates.TypicalcarsbackthenwereverydifficulttodriveandonlywealthyAmericanscouldaffordthem.Impact:From1909to1924,Fordsoldmorethantenmillioncars,fundamentallychangingthelandscapeofAmerica.Hecreatedtensofthousandsofjobs,paidbetterwagesthanthecompetition, and initiated some socialprograms for employees. TheModel T alsospurred other industries, such as insurance,distribution,andhomeandroadconstruction,aspeoplewereabletomoveouttosuburbs.Itwasagamechanger.

EarthEnable/earthenfloors—affordablehardenedfloorsthatareone-fifththecostofcement

Nonconsumption:Morethan80percentofhomesinRwandahavedirtfloors.Thesefloorsarebreedinggroundsformosquitoesandmanyotherparasites.Concretefloorswouldbeasolution,buttheyarejusttooexpensiveformostRwandans,wheretheGDPpercapitaisjust$703.Impact: Although just a few years old,EarthEnable has alreadyprovidedmore thanhalfamillionsquare feetof flooring inoverthreehundredvillagesinRwanda.

ClinicasdelAzúcar/diabetestreatment—affordableandconvenientdiabetestreatmentinMexico

Nonconsumption:Today,diabetesisthenumberonecauseofdeathandamputationsinMexico,claimingthelivesofmorethaneightythousandpeopleannually.Since1990,thenumberofMexicanswithdiabeteshasmorethantripledfrom5.6milliontomorethan16million.Butthe$1,000-a-year

treatmentistooexpensiveformostMexicans,andthehealth-caredeliverysystemisalsoveryinconvenient.Impact:ClinicasdelAzúcarhasreducedthecost of diabetes treatment from $1,000 toroughly$250ayear.Theirintegratedsolutionhasalsoresultedina60percentreductionindiabetes-related complications, such asblindness, amputations, and kidney failure.95 percent of the more than fifty thousandpatientstheyhavetreatedhadneverreceivedspecialized diabetes care. They are openingtwonewclinicseverythreemonths.

GrupoBimbo/bread—affordable,qualitybread

Nonconsumption:QualityaffordablebreadwashardtofindinMexicobeforeGrupoBimbo,theworld’slargestbakery,decidedtocreateanewmarketfordifferentbreadsthattargetedtheaverageMexican.Impact: Today,GrupoBimbo grossesmorethan$14billionannually,operates165plantsin 22 countries, and employs more than128,000 people globally. With a marketcapitalizationofover$11billion,BimboalsoownsmorethanonehundredbrandsandsellsitsproductsinEcuador,Colombia,andPeru,as well as in the United States, the UnitedKingdom, andChina. The company pays itslowest-paid employee more than double theminimumwageinMexico.

OpticasVerDeVerdad/prescriptionlenses—affordableprescriptionlensesandeye-careservicesfortheaverageMexican

Nonconsumption:Approximately43percentofMexicanshaveavisualdeficiencyforwhichtheyneedcorrectiveeyeglasses.Existingsolutions,whichonaveragecost$75,aretooexpensive.SomanyMexicansgowithoutglasses,effectivelylivingwithoutgoodsight.Impact: Since opening its first store inDecember 2011, Ver De Verdad hasperformed more than 240,000 eye tests andhas soldover150,000pairsofglasses.Withan average sale price of approximately $17per frame, the company is making badeyesight a thing of the past in Mexico. Itplans to operate over 330 stores across thecountryby2020.

MicroEnsure/insurance—affordableinsuranceformillionsofpeoplelivingonlessthan$3a

Nonconsumption:Insuranceisgrosslyunderconsumedbymanyinlow-incomecountries.NorthAmerica,WesternEurope,

day Japan,andChina(fewerthan34percentofglobalpopulation)areresponsibleformorethan81percentofpremiums.TheMiddleEastandAfrica,forinstance,areresponsibleforjust1.6percent,whileAsia(excludingChinaandJapan)isresponsiblefor11percent.Therewerepracticallynoinsuranceproductsintheircurrentformdesignedforthoseinlow-incomecountries.Impact:MicroEnsure is amisnomer; it is amisleading name for a company whoseinnovation,injustoveradecadeofoperation,has insured more than fifty millionnonconsumers of insurance in Bangladesh,Ghana, Kenya, India, Nigeria, and severalother countries.More than 85 percent of itscustomers hadnever purchased an insuranceproductuntilMicroEnsurecametothescene.

Ascounterintuitiveasitmayseem,itispossibletodevelopmarket-creatinginnovations amid the nonconsumption that exists inmanypoor countries. It isoften through thearduousworkof innovatorswhocansee theopportunities innonconsumption,spotastruggle,andconceiveofafuturethatisdifferentfromthepastthattheseedsofprosperitygetplanted.

That’s exactly what Leftley and his team continue to do at MicroEnsure.AfterspendingtimeinsomepoorneighborhoodsinDhaka,Bangladesh’scapitalcity, Leftley saw the opportunity for another product that might seeminconceivabletoothers:verybasichospitalizationinsurance.Anycustomerwhosignsup—forfree—forthisinsurancegets$50iftheyspendtwoormorenightsinahospital.Nomattertheirageorunderlyinghealthcondition,a$50paymentwill be made to a mobile phone number as soon as the claim is filed. Noquestionsasked.

TheideafortheproductcameafteraheartbreakingconversationLeftleyhadwithamotherwhohadlostherchildtoillness.Shehadbroughthersickchildtothelocalhospital,butwithoutmoneytopayforprivatemedicalcare,herchildjustwaited, for two days,without seeing a singlemedical professional.Whensherealizedthatherchildwasnotgoingtobeseenatthathospital,sheturnedupattheprivateclinicdowntheroadtoseeiftheywouldtreatherchild.Yes,theywould,ifthewomanwouldpaythem$5—halfupfront.Desperate,thewomanraced home, leaving her child alone in the hospital, so she could sell all herpossessionstoraisethemoney.Whenshereturnedtothehospitalthenextday,herchildhaddied.

“Shewas inconsolable.Broken.AndI felt it, too,”Leftley recalls.“Icame

awayfromthatconversationwithmyteamsayingwehavetofixthis.Wehavetocomeupwithaproductthataddressesthismarketfailure.”Herstrugglewasbeyonddescription,butnotbeyondrepair.

AccordingtoLeftley,24percentofpeoplewhoenterahospitalinIndia,foranyreason,leavethehospitalbelowthepovertyline,thetollofbothlostwagesandhospitalbills.Through trialanderror—the initialproductofferingwas tooclunky and relied on hospitals to submit paperwork and claims—MicroEnsuregot to the simple product it has now. It didn’t need to be cash in advance ofhospitalization—MicroEnsurelearnedthatevenpatientsrequiredtofindcashupfront,asthiswomanwas,couldborrowandraiseenoughmoneyknowingtheycouldrepayanyloanswithinacoupleofdays.“Toendupwithaproduct thatreallyworks,youhavenoideawhat thatdoestoyou,”Leftleysaysnow.He’swished many, many times that he could tell the woman how meeting herchangedthefateofmanyotherpeopleinherheartbreakingsituation.“I’vespentyears trying to find that family again and tell thatmother that her experiencecausedustocomeupwithaproductthatmillionsofpeoplehaveandhassavedsomanylives.I’dlovetohaveachancetodothat.”

*

Wedonothaveall theanswerstothestrugglesinourworld.Butwedoknowthatonerarely findswhatone isnot lookingfor.Wearehopeful thatwith thelenses of searching for nonconsumption opportunities through the strugglepeopleencounteronadailybasis,andbycreatingbettersolutionsfortheJobtoBeDone,wecanbegintochipawayat them.And,inturn,begintocreatethemarketsthatwillhelpstrugglingcommunitiesmarchtowardprosperity.

NOTES1. Inhisseminalwork,TheFortuneattheBottomofthePyramid:EradicatingPovertythroughProfits,the late business school professorC.K. Prahalad explains the vast potential in developing products andservicesforthoseatthebottomofthepyramid(BoP).TheBoPrepresentssomeofthepoorestpeopleinourworld,mostofwhomearnlessthan$2aday.ProfessorPrahaladhelpedusunderstandthatservingthepoorcanbeprofitableformanycompaniesthatoftenoverlookthemasconsumers.Althoughmanywhoarepoorareoftennonconsumersofexistingproductsandservicesonthemarketduetocost,thecostofaproductrepresents justoneconstraint tononconsumption.Sincenonconsumption ischaracterizedbystruggleandnotincomebracket,thishighlightsacoupleofthings.First,theincomebracketofapersoncanbeaproxyforstruggle,buttheyarenotthesamething.Second,focusingonnonconsumptioncharacterizedbystruggleallowsyou todevelop solutions that are useful for high-income, low-income, andmiddle-incomepeoplewhostrugglewiththesameproblem.Thissubtledifferenceindevelopinginnovationsexclusivelyforthepooranddevelopinginnovationstotargetnonconsumersisimportanttoconsider.

C.K.Prahalad,TheFortuneat theBaseof thePyramid:EradicatingPoverty throughProfits (UpperSaddleRiver,NJ:PrenticeHall,2006).

2. FromtheWorldBank’swebsiteonmethodologiesforcalculatinggrowth:“Growthratesarecalculatedas annual averages and represented as percentages. Except where noted, growth rates of values arecomputed from constant price series. Three principal methods are used to calculate growth rates: leastsquares, exponential endpoint, and geometric endpoint.Rates of change fromone period to the next arecalculated as proportional changes from the earlier period.” It is clear that these future calculations aredependentonpasteconomicdata,whichisprimarilybasedondemographicsofaregion.Forexample,oneof the methods, “least-squares growth rate,” is used when there is a “sufficiently [historical] longtimeseries”inordertoensureaccuracy.Butsincethenonconsumptioneconomyishardtosee,itisdifficulttoincludeitinthesecalculations.

“Data Compilation Methodology,” Data, The World Bank, accessed February 19, 2018,https://datahelpdesk.worldbank.org/knowledgebase/articles/906531-methodologies.

3. Wedonotimplyherethatthereareexactlytwodistinctpartsofaneconomyandonceyoubelonginone,theconsumptioneconomy,forinstance,youbelongtoeveryconsumptioneconomythatexistswithinthateconomy.Forexample,ifwedecidedtocategorizebasedonincome,wecouldsaythatindividualswhomadeover$75,000intheUnitedStateswerepartoftheconsumptioneconomy.However,withinthat,therearelikelypeopleforwhomcertainproductsonthemarketarestilltooexpensive,eventhoughtheywouldbenefit from owning the products. As a result, this model is helpful from the innovator’s perspectivebecauseithelpsherunderstandwhypotentialconsumers—nonconsumers—arenotpurchasingherproduct.

4. “FDIFlows,”Data,OECD,accessedFebruary19,2018,https://data.oecd.org/fdi/fdi-flows.htm.

5. “CuttingtheCord,”TheEconomist,October7,1999,http://www.economist.com/node/246152.

6. “Numberofmobilephonesubscriptionsworldwidefrom1993to2017(inmillions),”Statista,accessedFebruary19,2018,https://www.statista.com/statistics/262950/global-mobile-subscriptions-since-1993/.

7. Scott D. Anthony,MarkW. Johnson, Joseph V. Sinfied, and Elizabeth J. Altman,The Innovator’sGuidetoGrowth:PuttingDisruptiveInnovationtoWork(Boston:HarvardBusinessPress,2008),45–60.

8. InourbookCompetingAgainstLuck:TheStoryofInnovationandCustomerChoice,mycoauthors,mylongtimecollaborator,BobMoesta, and Iprovideamoredetailedoverviewof theTheoryof Jobs toBeDone.

ClaytonChristensen,TaddyHall,KarenDillon,andDavidDuncan,CompetingAgainstLuck:TheStory

ofInnovationandCustomerChoice(NewYork:HarperCollins,2016).

9. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,”Econometrica47,no.2(March1979):263–92.

10. Galanz served as a contractmanufacturer for severalmicrowave companies.As part of the contractmanufacturingagreements,Galanzwasabletorunthemanufacturinglinesforitsownpurposesafterithaddeliveredonitscontractobligations.Ontheonehand,thisgaveGalanzalow-costentryintothemicrowavebusiness.Thecompanydidnothavetoinvestinmuchmanufacturingtechnology.ButthiswasnotenoughtoselltotheaverageChinesecustomer.Galanzalsohadtodevelopthelocalsales,distribution,andsupportinordertosuccessfullytargetnonconsumptioninChina.

11. De Xian, “Innovative firm leads in microwave market,” China Daily News, December 19, 1996,http://www.chinadaily.com.cn/epaper/html/cd/1996/199612/19961219/19961219010_1.html.

12. AsdetailedinaSamsungEconomicResearchInstitutestudyconductedbytheBeijingoffice,GalanzdidmanyotherthingstoensureitsproductwasaffordablefortheaverageChinese.Forexample,whentheaveragecompanyspentroughly$800millionto$1billiondevelopingamagnetron,themaincomponentinamicrowaveoven,Galanzspentaround$400million.Thecompanyalsofocusedonefficientmanagementpracticesthatreduceditscostsofoperationby5–10percentwhencomparedwithcompetitors.Inaddition,Galanz’spurchasepractices,where itpurchasedsupplies inbulkandpaid immediately,helpedreduce itscostsofpartsandsupplies.Altogether,Galanzfocusedonmaking itsoperationscosteffectivebecause itwastargetingnonconsumptioninChina.

“Microwave Oven Maker Needs Reheating: Galanz’s Low Pricing Stalls,” Samsung EconomicResearchInstitute(BeijingOffice),February29,2008.

13. “About Galanz: Profile,” Galanz, accessed April 6, 2018,http://www.galanz.com/about/about_detail.html.

14. “Number of unique mobile subscribers in Africa surpasses half a billion, finds new GSM study,”GSMA, accessed February 1, 2018, https://www.gsma.com/newsroom/press-release/number-of-unique-mobile-subscribers-in-africa-surpasses-half-a-billion-finds-new-gsma-study/.

Chapter4

PullVersusPush

ATaleofTwoStrategies

Irunafoodcompany,butIknowmoreaboutelectricitygenerationthanfood.

—DEEPAKSINGHAL,CEOTOLARAMAFRICA

TheIdeainBrief

Everyyearwe spendbillionsofdollars inanattempt tohelp low-andmiddle-incomecountriesdevelop.Thesefundsareprimarilyusedtopushresourcesintopoor countries in order to help thembegin theirmarch toward prosperity.Butevenafterpushingtrillionsofdollars’worthofresourcesoverthepastseventyyears, toomanycountriesare stillpoor,with someevenpoorer today.Why isdevelopmentsohardtoattainandthensustain?

Webelievethatmanyoftheseattemptsaremissingacriticalcomponentfordevelopment: innovation. Development and prosperity take root when wedevelop innovations thatpull innecessary resourcesasociety requires.Onceanewinnovationthat isprofitableto thestakeholders in theeconomy(includinginvestors, entrepreneurs, customers, and the government) is introduced, thestakeholdersareoftenincentivizedtohelpmaintaintheresourcestheinnovationhas pulled in—such as infrastructures, education, and even policies. Pullstrategies ensure a ready market is waiting. This, we believe, is essential forlong-termandsustainableprosperity.

*

One of the most popular movies in India in 2017 was not a high-budgetHollywoodblockbusterorashinyBollywoodextravaganza.Itwasafilmcalled

Toilet: A Love Story, which chronicled the trials and tribulations of a youngbridewho is devastated to learn that her newgroom’s familydoesnot have atoilet.Thevillagedivides into thosewhounderstandherperspectiveand thosewhodon’t,andmuchchaosandlaughterensue.Eventually,thehusbandbuildshisbelovedatoiletandtheylivehappilyeverafter.

Toilet: A Love Story may sound like an unlikely sleeper hit, but the plotclearly hit a nerve for its intended audience in India,wheremore thanhalf ofhouseholds don’t have access to a toilet. In reality, the lack of toilets is nolaughingmatter.OneintendeathsinIndiacanbeattributedtopoorsanitation,according to the World Bank. Children pick up chronic infections fromcontaminatedgroundwater,anddiarrheaistheleadingkillerofIndianchildren,causingmore than three hundred thousand deaths annually.Millionsmore areimpairedbystuntedgrowthasaresultofcontaminatedwater.Manypeoplewaituntildark tousepublicspaces fordefecation—acircumstance thathascreateditsownsetofproblems,includingreportsofrapeandviolenceagainstwomen.Thequestforbettersanitationisprofoundlyimportantforthecountry,somuchso that Mahatma Gandhi once declared sanitation to be sacred and “moreimportantthanpoliticalfreedom.”

The solution, of course, seems obvious. Build more toilets. So obvious,agrees India’s current prime minister, Narendra Modi, that he has declaredbuildingtoiletsapriorityovertemplesaspartofhis“CleanIndia”mission.Tothatend,theIndiangovernmentbuiltmorethantenmilliontoiletsin2014and2015—withplanstoaddanadditionalsixtymilliontoiletsby2019.HowcanthisnotbeagoodthinginthecontextofIndia’sserioussanitationproblem?1

Well, it turns out that building toilets is not enough. By mid-2015, thegovernmentfoundthatamajorityofthetoiletswerenotbeingused.“Evenasweaccelerate toilet construction now, much more needs to be done to persuadepeopletousethem,”notedChaudharyBirenderSingh,India’sministerforruraldevelopment, sanitation, anddrinkingwater. “Persuading”has takenanumberof forms. In some rural parts of India, teams of government employees andvolunteer“motivators”roamvillagespubliclyshamingpeoplewhoopttorelievethemselves out in the open rather than use a newly installed public or privatetoilet. In some villages, little children have been taught to chase people whoappeartobeheadedforafieldtorelievethemselvesandblowwhistlesatthem.The government itself has resorted to financial incentives to help motivatevillagestosupporttheuseoftoilets.“Forlong,weassumedthatifthetoiletsarebuilt, people will automatically use it,” Singh observed. “But we have todiligently monitor the use over a period of time and reward them with cashincentivestothevillagecouncilsateverystage.Onlythenwillitbecomeadaily

habit.”2“Motivators” and children with whistles following, goading, and shaming

people? A cash incentive to use a free toilet? Something is wrong here. Nomatter how well intended the efforts, “pushing” a solution like this withoutunderstanding the underlying causes of why peoplemake particular decisionscanleadtosuchpainfuldistortions.Insomeof theruralvillageswherepeoplehavebeenshamedintocompliance,droughtconditionsactuallymakeitvirtuallyimpossible tokeep toiletsclean—thescarcewater isessential fordrinkingandbathing.Itwouldbealuxurytouseittocleanatoilet.Inotherlocations,toiletshavebeensohastilyinstalledthattheyarenotactuallyconnectedtoanything—quicklybecomingsofly-riddenandsmellythatnoonewillusethem.

After years ofworkingwith and studyingmany communities that strugglewith this problem, Kamal Kar, a development consultant, pioneered theCommunity-LedTotalSanitation(CLTS)approach.OntheCLTSwebsite,theynote, “Merely providing toilets does not guarantee their use, nor result inimproved sanitation and hygiene. Earlier approaches to sanitation prescribedhighinitialstandardsandofferedsubsidiesasanincentive.Butthisoftenledtounevenadoption,problemswithlong-termsustainabilityandonlypartialuse.Italsocreatedacultureofdependenceonsubsidies.”TheCLTSapproachdoesnotbelieve the solution to a sanitation problem is simply the provision of thehardware.3Andneitherdowe.Butthisiseasiersaidthandone.Here’swhy.

Poverty is painful, and almost always shows itself as a lack of resources,suchasfood,sanitation,safewater,education,healthcare,andpublicservicesinpoorcommunities.Assuch,itisreasonabletoassumethatpovertyisprimarilyaresourceproblem.Basedonthatassumption,over thepastseveraldecades,wehavebeenexecutinganexpensivepushstrategyofdevelopment that is almostexclusively resource-based. With good intentions, we push the resources thatwealthycommunitieshave,andthatpoorcommunitieslack,inordertosolveaproblem.ButastheeffortstopushtoiletsintoIndiaatarapidpaceshows,pushstrategiesdon’talwaystakeroot.Theyoftenaretemporarilysuccessfulatbest.A school, a hospital, a road, an airport, and even a toilet are all goodinvestments, but when made in the wrong sequence, they can unintentionallycausemore harm than good.CambridgeUniversity economistHa-JoonChangexploresthisphenomenonwithregardstobuildingrich-country-styleinstitutionsinpoorcountries,inhisbookKickingAwaytheLadder.4

To be clear, there can be real value in providing resources for those wholack.Butinmanycircumstances,theexpenseoutweighsthevaluewegetwhentheyaremerelypushedintoaregion.Anotherwaytothinkofitislikethis:push

strategiestreatpovertyasachronicdiseasethatmustbemanaged,andforwhichthereseemstobenocure.Butthisisaveryexpensiveapproach;intheUnitedStates alone, more than 80 percent of the nation’s $2.7 trillion health-careexpendituresisspentontreatingchronicdiseases.5Thediseasesaretreatedbutnotcured.Andforsome,thismaymeanlifelongsuffering.Itishardtobelievethat there isn’tabetterway.Withpoverty, it’spossiblewearedoingthesamething—treatingthepainbypushingalotofresources,butnotcuringthedisease,because treating thepain seems like themostobviousapproach tomaking thepatientbetter.Butourcurrentapproachmightbeblindingustowhat’spossible.

PushVersusPull

Push strategies are often driven by the priorities of their originators, typicallyexperts in a particular field of development, and generate solutions that arerecommendedtolow-incomecountries.Itisimportanttonotethatmanyoftheseresourcesbeingpushedaregoodthingsandareoftenwelcomebypeopleinpoorcountries.Unfortunately,however,theyareoftenpushedintoacontextthatisn’tquitereadytoabsorbthem.Andthatcanturnwhatstartedoutasagoodthingintosomethingprofoundlydisappointing,veryquickly.

Consider,forexample,thefiercecompetitionthatoccurseveryfewyearstohost the FIFAWorld Cup, one of themost prestigious sporting events in theworld. National federations around the globe launch ambitious campaigns toconvincetheirlocalcitizensthatspendingmillions,andevenbillions,topreparetheregiontohosttheWorldCupwouldbehugelybeneficial.Thereisalwaysaflashy media event in which the winning host is announced, to the jubilantcheers of local crowds. Flooding their local region with new resources andinfrastructureas theyprepareforsuchavauntedinternationaleventwillsurelyattract a huge influx of foreign visitors and money, create lots of jobs, andultimatelybenefitthecity’seconomicdevelopment,thethinkinggoes.

Butinreality,thoseoriginalpromisesalmostneverbearout.SouthAfrica,forexample,didawonderfuljobhostingthe2010WorldCup

—defyingcritics’expectations that thecountrywould fail to finish theneededinfrastructure and security improvements. But even so, the country ended uprecovering only 10 percent of the $3.12 billion it invested on transportation,telecommunication,andstadiums.6IntheyearsaftertheWorldCup,thevisibleremindersofthatspending—perhapsmostnotablyapurpose-builtstadiumnearCape Town—have come to symbolize “the worst of FIFA’s legacy in South

Africa,” according to theNew York Times. “It is a superfluousmegastructureunwanted by the wealthier, mostly white residents nearby, and it is far awayfromtheareaswheresoccer fans,whoaremostlyblackandcolored, live.Thestadiumhasalsobecomeastrainonthepublicpurse,costingthecityatleast$32millionsince2010.Thesefundscouldbebetterspentonthecity’smoreurgentpriorities,suchasprovidingsanitationandhousesforthepoor.Thelackofsuchservices continues to be the spark that periodically ignites protests.” Thespendingon theWorldCupdidnotmove theneedle—at leastnotenough—inSouthAfrica.Nearlyadecadelater,SouthAfricastilltopstheWorldBank’slistof countrieswith themost income inequality,withmore thanhalf the countrystilllivingbelowthenationalpovertyline.

By contrast, what we will call pull strategies are different from pushstrategiesinalmosteveryway.Considerthecaseofeducation,forexample,andmore specifically our investment in human capital, which is often far moresuccessfulattakingrootwhenitispulledintoasocietyasaresponsetodemand.Thisdemandisbroughtaboutbyaneconomythatcanabsorbtheknowledgeandskillsbeingtaughttostudents.

I became acutely aware of this after I began serving on the board of TataConsultancy Services (TCS), one of the world’s largest IT companies. Withalmost four hundred thousand employees, TCS is one of the largest private-sector employers in India. Over the past several years, in order to meet thedemands of many of its clients, who are asking for more and more digitalservices including data analytics, mobility, cloud computing, and Internet ofthings,TCShaspulled“digitaleducation”intoitsbusinessmodel.Thecompanyhastrainedtwohundredthousandemployeesonmorethansixhundredthousandcompetencies indigital technologies, and it doesn’t seem tobe slowingdown.WhenTCStrainsemployees—newhiresorexistinghires—itisusuallybasedonmarket demand or project specifications. This way, the education is relevantalmost immediately. The employee understands why she is learning, and thecompanyunderstandswhyitisinvesting.7

Ourresearchsuggeststhatpullstrategies,overtime,arefarmoreeffectiveattriggeringsustainableprosperity.

First, they are often originated by innovators on the ground who arerespondingtothestrugglesofeverydayconsumersorspecificmarketdemands.Second,pullstrategieshavemoreofaninvestigativeorinquisitorialapproachtoproblem-solving as opposed to a more advocacy or assertive approach. Theinnovatorsaretheretolearnandthensolveproblemsinasustainablemanner,asopposedtopushing,howeverwellintentioned,whattheybelievetobetherightanswers to particular development puzzles. Every quarter, for instance, TCS

takes stock of the skills it needs to pull into the organization and investsaccordingly.

Third, pull strategies focus on creating, or responding to the needs of, amarketfirst. It is thenthe jobof themarket topull in theresources itneedstosurvive. In essence, pull strategies emerge from a burning need to makesomethingwork—theyalmostwillasolutionintoexistence,howeverimperfectat first, because it is a criticalpartof creatingor sustainingamarket.Market-creating demands breathe life into a pulled-in solution, allowing them to takeroot.Consider, forexample, theextraordinary impactonenoodlecompanyhashadonNigeria’seconomy.

4.5BillionPacksofNoodlesandCounting

Perhaps the most beloved consumer product in Nigeria is also one of thehumblest: Indomie instant noodles. Sold in single-serving packets for theequivalent of less than 20 US cents, the brand enjoys near-universal namerecognitioninthecountry,maintainsa150,000-memberfanclubwithbranchesinmore than three thousandprimary schools, and sponsors IndependenceDayAwards forHeroes ofNigeria to celebrate the accomplishments of exemplaryNigerianchildren.

Youmay not have heard of it, but Indomie is a household brand name inNigeria.

In 2016, I was honored to speak at the annual conference of HarvardBusinessSchool’sAfricaBusinessClub.Withapproximately1,500attendees,itis the largest student-runconferenceonbusiness inAfrica in theworld. Inmytalk,IreferencedTolaram,afascinatingcompanywehadbeenstudying,onlytoreceiveblankstaresintheauditorium.8ButwhenIsaid,“Thesearetheguysthatmake Indomie noodles,” the crowd went wild. Why would noodles cause acrowdtoeruptinraucouscheers?Andmoreimportant,whatintheworlddoesthathavetodowithdevelopmentandprosperity?

WhatTolaram,throughIndomienoodles,hasdoneinNigeriaisastonishing.SinceitsentryintoNigeriain1988—whenNigeriawasstillundermilitaryrule—Tolaramhas investedmore than$350million tocreate tensof thousandsofjobs,developedalogisticscompany,andbuiltinfrastructureincludingelectricityand sewage and water treatment facilities. In addition, Tolaram has builteducationalinstitutions,fundedcommunityorganizationprograms,andprovidedmillions of dollars in tax revenues. Perhaps the most visible evidence of this

strategy is that thecompanyhas takena lead role indevelopinga$1.5billionpublic-privatepartnershiptobuildandoperatethenewLekkideep-waterportinthe state of Lagos,Nigeria’s commercial capital.Without overstating it at all,Indomienoodlesisdevelopment.

Tolaramhasshownthatoutofverylittle,amarketcanbecreated—andwiththebirthofamarketcometheattendantbenefitsthatcanleadtodevelopment.

Indomie noodles are so woven into Nigerian society that it might evensurpriseNigerians to recall that noodles are not among their traditional foods.Tolaramhasonlybeensellingtheproductinthecountryforaboutthirtyyears.Thecompany’sgrowthtrackturnstheconventionalwisdomaboutdevelopmentonitshead.

In 1988, the year Tolaram began selling Indomie noodles in Nigeria, thecountrywasfarfromaninvestmentmagnet:Nigeriawasundermilitaryrule;lifeexpectancy for its ninety-one million people was forty-six years; annual percapitaincomewasbarely$257(approximately$535today);lessthan1percentofthepopulationownedaphone;onlyabouthalfhadaccesstosafewater;just37percenthadaccesstopropersanitation;astaggering78percentlivedonlessthan $2 a day. But even in these dismal circumstances, brothers Haresh andSajenAswani sawa hugeopportunity to feed a nationwith an affordable andconvenient product. For them, this represented an enormous market-creatingopportunity.

Indomie noodles can be cooked in less than three minutes and, whencombinedwithanegg,canbeanutritious,low-costmeal.Butin1988,thevastmajority of Nigerians had never eaten or even seen noodles. “Many peopleinitiallythoughtweweresellingthemworms,”recallsDeepakSinghal,currentlytheCEOofTolaramAfrica.TheAswanibrotherswereconvinced,however,thatthey could create a market in Nigeria because of the country’s growing andurbanizing population, and the convenience their product offered. Instead offocusingonNigeria’sunfavorabledemographics,theyfocusedondevelopingabusinessmodelthatwouldenablethemtocreateanoodlemarket.

Thedecision to target theneedsof averageNigerianswhowereverypoorcompelledTolaramtomakelong-terminvestmentsinthecountry.In1995,thecompany made the decision to shift noodle manufacture to Nigeria to bettercontrol its costs. In order to do so,Tolaramhad to pull infrastructure such aselectricity,wastemanagement,andwatertreatmentintoitsoperations.“Irunafoodcompany,butIknowmoreaboutelectricitygenerationthanfood,”Singhalsaysnow.

Tolaram, just like TCS, also got into the “education” business, throughcompany-sponsored training in electrical andmechanical engineering, finance,

and disciplines relevant to the business. Tolaram had to make these specificinvestments because the underlying infrastructure in Nigeria was eithernonexistentorsubpar.SoTolaram“pulled”themininstead.

And that, in turn, created more opportunity for prosperity to beginflourishing.Consider, forexample,whathappenswhenTolarampullsa recentgraduate from a local university into its operations and provides employmentandtrainingforthenewemployee.First,thecompanyincreasestheproductivityof its ownoperations and, by extension, that of the region.Second, it reducesunemploymentand,asaresult,indirectlyreducescrime,sincepeoplewithjobsareless likelytoengageincriminalactivities to try tomeet theirbasicneeds.9Third, it contributes additional income taxes and consumer spending. All ofthesethingsmighthavebeencoreregionaldevelopmentobjectives,butfor theexecutives at Tolaram, they were just the natural result of operating theirgrowingbusiness.

36PercentGrowth,17YearsinaRow

Likemanyotheremergingandfrontiermarkets,Nigeriahasvirtuallynothriving“formal” supermarket sector, and the path from factory to consumer containsmany potential points of failure—or “leakage” (the process inwhich productsarestolenordisappearbeforethepointofsale).SoTolaram’smanagerschosetoinvest in a supermarket supply chain. This was by no means trivial, as thesupermarket supply chain investment required Tolaram to build an entiredistribution and logistics business. This meant the company built distributionwarehousesandstorefronts,purchasedhundredsoftrucksforitsfleet,andhiredthousands of drivers who would drive into neighborhoods selling cartons ofIndomienoodles to retailers inboth independentlyowned andTolaram-ownedstores.

Tolaram’s investments in distribution may have seemed like overkill, butTolaram’s executives knew theywould never succeed if they couldn’t get theproductintocustomers’hands.Inmanypoorcountries,companiesmightspendan inordinate amount of time thinking about how to make their productsaffordable, but may spend little time thinking about making their productsavailable.This is, in part, because these companies don’t see distribution as acore part of their business model. But at this stage of development in poorcountries, itmust be; in fact, investing inboth affordability and availability isparamounttothesuccessofamarket-creatingbusiness.

Itisthroughthisprocessofmakingone’sproductavailable,affordable,andthereforeaccessiblethatinnovatorscreatetherightsolutionsfornewmarkets.Amarket-creating innovation, then, isn’t simply a product or a service—it is theentire solution: the product or service coupled with a business model that isprofitable to the firm. In creating this solution, organizations do what isnecessary, including building infrastructures, factories, distribution, logistics,sales,andothercomponentsoftheirbusinessmodel.These,inturn,begintolaydown a foundation of a region’s infrastructure.This iswhatTolaramdid, andcontinuestodo,inNigeria.

The company now controls 92 percent of the supplies essential tomanufacture Indomie noodles and operates thirteen manufacturing plants inNigeria. This is no different from what the Ford Motor Company, Celtel, orGalanzdidwhenthecircumstancecalledforit.

Ithasbeenatoughjourney,butthat’stobeexpectedbecausedevelopment,by its very nature, is hard. Tolaram’s investments, however, are paying offhandsomelybyanymeasure—andNigeriaisreapingsignificantdevelopmentalgains.Todaythecompanysellsmorethan4.5billionpacksofnoodlesinNigeriaannually,makingNigerianstheeleventh-largestconsumersofinstantnoodlesintheworld,aproducttheybarelyknewexistedthirtyyearsago.Tolaramdirectlyemploysmore than8,500people,hascreatedavaluechainwithone thousandexclusive distributors and six hundred thousand retailers, and has revenue ofalmost$1billionayear,allthewhilecontributingtensofmillionsofdollarsintaxestotheNigeriangovernment.Tolaramalsocreatedalogisticscompanythatownsandoperatesmorethanonethousandvehicles.Thelogisticscompanynowserves both Tolaram and other Nigerian companies, with 65 percent of itsrevenuescomingfromexternalclients.Today,itisoneofthelargestcorporatetransportersinthecountry.10

IfTolaramhadtakenadifferentandmorecommonapproach,toinvestonlywhen the circumstances were right, or when the situation on the groundimproved, itwould likelynothaveachieved its stunning36percentyear-over-yeargrowth—inamarketitcreated—seventeenyearsinarow,amarketthathasattracted investments from sixteen other noodle companies and many othersupplier and raw materials companies responsible for things like packaging,flour,palmoil,salt,sugar,andchili,andalsodistribution,advertising,sales,andretail. All these companies are now responsible for directly creating tens ofthousandsofotherjobsinNigeria.

InordertobuildamarketinNigeria,andotherenvironmentslikeit,Tolaramhadto,andcontinuallyhasto, internalizetherisksthatothersperceive.Thisisoneofthereasonsbehindthe$1.5billionpublic-privatepartnershiptobuildand

operate thenewLekkideep-waterport in the stateofLagos.OnceTolaram issuccessful in building the port, the company will further reduce its costs andprovideportservicestoothercompanies.

If Tolaram had waited for the Nigerian government to address the“infrastructure” and “institutions” challenges before investing, the companywouldstillbewaitingandwouldlikelynotbeoperatinginNigeriatoday.

Ankur Sharma, former head of corporate strategy for Tolaram Africa,summarizedthecompany’sapproachtoself-relianceinFebruary2016:“Aswecreateamarket,wedowhatisnecessarytoensuresuccess.Insomecountrieswehave built power plants; in others we have invested millions of dollars intransportation infrastructure just tomove our products from the factory to theretailsites,inlinewithourthemeofcontrollingourowndestinybydrivingcostsdown.Wearecommitted towhatevermarketweenterandwilldowhatever ittakestobesuccessfulthere.”

A pack of Indomie noodles is simply a 20-cent packet of instant noodles.Howcan itmatter somuch? Itmatters because Indomienoodles represent theprocessbywhichpoverty,throughinnovation,canbecomeprosperity.

Tolaram’s investments in Nigeria illustrate a fundamental principle that,when applied in a context of nonconsumption and poverty, has a powerfulimpact on development and prosperity. It illustrates the immense potential ofmarket-creating innovations to pull many resources into an economy. Inaddition, it alsoshows that, in somecircumstances, localizingan innovation isnecessary for success.Although theAswani brothers are not nativeNigerians,theyareNigerianbyfunction.Infact,HareshAswanihasbeenhonoredwithachieftaincy title in Ogun state, one of the highest honors a community canbestowonaperson,becauseofhiscommitmenttotheeconomicdevelopmentofNigeria.

Because of its investments and success in Nigeria, Tolaram has begunattracting hundreds of millions of dollars of foreign direct investment frommajor international companies intoNigeria. In 2015,Kellogg’s, theAmericanmultinationalfoodcompany,boughthalfofTolaram’sdistributionoperationsinNigeria for $450million, and both companies commissioned a 6-billion-naira(~$17million)cerealmanufacturingplantinDecember2017.

Tolaram’s Impact on the Nigerian Economy (CurrencyValuesinNigerianNaira11)

Totalvalueaddedtotheeconomy—N241billionannuallyStaffincome—N7.6billionannuallyGovernmentrevenue—N4.5billionannuallyInvestmentinmanufacturingsector—N70billionDirectjobscreated—8,570Totaljobscreatedthroughouttheeconomy—42,850Numberofmanufacturingplants—13Numberofwarehouses—13Numberofdistributors—2,500Numberofsubdistributors—30,000Numberofnetworkandconveniencestores—290Numberoftrucksandothervehicles—1,000plusNumberofothernoodlecompanies—16

AndSpecifically,LookatWhatTolaram IsPulling intotheNigerianEconomy

ElectricitygenerationWaterandsewagetreatmentplant$1.5billiondeep-seaportEducation—specializedtechnicaltrainingonfinance,engineering,andmarketingforemployeesLogistics—TolaramnowrunsoneofthelargestlogisticscompaniesinNigeriaForeigndirectinvestment—Kellogg’s$450millionpurchaseofhalfofTolaram’sdistributionoperationsSustainablesocialdevelopmentprojects—theTolaramFoundationowns25percentoftheTolaramGroupandinvestsinawiderangeofsocialprogramsthatbenefitNigerians,includingprovidingprostheticdevicesforNigerianswhohavelostlimbs,caringfororphans,andprovidingscholarshipsforstudentstoattendschool,tonamejustafew.

ThePower,andtheNecessity,ofPull

Tolaram was able to pull many components into the Nigerian economy that

wouldotherwisehavebeenimpossibleor,attheveryleast,incrediblydifficulttosustain without the creation of a noodle market. The noodle market, in someways, acts as a magnetic force that ensures educated students get employed,governmentrevenuesaregeneratedtofundotherprojects,andnewtechnologiesget developed and used productively. All these things are pulled into theeconomyinordertogrowthenoodlemarketthatTolaramcreated.Ifwecreateamarket that successfully serves a growing population of nonconsumers, thatmarketislikelytopullinmanyotherresourcesaneconomyrequires.Thisisthesimple,yetpowerful,mechanismofpull.

Thequestion still remains,whydoesTolaramneed to invest in electricity,water,education,logistics,andsoon,inordertodeliverapackofnoodlestotheaverageNigerian?Surely,itwouldn’tneedtodothisifitwereoperatingin,say,the United States. The answer to that question—on when and whether acompany should internalize and integrate certain costs even though they don’tseem core to the company’s business—can be explained by one of themanagementtheoriesIteachmystudents.

The decision onwhether a company should integrate certain aspects of itsbusiness model (bring them in-house and do it by themselves) or whether itshould outsource them depends on a theory we call interdependence andmodularity.Acompanyshoulddevelopaninterdependent(integrated)businessmodel when it cannot depend on suppliers for specifiable, verifiable, andpredictable inputs. In some cases, this can be access to constant electricity,quality rawmaterials,orevenwell-educatedemployees. InputscoveranythinganorganizationneedstoensureitproperlyaccomplishestheJobtoBeDoneforwhichcustomers“hire”itsproduct.

Inotherwords,ifthecompanycannotreliablydependonaparticularinputfromasuppliertoaccomplishthecustomer’sJobtoBeDone,thenthecompanymust integrate its operations—create andmanage all those “inputs” itself. Forexample, when Tolaram began operating in Nigeria, it had partnerships withseveral other companies for its packaging and logistics needs. Tolaram alsodependedonsuppliersforwheat,flour,andoil.Butbecausesuppliesfromthesecompaniesweren’treliable,Tolaramhadto integrate thesecomponents into itsbusinessmodel.12Ithadtodotheseactivitiesitself.

If other companies were able to provide these supplies reliably, Tolaramwould have been able to more easily outsource these activities to thesecompanies. In this case, Tolaram would not have had to integrate as manyaspects of its business model and would have developed something moremodular.ThecompanywouldhavepartneredwithreliablesuppliersinthesamewaymanycompaniesintheUnitedStatespartnerwithUPSorFedExfortheir

logistics and shipping needs, or with other suppliers of things like electricity,water,rawmaterials,andsoon.

Itwas precisely becauseTolaram could not find reliable companies that itdecided to integrate many aspects of its business model. An interesting thinghappened after Tolaram successfully integrated these other aspects of itsbusiness model, including logistics, packaging, electricity, and others. Whenother companies, many of which also needed these things, saw that Tolaramcould reliably provide them, they began asking if Tolaram could sell thoseservicestothem.Andjust likethat,acostcenterwastransformedintoaprofitcenterforTolaram.

Thatisthepowerofpull.

Tolaram’sInfrastructureIsNigeria’sInfrastructure

Market-creating innovators do what is necessary, core competency or not, inordertocreateanewmarketthatservesthosewhohavehistoricallybeenunabletopurchase aproduct.The investments these companiesmakearenot just thecompany’sinfrastructure;theybecomethecountry’saswell.Butperhapsmostimportant of all is thatmarket-creating innovations instill in citizens a culturethatinnovationispossible,evenindirecircumstances.Thisiscrucialbecauseitis often in the process of developing market-creating innovations, which aresimpler, more affordable, and therefore more accessible to the broaderpopulation,thatacompanynecessarilypullsinthemanythingscurrentlypushedontopoorcountriesinhopesofspurringinnovation,development,andgrowth.

Unfortunately, when these things are pushed before there is a marketdemanding them orwilling to absorb them, the countries are seldom ready tomaintainthem.Andsowhatweseewithpushinitiativesarebrand-newschoolsthat lose their value and deliver subpar education; new roads that becomedifficult to maintain; and “institutions” that are copied and pasted fromprosperous nations that end up hitting the undo button. As a result, nothingremainspermanent,exceptperhapsthenever-endingstreamofwell-meaningbutunsustainableprojectsdesignedtohelppoorcountries.Butwhenamarketpullstheseresourcesin,theytendtostick.

ANoodleEconomy?

Weareundernoillusions;a20-centpackofnoodles,nomatterhowmanyaresold, cannot single-handedly develop Nigeria. But the principles behindTolaram’ssuccesscan.

Consider, for example, the sanitation problem in India through the lens ofidentifyingavastmarket-creatingopportunity.ThatistheapproachoftheToiletBoardCoalition(TBC),aglobalconsortiumofcompanies,socialinvestors,andsanitationexpertsthatareattemptingtocatalyzemarket-creatingsolutionstotheproblem. In what the TBC refers to as the “sanitation economy,” they’veidentifiedwhattheysayisa$62billionopportunityinIndiaalone.HerearethethreesubsectorsofthesanitationeconomyasidentifiedbytheTBC:

TheSanitationEconomy

Description TypeofWork

Toileteconomy

Productandserviceinnovationthatprovidestoiletssuitedtoallenvironmentsandincomes

Householdandpublictoiletfixtures,maintenance,repair;hygieneproducts

Circularsanitationeconomy

Toiletresources(humanwaste)feedintoasystemthatreplacestraditionalwastemanagement

Collection,transportation,processingofhumanwaste,andturningitintoproductslikeorganicfertilizers,proteinoils,andmore

Smartsanitationeconomy

Digitizedsystemsthatensureoperatingefficienciesandmaintenance,besidesconsumeruseandhealthinformationinsights

Consumerandhealthdatacollection,analysis,anddistribution;sensorsanddatatransmission

Source:TheToiletBoardCoalition2018

“Thisisthebiggestopportunityinacenturytotransformsanitationsystemsinto a smart, sustainable, and revenue-generating economy,” Cheryl Hicks,executive director of the TBC, believes. Hicks notes that each year over 3.8trillionlitersofhumanwastearegenerated,whichcompaniescanusetoproducetreatedwater,renewableenergy,organicfertilizers,proteinproducts,andsoon.“Innovationcanreallyeffecttransformationalchange,”Hickssays.“Justlookatall theways people are exploring creating ‘product’ out of the system, in theformofcapturingbiologicalresources,energy,fertilizers,plastics,protein,evendata tohelpusunderstand,digitally, a community’shealth.”For example, she

says, innovation ishelpingcreatedata trackers thatcanhelp identify,earlyon,outbreaks in a community—long before hospitals and clinics are floodedwithseriously ill people.Similarly, smart technologies canhelp shapebusiness andhealth decisions, as well as influence policy-making.Moreover, various otherindustriescouldalsoparticipateintheemergingsanitationeconomy.Onemarketcan be created, Hicks predicts, which will, in turn, generate other relatedmarkets. Identifying the opportunity and then innovating around a market-creating solution may just help India pull in the sanitation infrastructure itdesperatelyneeds.

BankingWithoutBanks,MoviesWithoutTVs

Wehaveobservedthepowerwithwhichpullstrategiescanserveascatalystsforlong-termchange.ConsiderhowthisplayedoutinKenyawhentwentymillionpeople adopted themobilemoney platformM-PESA into their lives in a veryshort time. Before M-PESA, the traditional banking system in Kenya servedfewer than15percent of the population.Also in 2007, the yearM-PESAwasfounded, Kenya had just over one thousand bank branches for its thirty-eightmillionpeople.ButM-PESA, an innovationbuilt on topof themobile phone,waspulled intomillionsofKenyanhomesand today transactsmore than$4.5billion a month.13 A traditional push approach would have meant setting upmanymorebankbranches inKenya, hoping it then spurredpeople to join theexistingbankingeconomy.But thatwouldhave likelybeen significantlymoreexpensive,reachedfarfewerpeoplethanM-PESA,andtakenlongertohaveanykindofimpact.

OrwhataboutNigeria’s“Nollywood” industry?YoumaynothaveknownthatNigeriahasathrivingmovieindustry,butthat’sprobablybecauseNigerianmovies are created to serve nonconsumption, forAfricans andAfricans in thediaspora.Intermsofnumberofmoviesproducedannually,Nollywood’s1,500moviesissecondonlytoIndia’sBollywood—asurprisingstatisticinacountrywhere fewer than 60 percent of people have access to electricity and only 40percent of households have a television.14 Nollywood has been able to thrivepreciselybecauseittargetsnonconsumption.Beforetheadventandproliferationof Nigerian movies, most Africans consumed Hollywood-and Bollywood-produced movies. There were few movies that spoke to the lives of averageAfricans,takingintoconsiderationtheirculturesandexperiences.Assuch,whileWesternandIndianmovieswereinteresting,theywerenotrelatable.Nollywood

changedthat.Nollywood’s annual revenue of roughly $1 billion pales in comparison to

Hollywood’s projected $35 billion in 2019, but that doesn’t mean thatNollywood isn’t having a significant impact on the Nigerian economy. Theindustry currently employs more than one million people, second only to theagriculture industry.15 In addition, Nollywood has been able to pull in bettergovernance as it relates to piracy and copyright laws. Appreciating theimportance of the industry as a major source of employment and potentialincome from the sale and export of Nigerian movies, the Nigerian ExportPromotionCouncil,theNigerianCopyrightCommission,andtheNationalFilmandVideoCensorsBoardarenowcollaboratingonprogramstoreducepiracyintheindustry.

NoOneGetsFiredforBuildingaWell

Ifpullingseemstobeamoreeffectivestrategythanpushing,thenwhydon’twededicatemoreofourresourcestowardpullstrategies?Thereareseveralreasonsforthis,oneofwhichisthatnoonereallygetsfiredforpushing.Thinkofitthisway:noonegetsfiredforbuildingawell inapoorcommunity.Therearefewmoresatisfyingimagesinpoorcountriesthangushingfreshwellwater,studentsin fresh school uniforms seated in a shiny new classroom, or ribbon-cuttingceremoniesforfabulousnewroadsorhospitals.

Bycontrast, there are also fewmoredepressing images thanbrokenwells,school-agedchildrenonthestreets,orabandonedinfrastructureprojects.

Whatcouldhappenifwechangedouremphasisfrompushtopull?Whatifmuchmoreofthe$143billionspentonofficialdevelopmentassistancein2016waschanneled tosupportdirectmarket-creationefforts inpoorcountries,evenwhenthecircumstancesseemedunlikely?Imaginehowmanymarketscouldbecreated; imaginehowmanyTolarams,Nollywoods,M-PESAs,andothernew-marketcreatorscouldemerge;imaginehowmanyjobscouldbecreated.

AsIthinkaboutthisproblem,Ican’thelpbutwonderhowmanyfathersandmothers would be afforded the dignity of work and the resources to providesimple things for their families—like food, health care, and quality education.Imagine howmany peoplewould have a renewed sense of hope and purposewhentheybegintoseetheirsufferingcanbecomeathingofthepast.

“Wearethefirstgenerationinhumanhistorythatcanendextremepoverty,”JimKim, president of theWorldBank, often says.Hemaybe right—but this

willnothappenifwecontinuefocusingoureffortsonendingpoverty.16That’stheparadoxatplay.

NOTES1. RamaLakshmi,“Indiaisbuildingmillionsoftoilets,butthat’stheeasypart,”WashingtonPost,June4,2015, https://www.washingtonpost.com/world/asia_pacific/india-is-building-millions-of-toilets-but-toilet-training-could-be-a-bigger-task/2015/06/03/09d1aa9e-095a-11e5-a7ad-b430fc1d3f5c_story.html?utm_term=.d28251385c4e.

2. Ibid.

3. “The CLTS approach,” CommunityLed Total Sanitation, accessed March 15, 2018,http://www.communityledtotalsanitation.org/page/clts-approach.

4. InhisbookKickingAwaytheLadder:DevelopmentStrategyinHistoricalPerspective,Changshowsthatmanyof the investments thatpoorcountriesaremakinginhopesofgeneratingeconomicgrowtharebeingmadeat adifferent stageofdevelopment thanwas thecase for countries that arenowprosperous.Theyareoftenmadetoosoonandasaconsequence,arenotyetsustainable.

Ha-JoonChang,KickingAway theLadder:DevelopmentStrategy inHistoricalPerspective (London:AnthemPress,2007).

5. “ChronicDiseases;TheLeadingCausesofDeathandDisabilityintheUnitedStates:ChronicDiseaseOverview,” Centers for Disease Control and Prevention, accessed February 5, 2018,https://www.cdc.gov/chronicdisease/overview/index.htm.

6. MireleMatsuokaDeAragao,“EconomicImpactsof theFIFAWorldCupinDevelopingCountries,”HonorsTheses,Paper2609,April2015,https://scholarworks.wmich.edu/cgi/viewcontent.cgi?article=3609&context=honors_theses.

7. MadhuraKarnik,“TCSisquietlytransformingitselftotakeonIndia’semergingtechscene,”Quartz,July 3, 2017, https://qz.com/1000424/tcs-is-quietly-transforming-itself-to-take-on-indias-emerging-it-scene/.

8. TheTolaramGroupwasfoundedinMalang,Indonesia,in1948.Itbeganbytradingtextilesandfabricsand has since evolved into a manufacturing, real estate, infrastructure, banking, retail, and e-commerceconglomerate.

9. Gillian B. White, “Can Jobs Deter Crime?,” The Atlantic, June 25, 2015,https://www.theatlantic.com/business/archive/2015/06/can-jobs-deter-crime/396758/.

10. TolaramisalsocreatingothernewmarketsinNigeriaforotherfast-movingconsumergoods,suchasbleach and vegetable oil. Before Tolaram released its Hypo bleach product, fewer than 5 percent ofNigeriansusedbleach towash their clothes.Tolaram reports that over thepast fewyears, leveraging itsmanufacturing and distribution prowess, it has expanded thatmarket sixfold, reaching 30 percent of thepopulation.

11. Many of these investmentsweremade over the span of three decades, unless otherwise stated. TheexchangeratefortheNigeriannairatotheUSdollarhaschangeddrasticallyduringthisperiod.In1995,forexample, oneUSdollar exchanged for approximately22Nigeriannaira.At the timeofwriting, oneUSdollarexchangedforabout360Nigeriannaira.

12. In their paper “The Educator’s Dilemma: When and how schools should embrace poverty relief,”Michael Horn and Julia Freeland Fisher provide an excellent example of howGustavus Franklin Swiftintegrated his operations in order to make beef more affordable and accessible to tens of thousands ofpeople at a timewhen itwasnot commonpractice tomovemeat across state lines in theUnitedStates.

Theyexplain,“Forcenturies,companieshavebeendriventointegrateactivitiesthatwerenotattheircorein order to reach new heights of performance and distribution. Gustavus Franklin Swift’s approach tomarketing and selling beef, for example, reflected his willingness to integrate beyond the late 19th-century’smodelofraising,butchering,andsellingbeefonanexclusivelylocalbasis.Atthattime,becausethere was no technology for transporting meat long distances, the beef industry lacked significanteconomiesofscale.Swiftsawanopportunitytointegratebackwardandforward:hecentralizedbutcheringinKansasCity,whichmeanthecouldprocessbeefataverylowcost.ThenSwiftdesignedtheworld’sfirstice-cooled railcars. He even made and sold ice cabinets to retail shops throughout the Midwest andNortheastsothatoncethebeefarrived,itwouldstayfresh.OnekeytoSwift’sabilitytomarketbeefinfarflungregionswastheabilitytoassurecustomersthatthebeefwasstillsafetoconsume,giventhatithadtraveled all the way from the stockyards of Chicago to the market. Because a clear understanding ofrefrigerationandmeatpackingprocessesdidnotexistatthetime,Swifthadtocontroltheentireprocesstoensure that the temperature and storage practices remained sound. In other words, Swift had to expandbeyond his so-called core competencies and introduce new, interdependent lines of business in order torevolutionizethebeefindustry.”

MichaelB.HornandJuliaFreelandFisher,“TheEducator’sDilemma:Whenandhowschoolsshouldembrace poverty relief,”ClaytonChristensen Institute forDisruptive Innovation, accessedMay 1, 2018,https://www.christenseninstitute.org/wp-content/uploads/2015/06/The-Educators-Dilemma.pdf.

InTheInnovator’sSolution:CreatingandSustainingSuccessfulGrowth,mycoauthorMichaelRaynorandIdedicateawholechapter(Chapter5)totheinterdependenceandmodularitytheory.

ClaytonM. Christensen andMichael E. Raynor,The Innovator’s Solution: Creating and SustainingSuccessfulGrowth(Boston:HarvardBusinessReviewPress,2003),125–126.

13. ElvisOndieki,“M-PesatransactionsrisetoSh15bndailyaftersystemsupgrade,”DailyNation,May8,2016, https://www.nation.co.ke/news/MPesa-transactions-rise-to-Sh15bn-after-systems-upgrade/1056-3194774-llu8yjz/index.html.

14. “WorldDevelopment Indicators: The information society,” TheWorldBank, accessed February 20,2018,http://wdi.worldbank.org/table/5.12.

15. RebeccaMoudio,“Nigeria’sfilmindustry,apotentialgoldmine?,”U.N.AfricaRenewalOnline,May2013, http://www.un.org/africarenewal/magazine/may-2013/nigeria%E2%80%99s-film-industry-potential-gold-mine.

16. Efosa Ojomo, “Obsession with ending poverty is where development is going wrong,” Guardian,February 8, 2017, https://www.theguardian.com/global-development-professionals-network/2017/feb/08/obsession-with-ending-poverty-is-where-development-is-going-wrong.

Section2

HowInnovationCreatedProsperityforMany

Chapter5

America’sInnovationStory

ThecenturyofrevolutionintheUnitedStatesaftertheCivilWarwaseconomic,notpolitical,freeinghouseholds fromanunremittingdailygrindofpainfulmanual labor,householddrudgery,darkness,isolation,andearlydeath.Onlyonehundredyearslater,dailylifehadchangedbeyondrecognition.1

—ROBERTGORDON,THERISEANDFALLOFAMERICANGROWTH:THEU.S.STANDARDOFLIVINGSINCETHECIVILWAR

TheIdeainBrief

Imagineacountrywhereaveragelifeexpectancyis justforty-fiveyears, infantmortality a staggering two hundred deaths per one thousand births, and fewerthan 5 percent of people have access to indoor plumbing. In this country, theaveragepersonspendsapproximately52percentoftheirhard-earnedincomeonfood.There’slittlehelpfromthegovernment,andcorruptionisrifeatalllevels—fromlocaltofederal;cronyism,notmerit,determinesmostcivilservicejobs.Whatimpoverishedcountrywouldyouguessthisis?

It’s the United States of America, in the nineteenth century. Though weusuallydon’t thinkof it thisway,Americawasoncedesperatelypoor—poorerthan some of today’s most underdeveloped economies. Considering where itonce was, America’s transformation into an economic powerhouse isextraordinary.Butaswewillexplore,at theheartofAmerica’s transformationstoryisthesameforcethathasdrivenmanyeconomiesaroundtheworldfrompovertytoprosperity:market-creatinginnovations.

In spite of being impoverished, unregulated, and poorly infrastructured,America became fertile territory for scores of innovators and entrepreneursseeing opportunity where others saw nothing. In this chapter, we profile theinnovatorsbehindseveralofthemostspectacularmarket-creatinginnovationsinAmerican history—Isaac Merritt Singer, George Eastman, Henry Ford, andAmadeoGiannini.Of course these innovatorsdidnot single-handedlydevelop

America—thecountryhasbenefitedfromtheinnovationofscoresandscoresofentrepreneurswhoseworkimprovedourlives.Butcollectivelytheydemonstratethetransformativepowerofacultureofinnovationthatallowsprosperitytotakerootandflourish.

*

Wehaveanold-fashionedSingersewingmachineinourbasement.Oneofmyneighbors left it out for trash and I couldn’t help rescuing it. It’s rusted andworn,butit’sstillabeautifulpieceofequipment.Thepedalsaloneareworksofart. Imade it apersonalpassionproject to refinish and restore it to its formerglory.

When I look at that sewing machine, I see more than just qualitycraftsmanship.I’mremindedofwhatitstandsfor.IsaacMerrittSingermaynotbe themost famousAmerican innovator—he’snot evencreditedwith actuallyinventingthesewingmachine—butSinger’simpactonAmericanculturecannotbeoverstated.

Wemay forget now, but in Singer’s time, America was not a prosperouscountry. Not only were most Americans poor, but many, especially in urbancenters,livedinsqualor.2Inthetenementsofmanylargecities,sewagespewedoutontoalleyways,garbagewasdumpedoutsideapartmentsandlefttorot,andhorsemanurelinedthestreets.ThetypicalNorthCarolinianwomanwalked148miles andcarriedmore than36 tonsofwater in ayear, just fetching thedailywaterforherfamily.3Wemayall lamentourcurrentfearsof increasingcrimerates in someAmerican cities, but formany of us, our grandparentswere notonlymuchpoorerthanwearetoday,butalsolesssafe.Themurderratein1900wasfarworsethanitisnow,doublewhatitwasin2016.4

America’s governments in the nineteenth century shared many of thecharacteristics of poor-country governments today. Local, state, and federalgovernmentofficialsengagedinrampantcorruption,takingkickbacksandbribesfrom legitimate businessmen and illicit actors alike. “Bosses” ran big-citypolitical organizations and indirectly controlled city services such as utilities,police protection and security, trash collection, and transportation. Some gavehandoutstothepoorinexchangeforvotes.5

Formost,workingconditionsweredeplorableandindustrialaccidentswereall too common. InDecember 1907 alone, close to seven hundredminers losttheir lives.6 Many children, some as young as eleven years old, began their“careers,”infactoriesandmines,wheretheywerepaidapittance.In1904,we

actually had a National Child Labor Committee to lobby for the rights ofchildren.Asmanyasfourteenthousandchildrenworked(legally)incoalmines.Womenwerepaidalittlemorethanchildren.Wagesatthetime,evenformenwho were better paid, were seldom enough to rise out of poverty.7 Workersfrequentlywentonstrike.Sometimesthestatemilitiasweresentintoquelltheseprotests,andothertimeswealthybusinessownersconscriptedtheirownprivatemilitiastodothesame.Thereweresometimesdeaths.ThiswasnottherelativepeaceandstabilityofAmericatoday.Americawasadhocandchaotic—atonepointthecountryhadmorethaneightytimezones.NooninChicagowas11:27a.m.inOmahaand12:31p.m.inPittsburgh.8

ButagenerationofAmericaninnovatorsandentrepreneursbegantochangeAmerica’s circumstances (including how the country kept time, a changebrought about by the proliferation of the railroads), succeeding against whatmighthaveseemedstaggeringodds,bypioneeringmarket-creatinginnovations,with new business models that allowed those products to become simple andaffordable.Intheirday,theinnovatorsweprofileinthischapter—IsaacSinger,GeorgeEastman,HenryFord, andAmadeoGiannini—were entrepreneurs andinnovatorswho justwanted to see theirmarket-creating innovations takehold.But their impact on American prosperity would be far more profound. It’salmost impossible to calculate the exact impact that these innovation pioneershadontheprosperityofAmerica,butbyanymeasure,itwasenormous.Whenyouviewnotjustwhattheybuilt,butthecultureofinnovationtheyinspired,itbecomes clear that the real revolution inAmerica after theCivilWarwas notpolitical,buteconomic.Intheirstoriesofsurvival,weseethestoryofAmerica’sremarkabletransformation.

WithIsaacSinger,wewillillustratetheimmensepowerofmarket-creatinginnovations.WithGeorgeEastman, thepoorhighschooldropoutwhocreatedKodak,wewill focuson theopportunityfoundintargetingnonconsumption.WewillrevisitHenryFord’sstorytodemonstratejusthowmuchtheModelTwasabletopullintoAmericansociety.Fromgasstationstoroadstohowweearnandspendourmoney,Fordplayedarole inchanginghowwelive,work,andplay.Finally,wewilllookathowAmadeoGianninifundamentallychangedthedominantbusinessmodelofbankingatthetime—andallofourlivesinthedecadessince then.Abank that lent topoor immigrantsbecamewhatwenowknowasBankofAmerica,creatingsomeoftheessentialbankingpracticesthatweallcounton today.Thesuccessof these four innovators (andscoresmore)hadenormousrippleeffectsacrosstheAmerican,andevenglobal,economy.AsacultureofinnovationbegantoemergeinAmerica,oneinwhichentrepreneurs

looked to servemore andmore nonconsumers, a virtuous cycle of prosperitycreationwassetinmotion.

AnIndustryIsBorn

IsaacSinger’simpactontheworldmighthavebeendifficulttopredictwhenhewasayoungman.BorninNewYorkin1811topoorGermanimmigrants, theuneducatedSingerwantednothingmorethantobecomeanactor.9Ashortstintas an apprentice in amachinist shopwhenhewasnineteengavehima careerfallbackplan,buthehadnointentionofearninghislivingthatway.Hetriedtofind his fortune on the stage, without much success. Until one day he foundhimself tinkeringwith an existing, but imperfect, sewingmachine design. Onpaper, the idea of a sewing machine made sense—at the time even a skilledseamstresscouldproduceonlyfortystitchesaminutebyhand—butnoonehadyetbeenabletoproduceareliablemachinethatcoulddomuchbetter.

Singer saw an opportunity to improve the machine. With mechanicalimprovementsthatmadethesewingmachinesimpler,lessexpensive,andmorereliable,Singer’s sewingmachineenabledanunskilled person toproduceninehundred stitchesaminute.Thatmeant that theaverage time it took to stitchashirtwentdownfromaboutfourteenhourstojustone.10

Experts who knew much more about tailoring and clothing predicted hewould fail.11 Who would buy it? It seemed inconceivable that Americanhouseholds that couldbarely findmoney for fabric for anewshirtwould findmoney for a fancy sewingmachine. “Would women even be able to operatesuchamachine?”skepticsasked.

ButSingerwasnotdaunted.His successeventuallycameafter teamingupwith lawyer Edward Clark to create “I.M. Singer & Co.” Together, theyinnovated not only their product, but also their businessmodel to ensure theycould survive in a challenging business and legal environment.12 Theseinnovationsincludedcreatingbranchoffices,sendingoutdoor-to-doorsalesandservice staff, offering lessons to customers on how to use the product, andextending credit to cash-strapped customers.A typical Singer sewingmachineretailedfor$100(roughly$1,400in2017dollars),butwithaslittleas$5downandamonthlypaymentof$3,afamilywhoearnedjust$500ayearcouldownasewingmachine.

Though familiar to modern-day Americans, these business modelinnovationswereunprecedentedinSinger’stime—andtheyledtoextraordinary

growth.In1858,thecompanyhadannualsalesofjustthreethousandunits.By1863,when a tailor namedEbenezer Butterick began selling dress patterns instandard sizes, making it easy for anyone to copy a dress design to make athome, theSingersewingmachinehadbecomeAmerica’smostpopularsewingmachineandwasonitswaytoaworldwidemonopoly.By1873,demandwassohighthatSingerhadtobuildtheUnitedStates’largestsewingmachinefactory,withamanufacturingcapacityofseventhousandunitsperweek.Tenyearslater,thecompanybuiltEurope’s largestsewingmachinefactory,where itproducedtenthousandunitsaweek.13TheSingersewingmachinewouldeventuallybuildan international organization14 that manufactured more than half a millionsewing machines in Europe and almost four hundred thousand in the UnitedStates annually.15 This led to vast numbers of jobs in sales, distribution,maintenance,manufacturing,advertising,training,bookkeeping,andbeyond.

While Singer’s direct economic impactwas impressive, its indirect impactwasarguablyevengreater—catalyzingotherinnovationsandindustries,andalsospurringtheconstructionofnewinfrastructures.Forexample,smallshopsbeganto open in the poorest districts of New York and Chicago to serve assubcontractorstolargermanufacturerswhohaddevelopedastandardized,task-orientedproductionsystem—apredecessorofthemodern-daysupplychain.Allamanufacturerhad todowascut andmark theclothwithaparticulardesign,andthenpackageandshipittothesmallshopswithinstructionsonhowtosewthepieces.Entire families tookpart in this process, leading tohigher incomesand better life prospects.16 Singer’s sewing machine was also an unexpectedboontotheclosetorwardrobeindustry.Wherewerepeoplegoingtoputalltheirnew clothes? First they needed wardrobes, and then they needed biggerwardrobes.Anotherindustrywasborn.

Perhapsmostnotably,theSingersewingmachinerevolutionizedtheclothingindustry—whichdoubledinsizebetween1860and1870,eventuallyreachingabilliondollarsby1890 ($26billion in2018dollars)—making itpossible foracustomer, knowing his or her size, to shop at the newly emerging departmentstoresof thelatenineteenthcentury.17 Increasingdemandforsewingmachinesalsoledtoboomsinthesteel,wood,andcottonindustries—andthecreationofseveralothers.Italso,inturn,impactedtheshoeindustry,whichcouldthensellitswaresatthosedepartmentstores,too.

Asthesenewindustriesandmarketswerecreated,theybegantopullintheinfrastructure and institutions they required to survive. The I. M. Singercompany actually built rail lines to more efficiently transport the company’ssewingmachines;thecompanyalsobuiltaturbinepowerstationfortheirfactory

inPodolsk,Russia,whicheventuallyprovidedelectricitytothewholetown;inMoscow, their foundry shop supplied pig iron to nearby cotton mills; and inScotland,theybuiltarailwaystationthat isstillfunctioningtothisday.18Thisall happened without the direct help of governments. In fact, the I.M. Singercompanyactuallyhelped thegovernmentsbygenerating taxes thatwould fundmanypublicservices.

In 1890, for instance, Americans didn’t expect much from their federalgovernment. The United States federal government managed the military,foreignpolicy,land,thetreasury,andtariffs.Theydidn’tdomuchelse.

Forexample,therewerenofederalagenciesforLabor(thatwouldnotcomeuntil 1913), Veterans Affairs (1930), Health and Human Services (1953),HousingandUrbanDevelopment(1965),Transportation(1967),Energy(1977),andEducation (1979) untilwell intoAmerica’s life as an independent nation.Theseagencieswouldformandevolveovertimeinresponsetopublicoutcryofsome sort, or to manage the affairs of a new and thriving market. TheDepartmentofTransportation,forinstance,camealmostsixtyyearsafterHenryFord’s Model T. In many instances, there were precursors to the federaldepartments, but they were smaller, were less of a priority, and thus wieldedmuchlessinfluence.Butthatdidn’tmattertoinnovatorslikeSinger.

The same was true for George Eastman, whose innovation has enabledmillions of us to preserve precious memories and communicate and connectthroughimages.

GeorgeEastman’sKodak—PicturingtheFuture

Today we take for granted how simple it is to take pictures and preservememories.Frompicturesofourunforgettablefamilyvacationstophotossharedwith us of faraway lands we may never visit, we are bombarded daily withimages.Bysomeestimates,weuploadmorethan657billionphotoseveryyear.Onewriterputitthisway:“Everytwominutes,humanstakemorephotosthaneverexistedintotal150yearsago.”19

Butimagesweren’talwayssowidelyaccessible.Photographywasinventedinthe1830s,butevenfiftyyearsafteritsinventionitwasstillapracticelimitedtohighlyskilledprofessionalsandtothosewhocouldafforditshighcost.Thisisbecausephotographyrequiredknowledgeofchemistryandexpertiseworkinginwetlabs.20Inadditiontothecamera,photographersrequiredlotsofadditionalequipmentlikechemicals,glasstanks,andheavy-dutyplateholdersandtripods.

Photographywas very expensive and impractical untilGeorgeEastman set upthe Eastman Kodak Company, which targeted the vast nonconsumption ofphotographythatwecannowseeinretrospect.

Born on July 12, 1854, George Eastman was a high school dropout, and,accordingtoschoolingstandardsatthetime,hewasnotparticularlybright.Tomakematters worse for Eastman, hewas born into a poor family and had tosupporthiswidowedmotherandtwosisters,oneofwhomsufferedfrompolio.Eastmanbeganhisprofessionalcareerasabankclerk,ajobhetooktohelppayhisfamily’sbills.Itwasthroughtheworkandingenuityofthisformerclerkthatmillions of nonconsumers of memories, pictures, and photography becameconsumers.Eastman’sinnovation,andthevastmarketitcreated,ledtoimmenseeconomicprosperity,jobcreation,andthedevelopmentandexpansionofmanybillion-dollarindustries,includingadvertisingandmotionpictures.

When Eastman was twenty-three, a colleague suggested that he take acamera on an upcoming vacation, an idea that thrilled him. Eastman quicklylearned, however, that cameraswereheavy, awkward, and expensive, and thatthesetofgearrequiredtodevelopphotographswasexpensive,too.Sohebegantoworkat findingabetterway to takepicturesanddevelopphotography,andspentthreeyearsexperimentingathismother’skitchentableuntilhegotitright.Eastman believed that one of our most precious resources, our experiences,should be preserved more easily, and that the average American—thenonconsumer—shouldbeable to takepictureswheneverhewanted,anddosoaffordably.

This led him to set up theEastmanKodakCompany. “The idea graduallydawnedonmethatwhatweweredoingwasnotmerelymakingdryplates,butthatwewerestartingout tomakephotographyaneverydayaffair . . . tomakethecameraasconvenientasthepencil,”Eastmannoted.21Eastman’sdecisiontotarget nonconsumption caused him to engineer an entirely different businessmodel. He intuitively understood the Job to Be Done, that people wanted tocapturethepreciousmomentsoftheirlives.Whiletheymightnotspendalotoftheir time looking at the pictures they took, the notion of stopping, capturing,andhavingthepossibilityofgoingbacktothepictureswasenoughforthemtoconsumephotography.

Kodak’s 1888 camera set the stage for transforming the photographyindustry.Theeasy-to-use$25camerawaspreloadedwithenough film foronehundredpictures.Oncedonewithtakingpictures,customerssentthecameratotheEastmanKodakCompany,wheretheyweredevelopedandsentbacktothecustomerwith a fresh roll of film formorepictures.This service—developingthe pictures and resending empty film—cost an additional $10. Eastman

popularized the slogan, “You press the button, we do the rest.” Eastman’sbusinessboomed.

Infact, theideaoftakingpicturescaughtonsowell that twelveyearslaterKodakdevelopedtheBrownie,acamerathatsoldforjustonedollar(amere$27intoday’sdollars);thefilmwasanadditional15cents.Anadvertisingcampaignfollowed.Andbeforelong,thephrase“aKodakmoment”becamemainstream.22

Unprecedented success and prosperity for themanwho once lived on lessthan a dollar a day followed. Over the next several decades, Eastman Kodakwould sell hundreds ofmillions of cameras and film, forever transforming anindustryoncelimitedtotherich.

In order to accomplish this, Eastman developed a business model thatfocusedonthefollowingcoreprinciples:thecustomer,massproductionatlowcost,worldwidedistribution, andextensiveadvertising.Thiswas in the1890s,whenfewer than10percentofAmericanswere insecondaryschoolandfewerthan10percentofAmerica’s roadswere constructed (thatwouldhappenafterHenryFord’sModelT),andshippingcontainerswerenotyetmainstream.Butthese facts didn’t stopEastman frombuildingKodak into amultibillion-dollarempireandoneofthemostsuccessfulAmericancompaniesatthetime.

By 1966, Kodak employed more than one hundred thousand people andcombinedsalesofallKodakunitsaroundtheworldsurpassed$4billion(morethan$30billionintoday’sdollars).Eastman’simpactonthedevelopmentoftheUnited States was immense. From the inputs and technologies necessary todevelopthecameratothemultibillion-dollarindustriesthatemergedasaresult,fewcouldhavepredictedEastman’simpact.23Butthat’salmostalwaystruewithtargetingnonconsumption.

Taking a picture today, and even recording a video,might seemmundaneandordinary,but thiswasnot so150yearsago.Eastman’s innovationandhisdecision to target nonconsumption createdmarkets thatmanyother innovatorshaveimprovedandfurtherdeveloped.Insodoing,Eastmannotonlygeneratedvastamountsofwealthforhimself,butalsocreatedamarketthatpulledinjobsandbusinessopportunitiesformanypeopleallaroundtheglobe.

HenryFord’sModelT

Aswewrite this,FordMotorCompany ismore than115yearsold, generatesmore than $150 billion in revenues annually, employs over two hundredthousandpeople globally, andhas assets ofmore than$200billion.Butwhen

HenryFordfirstboldlydecidedtobuildacarfortheaverageAmerican,hewasmetwithintenseskepticism.Criticspredictedhewouldbeoutofbusinessinsixmonths.24ButFordwasnotdeterred.“Iwillbuildacarforthegreatmultitude.Itwillbelargeenoughforthefamilybutsmallenoughfortheindividualtorunandcarefor.Itwillbeconstructedofthebestmaterials,bythebestmentobehired,after thesimplestdesign thatmodernengineeringcandevise.But itwillbesolowinpricethatnomanmakingagoodsalarywillbeunabletoownone—and enjoywith his family the blessing of hours of pleasure in God’s greatopenspaces,”hedeclared.

For transformativedevelopment tohappen, innovatorsmust first imagineadifferentworld,onethatisfilledwithpossibilitiesthatmanyotherscan’tbegintoimagine.It’snothardtounderstandwhycriticsthoughtFord’spredictionwascrazy.ThinkoftheAmericaintowhichFordintroducedhiscars.25Bytheearly1900s, GDP per capita had reached about $7,800 in 2018 dollars, almost theleveloftheUnitedKingdom’s$8,800,butlifewasstilldifficultfortheaverageAmerican.Mostpeoplestillhadnoaccesstoelectricity;relativelyfewchildrenmadeittosecondaryschools;lifeexpectancywasaroundforty-sevenyears;andAmerica’sroadinfrastructurewasnotdeveloped,atleastnotfortheautomobile.Atthetime,theaverageAmericandidnotevenseetheneedforcarsorthewaytheycouldimpactAmerica.Mostpeoplelivedclosetowheretheyworkedandplayed.Muchlikemanyemergingmarketstoday,onlywealthyAmericanscouldaffordcars.ButHenryFordsetabouttochangethat.

Bornin1863,HenryFordhadapenchantforinnovation.Hisfatherownedafarm in Dearborn, Michigan, where Ford made little contraptions that wouldeasesomeof themore laborious farming tasks.Likeother innovatorswehavewrittenabout,Fordwasnotformallyeducated.26Afterhebecameamechanic’sapprentice, Ford became increasingly fascinated with building a horselesscarriage.Heworkedonitinhissparetimeformorethantwelveyears,untilhequithisfulltimejobattheEdisonIlluminatingCompanytojoinafledglingstart-up,theDetroitAutomobileCompany.TheDetroitAutomobileCompanydidnotsucceed,andFordwasoustedfromthecompany,buthisdeterminationtobuildasuccessfulautomobilecompanyremainedstrong.

In 1903, after winning a race against a prominent Ohioan automaker,AlexanderWinton,withacarFordhaddesignedhimself,heandasmallgroupofinvestorsformedtheFordMotorCompany.Itwastherethattheseedsofthe“democratizationoftheautomobile”inAmericawereplanted.27

Inordertobuildasuccessfulbusinessmodelthattargetednonconsumption,Forddidmanythingsthatmayseemnot“core”tobuildingacartoday.Inother

words,hiscompanyhadtopullinmanyresourcesandcomponentsthat,today,would seem an unreasonable expenditure. But in particular circumstances—especially those inwhichanewmarket isbeingcreated—pulling inwhatmayseemtobe“non-coreresources”tosuccessfullyaccomplishaJobtoBeDoneisnecessary. Today, we call this vertical integration, but back then innovatorssimplyunderstooditasdoingwhatwasnecessarytosucceedincreatinganewmarket. That’s effectively what Ford did. Because a majority of carmanufacturers at the time focused on the consumption economy and targetedonly wealthy individuals, they remained small and didn’t have to pull inextensiveresourcestoproducetheircustom-craftedvehicles.

Bycontrast,Fordhadtofigureouthowtomakealotofthingswork.Bythe1920s, the auto assembly plant was just one in a long line of significantinvestments Ford made to get his car to American nonconsumers. Ford’scompany also ran blast furnaces for steel, timberlands, coal mines, rubberplantations,arailroad,freighters,gasstations,sawmills,andglassworks.28Thiswasa first in theauto industry.Noonehadeverquite seenanything like this.These investmentswere not just Ford’s infrastructure, they becameAmerica’sinfrastructure,too.

Ford’sModelTchangedthelandscapeofAmerica—quiteliterally.In1900,thenumberofregisteredcarsintheUnitedStatestotaled8,000;by1910,justtenyears later, it reached 458,000; in 1920, it was 8million; and by 1929, thereweremorethan23millionregisteredmotorvehiclesinthecountry.29TheModelTwasasignificantreasonfortheadoptionofautomobilesintheUnitedStatesand other parts of the world. In 1922, for instance, of the approximately 2.5millionnewcarsregistered,roughly2millionwereFordModelTautomobiles.

Ascarsweremademoreaffordable,fewerhorseswereneededbothforcitytravelandforworkonfarms.ManyfarmersalsoretrofittedtheFordModelTfortheirfarmingneeds,furtherreducingtheneedforhorsesandmules.Bytheearlytwentieth century, it was costing America more than $2 billion to maintainhorsesannually,aboutthesameasitcosttomaintaintherailroads.InNewYorkCity,forexample,cityofficialshadtodealwithmorethanforty-fivethousandtonsofhorsemanuremonthly.Theproblemwas sopervasive—andvile—thatone motoring advocate claimed, “all wars together have not caused half thedeathsthatmaybetracedtothehorse.”Thatmaybeabitofanexaggeration,butitcertainlycapturesthefearsatthetime.Onecriticwentsofarastosuggestthatby 1930, horse manure would reach “the level of Manhattan’s third-storywindows.” Luckily, Henry Ford’s automobile took off before that couldhappen.30

Ford’s decision to target nonconsumption and create a newmarket for theautomobileinAmericaandthemarket’sneedtodevelopandpullinmanynewresourceswerecriticaltothedevelopmentandprosperityofAmerica,includingroads. In his book The Big Roads: The Untold Story of the Engineers,Visionaries, and TrailblazersWhoCreated theAmerican Superhighways, EarlSwift explains that by1909, only 8 percent ofAmerica’s 2.2millionmiles ofroads were “improved in any way.” And half of the 8 percent of “improvedroads”weregravel.Atthetime,Americahadjustninemilesofconcreteroads.But as the car became ubiquitous, improved roads followed, and Americansbenefitedimmensely.

TheeconomicandsocialimpactofroadbuildinginAmericawasenormous.“Each billion dollars spent on construction provided the equivalent of 48,000fulltime jobs for a year and consumed an almost inconceivable vast pile ofresources;16millionbarrelsofcement,morethanhalfamilliontonsofsteel,18million pounds of explosives, 123million gallons of petroleum products, andenoughearthtoburyNewJerseyknee-deep.Italsodevoured76milliontonsofaggregate,”notesSwift.31

But as important as roadswere,what’s evenmore important iswhat theyenabled.RuralschoolattendanceintheUSstoodataround57percentbeforetheemergenceofgoodroads.Oncegoodroadswerebuilt,dailyattendancespikedto77percent.Thecostofmovingatonoffreightwasaround22centsamileonan unimproved road, but dropped drastically to 12 cents on better roads. Thereductionintransportexpensesenabledfurthertravelandtradetothrivewithinandbetweencities.32

Roadsandtheirattendantbenefits,however,werenottheonlythingsFord’sinnovationpulledintoAmerica.Considerhowthecompanyimpactedwagesandincomes, one of the most important determinants of development, prosperity,andtheefficacyofademocracy.33WhenFordinstitutedtheassemblylineinhisfactories,workbecamemonotonous.Unskilledmendidthesamethingoverandoveragainforninehoursaday,sixdaysaweek,andforapproximately$2.34aday ($60 in today’s dollars).As a result of thework’smonotony, turnover atFord’s manufacturing plant skyrocketed to a whopping 370 percent annually.This meant that for every one job, Ford had to hire four people to keep hisfactoryrunningsmoothly.Itwasunsustainable.Inordertocombatthisproblem,in1914,Ford instituted a$5perdayminimumwage, essentiallydoubling thepayforhisfactoryworkers.CriticsandotherautomobilemanufacturersthoughtFordcrazy for increasingwages.TheWallStreet Journal editorialpageat thetime implied that indoingso,Fordwasnotonlybetrayinghis fellowbusiness

owners,hewasjeopardizingthewholeofAmericanenterprise.“Todoubletheminimum wage, without regard to length of service, is to apply Biblical orspiritual principleswhere they do not belong,” the Journal wrote, adding thatFordhad“inhissocialendeavorcommittedblunders, ifnotcrimes.Theymayreturn to plague him and the industry he represents, as well as organizedsociety.”34

Luckily, Ford did not agreewithmany of the prevailing sentiments at thetime.Hisdecision is frequentlydiscussedaspartofhisefforts to turnhisownworkers into customers—with higher wages, they could afford his cars, thethinkinggoes.Butinreality,Fordwasfocusedonkeepinghisfactoryopen.Fordlaterremarkedthat thewage increasewas the“smartestcost-cuttingmove[thecompany]evermade.”Othermanufacturers,too,sawthepayoffinthemoveandfollowedsuit,optingforhigherwagesintheiroperations.35

Ford was also largely responsible for changing what had been a six-dayworkweekintoafive-dayone—amovehiscriticsalsofearedwouldunderminethe entire economy. Somehow, Ford saw things differently: he saw a reducedworkweek as essential for keeping (and even improving) his workers’productivity and understood the potential ripple effects on the economy as awhole.“Itishightimetoridourselvesofthenotionthatleisureforworkmeniseither‘losttime’oraclassprivilege...Thepeoplewhoworkonlyfivedaysaweekwillconsumemoregoodsthanthepeoplewhoworksixdaysaweek,”hesaidat thetime.“Peoplewhohavemoreleisuremusthavemoreclothes.Theyeat a greater variety of food. They requiremore transportation facilities. Thisincreased consumptionwill require greater production thanwe nowhave. . . .Thiswillleadtomorework.Andthistomorewages.”36

With such moves helping improve his plant’s efficiency, the Ford MotorCompany was able to reduce the price of the Model T from $950 in 1909(approximately $25,000 in 2018 dollars) to $260 in 1927 ($3,700 in 2018dollars), making it evenmore affordable for the average American, includingFordfactoryemployees.SalesoftheModelTboomedasaresult.37

By 1923, there were just over 15million cars registered in the country—approximately 135 cars per 1,000 people. Economists predicted that theindustry’s growth just couldn’t continue. They could not see how Americanswouldkeepbuyingcars.Mostpeoplewhocouldaffordcars, theythought,hadalready bought at least one. Some households even had two. But theirprojectionsgrosslymissedthemark.In2014,therewere816vehiclesper1,000Americans.38 More than 260 million cars roamed US streets, roadways, andhighways.

When I think about Ford, or the Model T, I think about how this oneinnovation changed so many American lives. I think about the culture ofinnovationFordfostered,andthepossibilitieshecreatedformanyofustoleadbetterlives.Thatkindofimpact,muchlikethekindweseeinthestoryofBankofAmerica,isoftenhardtopredictwiththeeconomictoolswehavetoday.

FromtheBankofItalytotheBankofAmerica

Likemanyproductsinthelatenineteenthandearlytwentiethcenturies,financialservices,suchasloansandbankaccounts,existedmostlyforthewealthy.WhenAmadeoGiannini suggested that his bank lend to credit-worthyworking-classAmericans, he was ungraciously rejected.39 Determined to change things, in1904hewentontofoundtheBankofItalyinSanFrancisco.Hewouldfocusonthe“littlefellows,”whomtheotherbankswouldn’tserve.40That’showBankofAmerica,theonetimelargestcommercialbankintheworld,wasborn.

SomehistorianshavehailedGiannini as the “greatest innovator inmodernbanking,”explainingthat“heprobablydidmoretodemocratizeandpopularizebankingthananyotherindividual.”41JudgingnotonlyfromBankofAmerica’sultimatesuccess,butalsothenewbusinessmodelsGiannini’sbankexecuted,itis hard to disagree with the assertion. Amadeo Giannini is responsible forconvertingmillions of Americans from nonconsumers of financial services toconsumers.Todothat,however,hehadtochangethedominantbusinessmodelofbankingatthetime.

Market-creating innovations are not simply the products or servicesthemselves.At thecoreofanymarket-creating innovation is abusinessmodelthat profitably democratizes an innovation so that many more people—nonconsumers who can benefit from using the innovation—gain access to it.That’swherethetransformativepowercomesintoplay.

Asahighschooldropoutwhojoinedhisstepfather’sproducecompanywhenhewasfifteen,Giannini’sdecisiontogointobankingstemmedfromhisdisdainfor conventional banking practices that primarily targeted the rich—a groupfromwhichhewasdecidedlyexcluded.Buthowcouldoneblamethebankers?Atthetime,Americanswerenotaswealthyastheyaretoday,andtherewasnoestablishedbusinessmodelfortargetingthosewhowerenotrich.Itmadesensefor bankers to lend money to big corporations for railroad and skyscraperprojects,butnot to thepoor,nomatterhowhardworkingtheywere.Similar tothe situation in many poor countries today, it was incredibly difficult for the

average American to get a bank loan. They were considered high risk—howwouldtheyeverrepaytheloans?Infact,thebankingindustrydideverythingitcouldtodiscouragepoorAmericansfromevenasking.Andintheeventtheygotaloan,interestrateswereofteninhighdoubledigits.

Butitwasinthis“undesirable”segmentofthepopulationthatGianninisawopportunity. “The ‘little fellow’ is the best customer that a bank can have,”Giannini reasoned. “He starts with you and stays with you until the end.”42Giannini believed that he could develop a profitable banking business thatprovided lower interest rates to the averageCalifornian, offering customers inCentralValleyloansatjust7percent—afractionofwhattheywouldbeabletogetfromanyotherbank(andanevensmallerfractionofwhatthey’dhavetopayiftheyresortedtothe“graymarket”foraloan).Offeringloansof$10to$300toanyonewhohadajob,Gianninialsoconvincednonconsumersthattheyshouldstopstuffingtheirhard-earnedmoneyintomattressesortincansandturnitovertoabank,whereitwouldbeprotectedandearninterest.

ButGianninicouldn’taffordtodothisunlessherippeduptheconventionalrulebookforbanking—sohe“beganknockingthestarchoutoftried, trueandconservativebanking,”astheSanFranciscoChroniclelaterobserved.

Giannini would literally stop people on the street and solicit would-becustomers to open accounts with the bank. It was a practice that was lookeddown on by other banks and bankers who relied on one-on-one meetings inaugustbuildingswithprivatebankerstoimpresswealthyclients.Gianninididn’tjust offer his bank’s services.He also had to educate his customers about thebenefitsofbankingingeneral.Hesetuplocaladvisorycommitteesinhisbanks,advised his customers to purchase the bank’s stock, and created a nationalsystemofbranchesthatcateredtothepoorandworkingclass.Althoughbranchbankingmay seem obvious today, it wasn’t one hundred years ago. Gianniniintroducedthemodelforbankingthatmostofusknowtoday.

Gianninialsodidn’tseeBankofAmericaas justabank.He integrated thebank’s services to meet the needs of its customers. For example, in thedevastationofthegreatSanFranciscoearthquakeof1906—justtwoyearsafterhe founded his bank—Gianninimanaged to remove $80,000 in gold from thedeposit vaults of his Bank of Italy with the help of two quick-thinkingemployees, loading the gold onto a horse-drawn cart, hidden under loads ofvegetables,beforefireravagedthebuilding.Otherbanksthathadnotthoughttodo that would find their vaults too hot to open for weeks. The day after theearthquake ravaged the city, his fellowbankers proposed a six-monthbankingmoratorium until their banks could recover. But Giannini broke ranks. “In

November,”heargued,“therewillbenocityorpeoplelefttoserve.”43HewasopenforbusinessthenextdayatamakeshiftdeskinNorthBeachandofferedtoextendcredit“onafaceandasignature”tosmallbusinessesandindividualsinneed of money to rebuild their lives. His actions spurred the city’sredevelopment.

ThegesturereflectedGiannini’sphilosophy:themoneyinthevaultswasn’tthere to serve banks. It was there to serve customers. By the mid-1920s,Giannini’sBankof Italywasalreadyamisnomer,ashehadstarted lending to“little fellows” in the Yugoslavian, Russian, Mexican, Portuguese, Chinese,Greek,andseveralotherimmigrantcommunities.In1930,BankofItalybecameBankofAmerica,andby1945,ithadbecomethelargestcommercialbankintheworld.

Giannini also lent to other undeveloped andnascent industries at the time,including theCaliforniawine industry,Hollywood,and thehigh-tech industry.AfterWaltDisneywentoverbudgetonhisproductionofthefirstfullyfeaturedanimationmovie,SnowWhiteandtheSevenDwarfs,Gianninisteppedinwitha$2 million loan to Disney. Giannini also provided initial capital to WilliamHewlett andDavidPackard, foundersofHewlett-Packard Inc.While these areall multibillion-dollar industries today, each attracting billions of dollars ofinvestmentsannually,fewwouldhavepredictedtheirsuccessatthetime.EvenCharlie Chaplin, one of the world’s most prominent actors, directors, andproducers,oncedeclared that“thecinema is littlemore thana fad. It’scanneddrama.Whataudiencesreallywanttoseeisfleshandbloodonthestage.”44

While themarket thatGianninicreated for theaverageAmerican toaccesscapitalwas important,what’s evenmore important are the institutions and theinfrastructurethemarkethelpedputinplace.Whenlendingtoafewrichpeopleinsociety,banksdidnotneedtoinvestinmuchinfrastructuretoensurethattheirloanswouldberepaid.Whenlendingtohundredsofthousandsofpeople,thesesystemswerenotonlyimportant,butessential.Gianninihadhisstaffcheckonthe business practices of people they lentmoney to, to ensure that theywererunning their firms as well as possible. For example, senior bank officialsrealized that formanyof their agribusiness customers to succeed inmarketingtheirproductsinfarawaymarkets, theywouldneedtoestablishcooperatives.45BankofAmericahelpedwiththis,andby1919,Californiafarmersgrossed$127million in sales throughmarketingcooperatives. (Thenext largest, at the time,wereMinnesotafarmersat$82million.)

Giannini’sdedicationtothe“littlefellows”gaveusBankofAmerica.Butitalsochangedourlives.Ourparentsandgrandparentswereabletounderstandthe

valueofsavingmoney,ofcompoundedinterest,ofmakinginvestmentchoices.EntiregenerationsofAmericansreapedthebenefitsofthatknowledge.It’shardtoimaginethatthesameseachangeisn’tpossibleforthe“littlefellows”inpooreconomies, too. Thanks toGiannini, and otherswho followed in his path,weknowwhat’spossible.

InnovationBecomestheNewNormalinAmerica

IdentifyingjustafewAmericanmarket-creatinginnovatorswasdifficultforus—not because we couldn’t find them, but because there were so many greatstories from which to choose. American history is replete with tales ofinnovators whose work played a role in America’s march to prosperity. Noteveryinnovatorsucceededincreatinganewmarket;noteveryentrepreneurgothis or her business model right. History is also littered with painful tales offailure.ThomasEdisonfailedmanymoretimesthanhesucceeded—electricpen,anyone? “I have not failed 10,000 times,” he famously declared, “I’vesuccessfully found 10,000 ways that will not work.” But he got severalinnovations spectacularly right, including the incandescent light bulb,phonograph, and motion picture camera, a process that ultimately gave usGeneralElectric.There are dozens and dozens of otherswho did aswell. Forexample:

SamuelInsull,acolleagueofThomasEdison, targetednonconsumptionofelectricity when he developed a way to deliver inexpensive electricitythroughoutAmerica.Hiscompany,CommonwealthEdisonCompany,combinedtechnologicalinnovationswithbusinessmodelinnovations—chargingcustomersbasedontimeofdayanduse,wiringhomescheaply,andgivingawayelectricalappliances in order to increase demand. He started out in 1892with just fivethousand customers inChicago.By the 1920s, hewas servingmore than fourmillioncustomersinthirty-twostates.

Sarah BreedloveWalker, popularly known as “Madam C.J.,” embodiedthis spirit when she founded a business that targeted nonconsumption ofcosmeticproducts inAfrican-Americancommunities. In theearly1900s,whenfew thought a business that served theAfrican-American community couldbeviable,MadamC.J.sawopportunity—notjustforherselfbutforothers.Assheexplainedin1914,“Iamnotmerelysatisfiedinmakingmoneyformyself,Iamendeavoringtoprovideemploymentforhundredsofwomenofmyrace.”46Shedid end up making money for herself—becoming the first African-American

womantobecomeamillionaire.Butmoreimportant,sheachievedherambitionof creating employment for thousands of women. She was not formallyeducated,andonceearnedbarely$1.50aday.

Charles Goodyear, after enduring years of poverty—living on fish hecaughtintheharboroffStatenIsland,NewYork—andspendingtimeinjailfornotbeingabletopayhisdebt,gaveusvulcanizedrubber.Atatimewhenmanyadvised him that “rubber was dead” in America after many Americans sawsmellyrubbermeltinthehotsummermonthsandbecomehardlikerockinthewinter, Goodyear continually experimented with it, trying to make it moredurable and affordable. After many years of failure, he succeeded. In 2018,globaldemandforindustrialrubberproductstopped$150billion.

Georges Doriot institutionalized America’s innovation culture when hefounded American Research and Development Corporation (ARDC), theworld’s first publicly owned venture capital firm. One of the start-ups hiscompanybackedwasDigitalEquipmentCorporation—atonetimeasuccessfulcomputercompanywithmorethan140,000employeesand$14billioninsales.HealsoadvisedFredSmith,thefounderofFedEx.

No one innovator single-handedly changed America’s fate, but the rippleeffectsoftheirworkcertainlydid.

InPraiseofFixer-Uppers

Whenwebought our first house, I optimistically saw it as a fixer-upper.Thatwasprobablytoodiplomatic.Mywife,Christine,wouldtellyouitwasawreck.AtthetimeIwasworkingatmyfirstjob,andwestretchedeverythingwehadtobuyahomeforourgrowingfamily.Butitwasashellofahome.Wecouldn’tafford topayany tradesmen to improve thehouse forus.Sowhateverneededfixinghadtobefixedbyus.Andeverythingneededfixing.Therewasn’taroomin thehouse thatdidn’tneedsomething.Someof itwasminor, likepaintingaroom.Someofitwastrulyfundamental,likemakingsurethewindowskeptouttherainortheplumbingdidn’tleak.ThoughImightneverhavepredicteditthedaywewerefirsthandedthekeys,littlebylittlethatwreckdidtrulybecomeourhome.Convertingourhousefromafixer-uppertothehomethatitistodaywasaprocess that took time, financial resources, patience, and resilience. But ourhome,overtime,cametoreflectwhoweareasafamily:ourvalues,ourabilities(or lack thereof), and ourwillingness to roll up our sleeves and findways tosolveproblems.

America was once a fixer-upper, too, but through trial and error, andinvestmentsinmarket-creatinginnovations,we’vebuiltacultureofinnovation.Singer,Eastman,Ford,Giannini,andtheotherinnovatorswementionedabovearejust thetipoftheiceberg.TheyrepresentaspiritofinnovationinAmericathathasbecomeafoundationofAmericanculture.Manymorefollowed,each,inturn,helpingcrankthewheelofprosperityalittlebitfurther.AsHenryFordoncesaid,“Everysuccessisthemotherofcountlessothers.”Collectively,theychangedAmerica’sdestiny.

NOTES1. RobertJ.Gordon,TheRiseandFallofAmericanGrowth:TheU.S.StandardofLivingSincetheCivilWar(NewJersey:PrincetonUniversityPress,2016),1.

2. In1890,morethanhalfofNewYorkerslivedin“crowded,small,poorlyventilatedapartmentsfromwhichwindowslookedoutonstinkingairshafts.”Childrenoftenurinatedonthewallsinmanyapartmentbuildings and plumbing pipeswere infested “with holes that emitted sewer gasses so virulent theywereflammable.”

RobertJ.Gordon,TheRiseandFallofAmericanGrowth:TheU.S.StandardofLivingSincetheCivilWar(NewJersey:PrincetonUniversityPress,2016),97,103.

3. Ibid.,57.

4. “Rate:NumberofCrimesper100,000 Inhabitants,”2016Crime in theUnitedStates,DepartmentofJustice: FBI, accessed March 8, 2018, https://ucr.fbi.gov/crime-in-the-u.s/2016/crime-in-the-u.s.-2016/tables/table-11.

5. FaithJaycox,TheProgressiveEra(NewYork:FactsonFile,Inc.,2005),79.

6. Ibid.,267.

7. Ibid.,22.

8. JackBeatty,AgeofBetrayal:TheTriumphofMoney inAmerica,1865–1900 (NewYork:AlfredA.Knopf,2007),3.

9. IsaacMerrittSingerwasnot,byallaccounts,averyniceman.Hefatheredtwenty-fourchildrenwithhiswifeandvariousmistresses.Herepeatedlypushedbackersandpartnersasideinhisascent,andhewasknownforhispersonalflamboyance.Buthisdrivealsoplayedaroleinpioneeringbusinesspracticeswherehe saw opportunity, including translating Singer owners’ manuals into fifty different languages. As wedescribe,whatSinger’sinnovationenabledchangedtheworld.

10. ApopularsongatthetimeofSinger’srisewasthisdittyaboutthestressfullifeofwomenseamstressesbeforethesewingmachine’sproliferation.

SongoftheShirt

Withfingerswearyandworn,Witheyelidsheavyandred,Awomansat,inunwomanlyrags,Plyingherneedleandthread—Stitch!Stitch!Stitch!Inpoverty,hunger,anddirtAndstillwithavoiceofdolorouspitch—Wouldthatitstonecouldreachtherich!—Shesangthis“SongoftheShirt!”

11. Many expertswhoknewawhole lotmore about tailoring and the industry thanSinger did, thought

Singerwouldfail.Whocouldblamethem?EdwinWildmanwritesinhisbookFamousLeadersofIndustry,“People were skeptical of the sewing machine . . . and quite often [Singer] was ‘shown the door’ themomenthementionedhisbusiness.He[Singer]wasadvisedbyMr.Blodgett,whowasatailorbytradeandknewmoreabout sewing thanSingerpossiblycould, togiveupmanufacturing . . .Blodgett further toldSingerthathewaspositivethatsewingmachineswouldnevercomeintouse...”

EdwinWildman,FamousLeadersofIndustry:TheLifeStoriesofBoysWhoHaveSucceeded(Boston:ThePageCompany,1921),251–252.

12. Thereweremany sewingmachine “inventors” jockeying formarket dominance in Singer’s era, andtheywere quick to grab patents (from a largely undiscerning patent office) to stake their claims. Legalbattles flourished, threatening to bankrupt virtually all of the sewing machine companies at the time,including Singer. Eventually many patent holders of specific innovations on sewing machines pooledtogetherandagreedtoallowtheuseof theirpatents inexchangeforashareof theproceedsofanysalesgenerated. This is how Elias Howe, who is credited with the first patent of a sewing machine, finallybecamewealthy. Previously, he had utterly failed to commercialize his invention, showing that perhapsevenmoreimportantthantechnicalinnovationisbusinessmodelinnovation.

13. Geoffrey Jones andDavidKiron, “Globalizing ConsumerDurables: Singer SewingMachine before1914,”HarvardBusinessSchoolCase804-001,October2003.(RevisedJanuary2017.)14. Singer’sstoryis especially noteworthy because in the late 1800s, he created a truly global company, setting upmanufacturing, distribution, and sales offices inAmerica, Russia, Scotland, England,Germany,Austria,andseveralothercountries.Notethatthesecountrieswereatvaryinglevelsofdevelopment,eachwithitsownuniqueinfrastructures,institutions,andculture.Russia,forinstance,wasconsideredan“undevelopedwasteland” at the time.But Singer’s firmwas able to internalize a lot of risk and pull in the necessaryinfrastructure to sell his products in the region. As a result, his firm succeeded in Russia withoutgovernmenthelpanddespite thegovernment’s efforts to imposehigh tariffson thecompany.His focus,however, remainedclear—tocreateanewmarketbygettingasmanysewingmachines into thehandsofRussiannonconsumersaspossible.

ConsiderhowSinger’sstrategyoftargetingnonconsumptionenabledthecompany’ssuccessinRussia.ThecountrywassopoorthatSingerwouldhavehadtosellalmostallitsmachinesoncredit;Russia’slegalsystem, capital markets, and credit institutions were underdeveloped even for that era; Russia was alsoexperiencing economic and political turmoil; the country did not have the skilled labor force that wasimportanttoSinger’soperations;andthecountry’slandmasswaslarge,withadispersedpopulation.Doesthatremindyouofanypoorcountriesoremergingmarketstoday?

ButSingernotonlybuiltafactoryinRussia,healsocreatedRussia’slargestcommercialenterprisewiththousandsof storesanda staffofmore than twenty-seven thousand.Througha seriesofmanagerial andorganizational innovations, including hiring unskilled workers and training them (building an educationinfrastructure), the Singer operation in Russia became one of the most successful within the Singercorporation.

15. Buildinganinternationalorganizationisnosmallfeattoday,evenwithhowgloballyconnectedweare,consideringimprovementsintelecommunicationsandtransportationtechnology.Singer,however,wasableto accomplish this in the 1800s, when no such technologies existed. Similarly,many emergingmarketstodayhaveatleastcomparableorbetterinfrastructuresthanAmericadidduringSinger’srise.Thequestionremains, what businessmodel innovations should innovators in these regions execute in order to targetnonconsumption?

16. Quentin Skrabec, The 100 Most Significant Events in American Business: An Encyclopedia (SantaBarbara:Greenwood,2012),39.

17. Ibid.,38.

18. “Singer Railway Station,” Overview, Gazetteer for Scotland, accessed February 24, 2018,

http://www.scottish-places.info/features/featurefirst11985.html.

19. RoseEveleth,“HowManyPhotographsofYouareOutThereintheWorld?,”TheAtlantic,November2, 2015, https://www.theatlantic.com/technology/archive/2015/11/how-many-photographs-of-you-are-out-there-in-the-world/413389/.

20. Wetlabsarelabswherechemicalsarehandledinliquidandsometimesvolatileforms.

21. “About us: George Eastman,” Heritage, Kodak, accessed February 27, 2018,https://www.kodak.com/corp/aboutus/heritage/georgeeastman/default.htm#.

22. “George Eastman, Easy-to-UseCameras,”WhoMadeAmerica?, PBS, accessed February 27, 2018,http://www.pbs.org/wgbh/theymadeamerica/whomade/eastman_hi.html.

23. As impressive as George Eastman’s prowess for business and innovation was, his generosity wasperhapsevenmorenoteworthy.GeorgeEastmangave.ThefirstactofgenerosityEastmandisplayedwasanoutrightgiftofa“substantial sumofhisownmoney” toallhisemployees in1889.Moreacts followed,including a “wage dividend,” where employees benefited beyond their wages in accordance with thecompanydividend.Thatwasnotnormalpracticeduringthattime.Eastmantrulybelievedthatorganizationsroseandfellonthebacksoftheloyaltyandingenuityofemployees.Heexemplifiedthisbeliefin1919bygivingathirdofhisstock,worth$10million(or$146.3millionin2017dollars),tohisemployees.Soonafter,heinstitutedretirementannuityprograms,lifeinsuranceplans,anddisabilitybenefitsforhisstaff.Butgenerositywasinhisbloodand,assuch,wasnotlimitedtohisemployees.Eastmangaveupto$20millionto the Massachusetts Institute of Technology (MIT) and millions more to the University of Rochester,HamptonUniversity,andTuskegeeUniversity.HealsofinancedmanydentalclinicsinvariouscitiesintheUSandEurope,includingRochester,London,Paris,Rome,andBrussels.

“About us: George Eastman,” Heritage, Kodak, accessed February 27, 2018,https://www.kodak.com/corp/aboutus/heritage/georgeeastman/default.htm#.

24. HenryFord,MyLifeandWork(NewYork:GardenCityPublishing,1922),31.

25. Although we go into more detail on the relationship between innovation and infrastructures andinstitutionslater,considerthefollowing.Americanintellectualpropertylawwasnotadvanced(andthisiseven overstating it) in the mid-1800s. Cambridge economist Ha-Joon Chang notes that “patents weregranted without proof of originality,” leading to importation of already-patented technologies and rent-seekingbyracketeerswhosoughttoprofitfromalready-existinginnovations.BankruptcylawinAmericawas also nonexistent, or immature at best. It wasn’t until 1898 that Congress adopted a lasting federalbankruptcy law. Earlier attempts created significant stress on the court systems. Additionally, mostmanufacturinginthe1860swasdonebyunincorporatedfirmsastherewasnotyetafederallawgrantinglimitedliabilityforentrepreneurs.

26. FordwouldlaterattendGoldsmith,Bryant&StrattonBusinessCollege(nowcalledDetroitBusinessInstitute)inDetroit.Whatever“education”Fordreceivedgrowingupwascontextualinnature.HelearnedtofixthingsaroundthefarmuntilhemovedtoDetroit,wherehefoundworkasamechanic’sapprentice.

27. In retrospect, the idea of an affordable car is sensible. However, at the time it was considerednonsensical.SeveralofFord’sinvestorspulledoutbecausetheycouldn’tseehowhecouldsucceed.Onlyrichpeopledrove,andmainlyforthepurposesofjoyriding.Long-distancetransportationwaslargelybyrailor sea. Shorter-distance transportationwas by horse and carriage.Most people lived aroundwhere theyworked.ButFordforesawafuturethatmanydidn’t.

28. “Is the recession heralding a return to Henry Ford’s model?,” The Economist, March 27, 2009,http://www.economist.com/node/13173671.

29. “StateMotorVehicleRegistrations(1900–1995),”U.S.DepartmentofTransportationFederalHighwayAdministration,accessedMarch1,2018,https://www.fhwa.dot.gov/ohim/summary95/mv200.pdf.

30. EarlSwift,BigRoads(NewYork:HoughtonMifflinHarcourt,2011).

31. Ibid.,255.

32. Even as carsweremaking theirway all acrossAmerica,many states still had a hard time buildingroads. Swift points out that “just about every state [in America] was desperate for better roads butexasperated by its inability to provide them.The cost of bringing highways up to evenminimal surfacestandards was beyond the means of most and the technical capabilities of many.” We discuss therelationshipbetweeninnovationandinfrastructuresinChapter10.

Ibid.,24,38.

33. Adam Przeworski’s study on this is quite comprehensive and clear. As citizens gain economicindependence, political liberties and democratic freedoms follow. Summarizing Przeworski’s research,FareedZakarianotesinhisbookTheFutureofFreedom:IlliberalDemocracyatHomeandAbroad,“Inademocraticcountrythathasapercapitaincomeofunder$1,500(intoday’sdollars),theregimeonaveragehadalifeexpectancyofjusteightyears.Withbetween$1,500and$3,000,itsurvivedonaverageforabouteighteenyears.Above$6,000itbecamehighlyresilient.Thechancethatademocraticregimewoulddieinacountrywithanincomeabove$6,000was1in500.Oncerich,democraciesbecomeimmortal.”Andso,on theonehand,onecouldapplaud theAmericangovernment for its ingenuity inpromotingdemocraticvalues,oronecouldapplaudtheinnovatorswhoworktirelesslytoincreaseincomesthat,thereafter,renderdemocraciesstable.

FareedZakaria,TheFutureofFreedom:IlliberalDemocracyatHomeandAbroad(NewYork:W.W.Norton&Company,Inc.,2007),69–70.

34. DanielGross,“HenryFordUnderstoodThatRaisingWagesWouldBringHimMoreProfit,”TheDailyBeast, January 6, 2014, https://www.thedailybeast.com/henryford-understood-that-raising-wages-would-bring-him-more-profit.

35. StevenC.Stanford,“HenryFord—AnImpactFelt,”HenryFordHeritageAssociation,March1,2018,http://hfha.org/the-ford-story/henryford-an-impact-felt/.

36. “Henry Ford Quotations: Popular Research Topics,” Collections & Research, The Henry Ford,accessed April 7, 2018, https://www.the henryford.org/collections-and-research/digital-resources/popular-topics/henryford-quotes/.

37. Itisnocoincidencethatthepriceofsteeldroppedsignificantlyduringthelate1800sandearly1900s.In 1872, a ton of steel cost $56, but by 1900, steel prices had dropped to $11.50. As market-creatinginnovations spread in theUnitedStates, transportationbecamemore important tomoveproductsaround.For instance, thenumberofmilesof railroad track,ofwhichsteel isamajorcomponent, increasedfrom30,626in1860to193,346in1900.Thisresultedinasignificantdropinfreightcostsfrom20centsperton-milein1865to1.75centsperton-milein1900.AsmoreAmericanspulledsteelintotheirlives(railroads,automobiles,buildings),innovatorswereincentivizedtomaketheproductcheaper.AndrewCarnegie,oneofthemostinfluentialinnovatorsofthenineteenthandtwentiethcenturies,wasresponsibleforamajorityoftheefficiencyinnovationsinthisindustry.Heconsolidatedtheindustryandtookadvantageofeconomiesofscale.

MichaelDahlen,“TheRiseofAmericanBigGovernment:ABriefHistoryofHowWeGotHere,”TheObjective Standard, January 28, 2014, https://www.theobjectivestandard.com/issues/2009-fall/rise-of-american-big-government/.

38. “Fact#962:January30,2017VehiclesperCapita:OtherRegions/CountriesCompared to theUnitedStates,”VehicleTechnologiesOffice,OfficeofEnergyEfficiency&RenewableEnergy,January30,2017,https://energy.gov/eere/vehicles/fact-962-january-30-2017-vehicles-capita-other-regionscountries-compared-united-states.

39. Daniel Kadlec, “America’s Banker A.P. Giannini,” TIME, March 8, 2017,

http://content.time.com/time/magazine/article/0,9171,989772-2,00.html.

40. “A. P. Giannini, Branch Banking,” Who Made America?, PBS, accessed March 1, 2018,http://www.pbs.org/wgbh/theymadeamerica/whomade/giannini_hi.html.

41. Ralph J. Christian, “Statement of Significance,” form for United States Department of the Interior,accessedMarch2,2018,https://npgallery.nps.gov/pdfhost/docs/NHLS/Text/78000754.pdf.

42. Alex E. McCalla and Warren E. Johnston, “Giannini: A Retrospective,” Giannini Foundation forAgricultural Economics, accessed March 2, 2018,https://s.giannini.ucop.edu/uploads/giannini_public/7b/9e/7b9e282b-f8dd-4250-bdd7-9cd42235c269/apgiannini-book-a-retrospective.pdf.

43. JerryUseem,“20ThatMadeHistory,”Fortune,June27,2005.

44. Richard Morin, “UNCONVENTIONAL WISDOM,” Washington Post, November 15, 1998,https://www.washingtonpost.com/archive/opinions/1998/11/15/unconventional-wisdom/24f94e64-5010-4ca1-9786-8c5c30bf6a68/?utm_term=.a3c06a9278ea.

45. Farmers,pickers,andcannerswereveryimportanttoBankofAmerica’sbusiness.In1919,morethanhalfofthe$74millionthebankloanedoutwenttofarmers.

46. Henry Louis Gates Jr., “Madam Walker, the First Black American Woman to Be a Self-MadeMillionaire,” PBS, accessed March 9, 2018, http://www.pbs.org/wnet/african-americans-many-rivers-to-cross/history/100-amazing-facts/madam-walker-the-first-black-american-woman-to-be-a-self-made-millionaire/.

Chapter6

HowtheEastMettheWest

ThemissionofSonyistodesignproductsformarketsthatdon’texistyet.

—AKIOMORITA,COFOUNDEROFSONY

TheIdeainBrief

AfterWorldWar II and the subsequentKoreanWar, Japan,SouthKorea, andthe whole East Asia region were desperately poor.Whatever industries thesenations had were decimated by the wars, and prospects for economicdevelopment were bleak. Fast-forward to today, and Japan and South Koreahaveeachachievedaremarkablelevelofprosperity.Asthesenationsemergedfrompoverty,notonlyweretheeffortsofsomeentrepreneurssupportedbythegovernment,butseveralcompaniesalsoleveragedtheirlow-costadvantageandultimatelytargetedexportmarkets.

Althougheachofthosefactorswascritical,whenweassesstheriseofthesenationsthroughourlenses,wealsoseeaspectaculartaleofinnovation.Manyofthemostsuccessfulfirms,someofwhicharehouseholdnamestoday,investedininnovations thateithercreatednewmarketsorconnected to largeandgrowingones. The trajectory of these firms would have been impossible to predictconsidering their humble beginnings. One of Sony’s initial products was anelectric blanket that often caught fire. Kia began as a bicycle company. AndSamsungoncesolddriedfish.

In this chapter, we shine a light on the triumph of innovation in helpingJapanandSouthKoreasustaintheirrisetoprosperity.Whatwelearnfromthesenations is that prosperity is a process, not an event, one that requires acontinuouscommitmenttoinnovation.

*

IntheyearsaftertheendofWorldWarII,Japanwasindireeconomicstraits.In1950, the per capita income of Japan was less than those of Mexico andColombia—and just 20 percent of that of the United States. Most of thecountry’s industry was destroyed during the war, and it experienced a severefoodshortagethatlastedseveralyearsafterward.Foodwasrationedandmillionsstarved. Raw materials, such as rubber, magnets, electric motors, and othermetals,werevirtually impossible tocomeby.Infact,manyhomesdidn’thavecookingutensilsanddoorknobsbecausetheywereusedtowardthewareffortasrawmaterials.Fouryearsbeforethewar,Japanesestreetswereteemingwithsixtimes as many horse-drawn cargo vehicles as motorized cars. After the war,motorcycles were a luxury for civilians, also cars—and many cars had beenconvertedtorunonwood,theonlyfuelJapancouldbesuretoreplenishduringthewar.In1949,Japanhadonly9,306kilometersofroads,ofwhichjust1,824kilometers were paved. To put that into perspective, today Japan hasapproximately1.2millionkilometersofroads,mostofwhicharepaved.

TheJapanese—muchliketheAmericansinthe1800sandbillionsofcitizensinlow-incomecountriestoday—werevery,verypoor.

As if thatweren’tbadenough,AlliedForcesoccupiedJapan from1945 to1952anddictatedmanufacturingandindustrialpolicyappropriateforpeacetime.Forexample,attheoutsetoftheoccupation,GovernmentHeadquarters(GHQ)limitedmonthly production of trucks andpassenger vehicles to just 1,500 and350respectively.Japanfacedanenormousuphillbattletorebuild.

TheprospectofJapan’seconomyrecoveringswiftlyfromtheshockofwarseemed unlikely. So unlikely, in fact, that US Secretary of State John FosterDullesfamouslydeclaredthatthecountry“shouldnotexpecttofindabigU.S.marketbecausetheJapanesedon’tmakethethingswewant.”1 Inotherwords,don’t look to the exportmarkets to solveyourproblems.Whatever Japanwasselling,Americawasn’tbuying.Insomeways,Dulleswasright.Manyofusareoldenough toremember that the label“Made inJapan”oncesignaleddubiousquality.2

The nascent innovations being developed at that time by Tokyo TsushinKogyo (TTK) cofounders Akio Morita and Masaru Ibuka, out of what wasinitiallyaradiorepairshopsetupinabombed-outdepartmentstore,werepartofthegenerationoflow-qualityJapaneseproducts.Thetwenty-personcompanyhadnosupportfromthegovernmentandnoobviousdemandfortheinnovationstheyhadbeguntocreate,buttheyremainedundeterred.Thoughhedidn’thaveourlanguageforitatthetime,it’sclearthatMoritawasamasteratinstinctivelyidentifying opportunity in struggle and nonconsumption. Morita and his

colleaguesbegantobuildamarket-creatinginnovationpowerhouse—acompanyyou now know as Sony Corporation. Today, Sony is worth an estimated $49billion and employs more than 128,000 worldwide, and the company issynonymouswithtechnologyandinnovationinJapanandacrosstheworld.

Sony is just one of the plethora of Japanese companies that focused ondevelopinginnovationsformarketsthatdidnotyetexist.Bythen,theworldhadbeguntohearaboutToyota,Nissan,andaveryyoungHonda.What theworlddid not know, however, was that this was simply the tip of the innovationiceberg,whichwould impact citizens of both Japan and the rest of theworld.With thesecompaniesand themarket-creating innovations theydeveloped, thecountry’seconomywouldgrowsofastthatwar-ravagedJapanwasinapositiontohosttheworldinTokyoatthe1964OlympicGames—lessthantwodecadesafter theendofWorldWarII.FiftyyearsafterWorldWarII,Japan’sGDPof$42,500hadeclipsedthoseoftheUnitedStatesandtheUnitedKingdom.Today,Japan is the world’s third-largest economy, responsible for approximately 6percentofallglobaleconomicactivity.

Japan’s neighbor, South Korea, shares a similar story of economictransformation through innovation. And as was true for Japan, a few decadesago,noonewouldhavepredicted thatSouthKoreawoulddevelop,much lessdevelopasquickly as it did.Thecountry’s transformationhas frequentlybeendubbeda“miracle”becauseitseemedtodefylogic.Butthat’sexactlywhybothJapan’s and South Korea’s rise from poverty to prosperity offers us severalimportantlessons.Wewillfocusonthreehere.

The first is that investing in innovation, regardless of the circumstances inwhich a country finds itself, is possible. The markets that these innovationscreateandsustainpullothermuch-needed resources into society.Andbecausethose components are pulled in to support a market, their likelihood ofsustainabilityisveryhigh.

The second lesson is that entrepreneurs with an eye for local needs arenecessarytodrivemarket-creatinginnovations.Becauselocalsareimmersedinthestrugglesofaverageeverydaycitizens,theycantranslatethosestrugglesintoviable innovationsandeconomicopportunity.And localentrepreneursareabletoinstillasenseofprideintheircitizens—abeliefthat“wetoo”caninnovate,create,andprosper.This,tous,seemstobeoneofthemostvaluablethingsthatcan happen in a nation: driving home the fact that locals can solve their ownproblems.

And finally, as we showed in the last chapter, we see that integration isnecessarywhen countries are at an early stage of development.By definition,poorcountriesdonothavetherequisiteeducation, transportation,andbusiness

andgovernanceinfrastructuresthatarealreadypresentinwealthyeconomies.Assuch,innovatorsthatseektoengageinbusinessinthesecountriesoftenhavetointegrate theiroperations inorder tobesuccessful.Bypulling in the resourcesand the support they need for their businesses to thrive, be it infrastructures,education,orotherthings,theyareinadvertentlyengaginginnation-building.

FewexamplesillustratetheselessonsbetterthanSony.

Sony:TheMarket-CreatingMachine

BeforeSonybecameSony,whenitwasstillTokyoTsushinKogyo(TTK),thecompanymighthavedeservedDulles’sharshwords. Itdidn’tstartoutmakingworld-classinnovationsthatwouldwowtheworld.Infact, itwouldhavebeenimpossibletopredictSony’strajectoryfromitshumblebeginnings.Intheearlyyears, TTK manufactured and sold electric heated cushions that often caughtfire, “scorching blankets and futons.”3 The floors in the company’smanufacturingplantswerepepperedwithpotholes,andsincethecompanycouldonlyaffordbuildings thathadbeendamagedduring thewar, theexteriorsalsohad cracks. This made for very interesting working conditions: whenever itrained,thefactoryfloorsweredottedwithpoolsofwater.

As was true for so many of the innovation pioneers in America in theprevious century, the tale of Sony’s humble start-up years is filled withhardscrabblesurvivalstrategies,workarounds,andsheeringenuityinthefaceofseemingly impossible survival odds. Sony had so few resources that thecompany couldn’t affordmachinery and equipment, so engineers created theirown.Theymade soldering irons, electrical coils, and even screwdrivers, oftenworking into the early hours of the morning, sometimes being mistaken forthievesbythelocalpolice,astheytriedtogetinandoutofthebuildingatoddhours. Several times, Sony almost couldn’t make payroll. On one particularoccasion, the company had to pay salaries in two installments, instead of theusualone.

Noneofthat,however,stoppedcompanyfoundersAkioMoritaandMasaruIbuka, who instinctively did what large corporations, many of which werepropped up by the government, found difficult to do—target nonconsumptionandcreatenewmarkets.

Many people would think of Sony’s major innovation triumph as theWalkman,whichwenton toselloverfourhundredmillionunitsandcreatedaworldwide culture of personal music devices. But it was actually a much

humblerproductthatstartedSonyonitstrajectorytotheinnovationpowerhouseit is today: the G-type tape recorder, a portable magnetic reel-to-reel tape-recordingdevice,whatMorita calleda “tapecorder” at the time. “Before tapecorderswere invented, ‘recording’was something very remote fromour dailylives,”Moritawouldwriteina1950booktryingtoexplainthevalueofpersonalrecording. “Previously it required special, complex technology and was veryexpensive.Now,however,withSony’snewtapecorder,recordingscanbemadequickly,cheaplyandaccuratelybyanyoneanywhereanytime.”

Moritasawtheenormouspotentialofhelpingcustomersrecordmomentsandmemories of their own lives, not unlike Eastman’s photographs had donedecadesbefore.“It’ssucharevolutionaryproduct,thefirstofitskindinJapan.And it is so convenient. How could anyone resist buying it?” was howAkioMoritasawit.Yetpeopledidresist.Atleastatfirst.Peoplewerefascinatedbythe portable recorders, but they weren’t selling like hotcakes, and Sonyexecutives knew they had to do something different. After experiencing tepidsales for a while, Ibuka andMorita mobilized virtually all of the company’sengineers into sales roles. Sony learned through this process that, as Nobellaureate Ron Coase observed, markets don’t just appear or happen; “marketshavetobecreated.”

To create this new market, the company had to build its own sales anddistribution channels, and so in 1951,Sony established a subsidiary called theTokyoRecordingCompanyforthispurpose,triggeringthecreationofabatteryof local jobs (sales,distribution,advertising, training, serviceandsupport, andsoon).Once, Ibuka asked the headofTokyoRecordingCompany to go on anationwide tour todemonstrate theproduct inschools.Somanyschoolsendedup putting in orders as a result of this tour that Sony couldn’t produce therecordersfastenoughtomeetthedemand.Additionally,Ibukaredirectedsomeofthecompany’sengineeringefforttoafter-salessupportinordertoimprovethecustomerexperience.Salesflourished,andSonylearnednevertounderestimateeithertheeffortrequiredtocreateanewmarketorthepotentiallyhugerewardthatcomeswithit.

Thankfully,Sonykeptinnovating,focusedoncreatingnewmarkets—firstinJapan,andthenforexports.In1955,Sonyintroducedtheworld’sfirstbattery-poweredpockettransistorradio,aproductthattargetedthehundredsofmillionsofpeopleforwhomvacuumtuberadiosweretoolargeandexpensive.AlthoughSony’s battery-powered transistor radio was not as good in terms of soundquality compared to the vacuum tube radios on the market, it was small,inexpensive, and “good enough.” The customers Sony targeted—typicallyteenagers,fewofwhomcouldaffordbigvacuumtuberadios—wereveryhappy

tolistentomusicwiththeirfriendsinnewplacesoutofearshotoftheirparents.Irememberbeingthrilledtopurchaseandlistentomyowntransistorradio.

Forme,itrepresentedprogress,and,quitefrankly,myalternativewasnoradioatall.Before theendof the1950s, thebattery-poweredtransistorradiomarketwas worth hundreds of millions of dollars, with many other companiesdeveloping the product. The battery-powered transistor radio created jobs,generatedprofitsforSony,andprovidedSony,andJapanesecitizens,withmoreproofthattheycouldinnovatetheirwaytoprosperity.Sonywouldreplicatethisformulatimeandagain,withmarket-creatinginnovationsthatinitiallytookrootinlocalmarketsbeforetravelingaroundtheworld.

Between 1950 and 1982, Sony successfully built twelve different newmarkets.Theseincludedtheoriginalbattery-poweredpockettransistorradio,thefirstportablesolid-stateblack-and-whitetelevision(by1959,somanyJapanesefamiliesownedatelevisionthattheroyalweddingofthecrownprincebecameamedia spectacle,with a record fifteenmillion peoplewatching it live onTV),videocassetteplayers,portablevideorecorders,3.5-inchfloppydiskdrives,and,ofcourse,thenow-famousSonyWalkman.

Sony cofounderMorita built an empire on his instinctive understanding ofthe opportunity found in struggle. TheWalkman cassette player was actuallytemporarilyputonholdwhenmarket research indicated thatconsumerswouldneverbuyatapeplayerthatdidn’thavethecapacitytorecordandthatcustomerswould be irritated by the use of earphones. ButMorita ignored hismarketingdepartment’s warning, trusting his own gut instead. Rather than relying onmarketresearch,heurgedhisteamto“carefullywatchhowpeoplelive,getanintuitive sense as to what they might want, and then go with it.” Morita’sinstinctswere right: others shared inhis struggle tomakemusicportable.TheWalkman found a ready market in Japan, where Sony executives initiallythoughttheywouldsellroughlyfivethousandunitsamonth.Instead,theysoldmore than fifty thousand in the first two months. All of a sudden, walking,running,reading,andwritingwhilelisteningtomusicbecamepossible.Infortyyears,Sony soldmore than four hundredmillionunits.TheWalkmanbecameoneofthemostsuccessfulportableconsumerproductstoeverbereleased.

A market was born—and others were quick to jump in. With every newmarketSonycreated,manyothercompanies,includingToshiba,Panasonic,andseveralothers, followedsuit andcapitalizedon theopportunity.TheWalkmanhelped other companies see that “mobilemusic” was possible. To be clear, amarket does not revolve around any individual company—it revolves aroundcreating new consumers and continually innovating and refining theunderstandingoftheirstruggleandJobtoBeDone.Sonylatermissedtheboat

on theMP3 and iPod, but the company had already planted the seeds for theindustry to grow and flourish.What’s truly amazing is howmany timesSonyidentifiedandcreatednewmarketsthatothersthenjumpedinto.

That’s in part becausewith each product Sony released—from the electricheatedcushionstotheWalkman—andeachmarket thecompanycreated,Sonyfoundawaytodevelopaprofitablebusinessmodelthattargetedthestrugglesofaverage Japanese people. To be successful, Sony needed to create local jobs.With each job the company created, Sony was inadvertently helping rebuildJapan, and pulled in the resources necessary to develop it into a prosperousnation.When IcomeacrossaSonyproduct thesedays, Idon’t just seeacoolinnovation, Iseesomethingmuchmorepowerfulandenduring: theprocessbywhichoneofthemostprosperousnationsintheworlddeveloped.

Even though there are other prominent consumer electronics companiestoday,SonyisstillsynonymouswithJapaneseinnovation.Fromwar-tornJapan,two friendswithmodestmeans andwith no government supportwere able tobuildoneoftheworld’smostrecognizablecompaniesbycreatingnewmarketsthat targeted nonconsumption. And that, of course, was just one of theinnovationsuccessstoriesthatfueledJapan’seconomicascendancy.Thereweremanymore.

Toyota: From Japanese Nonconsumption to GlobalPowerhouse

Consider the Japanese automaker Toyota,whose low-cost, compactCorolla isthebestsellingcarofalltime.Thatdidn’thappenprimarilybecauseToyotawasable to employ cheap labor or receive government support. Those thingscertainly helped, but Toyota was onto something far more significant—andenduring—intheyearsafterWorldWarII.

When ToyotaMotor Corporationwas first founded in 1937, the companyfocused on nonconsumption locally in Japan and the East Asia region. Fewwouldhavethoughtthatitwouldsomedaybecomethefifth-largestcompanyinthe world by revenue. At the time, there were close to 310,000 horse-drawnvehicles and another 111,000 ox-drawn vehicles still circling the streets ofJapan.4 Most of Japan’s roads were unpaved, which made driving both anexpensiveandriskyadventure.Badroadsleadtobrokencars,andwithonly20percent of roads paved, broken cars were a common sight in postwar Japan.Toyota vehicles were therefore designed with that local context in mind: the

then-presidentofToyota,KiichiroToyoda,declaredthatToyotacarsshouldbedevelopedas“economicalvehicles thatcanwithstandpoorroadsandaremorepracticalforthepeoplesofEastAsia.”5

ThecarsToyotamadeinJapanbackthenwouldnothavebeengoodenoughforanAmericanconsumer.Butthatdidn’tmatter.Hisintentwastocapturethevast nonconsumption in both Japan and neighboring Asian countries beforefocusing on exporting to more advanced countries. It wasn’t until 1980 thatToyotaexportedasmanycars toNorthAmericaas it sold inJapan.6ButevenwhenToyotabeganexportingtoNorthAmerica, itstillemployedastrategyoftargeting the lower end of the American market, people who couldn’t affordDetroit’sgas-guzzlingvehicles.

The importance of Toyota first targeting nonconsumption, as opposed tocompeting with incumbent automobile companies in richer countries, such asFord, General Motors, and Chrysler, cannot be overstated, especially in thecontext of a developing Japan. First of all, Toyota was able to create a localmarketinJapanthatpulledinmarketing,sales,distribution,training,servicing,and supporting products pertaining to the auto industry. For example, Toyotainvestedheavily in theChubuNipponDrivers’School inNagoyaandspentasmuchas40percentofthecompany’scapitalontheschool.Itbecameamodelfor other driving schools in the country, promotedmotorization in Japan, andhelpedToyota sellmorevehicles.Thisdiffersgreatly fromapurely low-wagestrategywhereproductsaremanufactured ina factoryandexported toanothercountry.Ifithadfollowedthatstrategy,Toyotawouldnothavechosentoinvestinadrivingschool,which, in1958,housedaToyotasalescollege for trainingnewemployeesontheToyotasalesmethod(nowcalledNisshinEducationandTraining Center). Targeting nonconsumption requires more than technicalknowledgeofhowtoefficientlymakeandshipaproduct.Itrequiresknowledgeofthelocalcontext.

Second,targetingnonconsumptionsuccessfullycreatesavibrantmarketthatpullsinlong-termemployment.AsToyotabuiltnewplantsandsoldmorecarsto Japanese customers, it needed more employees. For example, as morecompanies set up automobile manufacturing in Toyota City—a city that wasgivenitsnewnameafterToyotabuiltaplantandofficesthere—theratioofjobopenings to job applicants rose from 2.7 in 1962 to 7.1 in 1970.7 Toyota hadonlytwenty-ninedealerships in1938;by1980, ithadmorethanthreehundredacross Japan. From an employment standpoint, Toyota’s growth wasexponential. In1957,Toyotaemployedapproximately6,300people.Tenyearslater,employmentatToyotahadquintupled,reachingmorethan32,000.Today,

Toyotaemploysmorethan344,000peopleworldwide,withmorethan70,000inJapan.EijiToyodasummarizedToyota’sattitudetowardtrainingandprovidingrelevanteducationforitsworkforce:“Itispeoplewhomakethings.Sowemustfirstmakepeoplebeforewemakethings.”ThisthinkingledToyotatobuildaneducation and training department and a Toyota trade school for training“middle-rankskilledshopemployees.”8

Third, targeting nonconsumption can help a region create amore relevantand contextual regulatory and institutional framework. As Jeffrey AlexanderwritesinhisbookJapan’sMotorcycleWars,asmoreandmorevehiclesfoundthemselves on Japanese roads, “[there became] a pressing need for coherentgovernment policies on road traffic, vehicle and driver licensing, and thepolicing of city streets.”9 In other words, the proliferation of the innovation(vehicles) led to policies that made sense in Japan’s specific circumstances.These circumstance-specific regulations further helped the country develop itsregulations more sustainably. Innovations, as we have found, often precederegulations.It’shardtoproperlyregulatewhatyoudon’tyethave.

Fourth, targeting nonconsumption, especially for the automobile industry,built up other industries in the Japanese economy. For example, not only didjobs in selling and servicing cars increase, but jobs in the logistics andtransportationsectorsincreasedaswell.MoreJapanesebegantotravelandtourtheir country as transportation became less expensive. Additionally, access toschoolsandhospitals,andtheexpansionofcitiesinJapan,werealsoenabledbytheautomobile.

SlidingDoors:WhatifToyotaWentafterConsumption?

Imagine if this had all played out differently. What if postwar Toyota hadconsistentlyfocusedoncompetingwiththebigthreeUSautogiantsatthetime(Ford, GM, Chrysler)?Would the company—and the country—have fared aswell?Asitturnsout,Toyotadid,butonlyverybriefly.

In 1958, after Toyota experienced success in the Japanese market, thecompany set its eyes on the US market with its leading model, the ToyopetCrown. The car had done very well in Japan, and executives felt the successwouldbereplicated in theUnitedStates. Instead, theCrownwasaspectacularfailure. One observer commented, “While the Crown was purpose-built forJapan’s poor quality road network, it struggled to keep pace on America’ssmooth,fast-flowingblacktop.Wheniteventuallygotto60mph—aspeedthat

wasrareinJapan—thecarapparentlyshudderedsomuchthedrivercouldn’tseeoutoftherear-viewmirror.”By1961,defeatedToyotaexecutivespackedtheirbagsandlefttheUSmarket.Butnotforgood.

AfterstudyingtheUSmarketandbetterunderstandingtheJobtoBeDoneofUSconsumers,ToyotabuilttheCorolla,whichwouldgoontobecomethemostsuccessful car in history by sales volume. Instead of building something thatcompetedwiththebigthree,Toyotapursuedadifferentstrategy.“Wecanavoiddirect competitionwith theBig3, and small cars are verygood for secondorthird cars,” one of Toyota’s top executives, Shotaro Kamiya, later explainedabouttheCorollastrategy.10

Toyota’s success as a Japanese car manufacturer affected other Japanesecompaniesaswell.WhileToyota is the largestJapanesecarmanufacturer,andcurrentlyamongthetopthreelargestcarcompaniesintheworld,thecompanyisnotalone.Nissan,Honda,Mitsubishi,Suzuki,andMazdaarejustseveralotherJapanese automanufacturers that haveplayed a significant role in shaping theJapaneseeconomyaswell.

SmallMotorcycles,BigDevelopment

As impressive as the Japanese entry into the global automobile industry was,even more impressive was their entry into the motorcycle market, largelybecausetheydiditinspiteofthelackofgovernmentsupport.Afterthewar,theJapanese government supported investments in heavy industries, such asshipbuilding and the manufacturing of larger vehicles, because it assumedgrowth would come from those industries.11 As such, many motorcyclemanufacturerswereoftendeniedtherawmaterialstheyneededtodeveloptheirproducts,whichwerereferredtoastoys.

Aswementionedearlier,governmentsupport,whenchanneledproperly,canhelpanindustryandaneconomygrow,butitisusuallynotthemainreasonforsuccess. And we can all point to well-intentioned and well-designed butultimatelyunsuccessfulgovernment-ledeconomicdevelopmentprograms.Manygovernmentspursueoneeconomicagendaor another,butonlya fewsucceed.Sowhennewcompaniesenteramarketandswiftlybecomedominantplayersinit,asJapanesecompaniesdidinthemotorcycleindustry—withoutthesupportofthe Japanese government—it provides compelling evidence of the power ofmarket-creatinginnovation.

BeforetheemergenceoftheJapanesemotorcycleindustry,motorcycleswere

veryexpensiveinJapan.“Nomotorcyclesweremadedomesticallyatthetime,soallofourswereimported...Webroughtintenunitsofthis‘RollsRoyceofMotorcycles,’but theysold for roughly2,000yen,whileaFordModelTsoldfor only 1,900 yen, so motorcycles were more expensive,” recalls OzekiHidekichi,oneofthepioneersintheindustry.“Ithinkmymonthlywagewas3yenor5yenatthattime,andfromtheageoftwentyIwaspaid7yenor10yen,soamotorcyclewasabsurdlyexpensive,andasaresultweonlysoldoneortwoinayear.”12Understandably,theindustrywasjusttoosmallandunimportanttoattract any sortof attentionorhelp from thegovernment.Nonetheless, severalcompanies began to see the need for Japanese people to move around morefreely,andmorecheaply.Over time,asmoreandmoremotorcyclecompaniessprang up in Japan, these firms created the Hamamatsu MotorcycleManufacturers’Association.13

From a group ofmore than two hundredmotorcyclemakers in the 1950s,Honda, Kawasaki, Suzuki, and Yamaha emerged to captain the industry’sdevelopment at home and abroad. As tempting as it was, these “big four”motorcycle firms did not seek growth by stealing market share from existingleaders in motorcycle manufacturing. Rather, they created new markets bytargeting nonconsumption. When the National Diet (Japan’s legislative body,knownasKokkai)passedanamendmenttothecountry’sRoadTrafficControlLawin1952toallowyoungerdriverstoridemotorcycles,Suzukiwasoneofthefirstcompaniestoseetheopportunitytocreateanewmarket.Itswiftlyadapteditsofferingsforyoungerconsumers,withitslow-end60ccDiamondFreebike.

Similarly,Hondalaunchedthe195250ccCubF-Typetotargetthegrowingnumber of small businesses that needed delivery vehicles but couldn’t affordlarge ones. Honda positioned the motorcycle at a more affordable price of25,000yen (about$70at the time)14 andprovideda twelve-month installmentfinancing plan. Domestic competition among firms vying for the business ofconsumers with little disposable income caused them to invest in not justmanufacturing, but also distribution, marketing, sales, support, and, in somecases, training.Thiscreated jobs inJapanbeyondthebigfour themselves,andafter years of improving their products, it also gave them the ability to exporttheirmotorcyclestononconsumersintheUnitedStatesandEurope,servingthemarketsthereaswell.

The same pattern of targeting nonconsumption was seen with Panasonic,Sharp,andNintendoinconsumerelectronics,andCanon,Kyocera,andRicohinofficeequipment.ThesefirmsoftentargetednonconsumptioninJapanfirst,andthen globally.15 Focusing on nonconsumption has significant development

potential for countries, because it forces companies to develop not just theirmanufacturing capabilities, which create global jobs, but also their sales anddistributioncapabilities,whichcreatemuch-neededlocaljobs,acriticalfactorinproducingandspreadingprosperity.

Japanroseoutoftheashesofthewar’sdestructionwithidealsandgoalsthatcreated a culture of innovation and opportunity. “The losers wished to bothforget the past and to transcend it,” John Dower wrote in his Pulitzer Prize–winninganalysisofJapaninthewakeofWorldWarII.“Theidealsofpeaceanddemocracy tookroot inJapan—notasaborrowed ideologyor imposedvision,butasalivedexperienceandseizedopportunity.”

Where you start is not where you finish, and Japan is not the onlyAsiancountrythatmakesthatclear.SouthKoreadoesaswell.

SouthKorea:PullingItsWaytoProsperity

In the years following the Korean War, South Korea was in tatters. “[In]1953 . . . The nation’s capital, Seoul, had changed hands four times and eachtime there was bitter fighting between rival parties. There was little to noelectricity and just about the only industry the country had was textiles,”16according toHarvardemeritusprofessorEzraVogel. In fact,at the timeNorthKoreawasmoreindustrializedthanSouthKorea.WithaGDPpercapitaof$155in1960,SouthKoreawasdesperatelypoor.

Butwhen I visit SouthKorea these days, it’s hard to reconcile itwith theimpoverishedcountryIgrewtoloveafewdecadesago.Today,withaGDPpercapita of more than $27,500, South Korea’sKorea Aid is active in assistingmanyotherpoorcountries inmeeting theUNSustainableDevelopmentGoals.HowdidSouthKoreaorchestratesuchanastonishingturnaround?17

Manyfactors,suchasculture,visionaryleadership,heavyindustries,foreigntrade,aidfromtheUnitedStates,andgeography,haveplayedanimportantrolein what’s been dubbed “The Miracle on the Han River.” But the story ofinnovation in South Korea, one not often told, has also been critical in thecountry’stransformation.

Companies such as Samsung, Hyundai, LG, and KiaMotors, which havebeenenginesofeconomicgrowthinSouthKorea,aretodayrecognizedassomeoftheworld’smostinnovativecompanies.Samsung,forinstance,isresponsibleforapproximatelyafifthofSouthKorea’s$1.1trillionGDP.Whenthesefirmswere founded, however, the notion that they would someday become major

globalpowerhouseswasunthinkable.ButSouthKorea’sstorytellsusthat it ispossible.

ConsiderKia’smodest beginnings. The companywas founded in 1944 asKyungsungPrecisionIndustry,makersofsteeltubingandbicycleparts.KiathensawtheopportunitytohelpKoreansmovearoundmuchmoreeasily,andfullyintegrated to manufacture bicycles. By 1952, Kia developed its first bicycle,called the Samchully. A few years after the Samchully, Kia began buildingHonda-licensedmotorcycles.In1962,Kiabuiltthethree-wheelerK-360pickup;thatwasthecompany’sfirstforayintoautomobilemanufacturing.WiththeK-360,KiamademobilitymoreaffordableforKoreans.Itsoonfollowedthatwiththe T-600, another three-wheeler pickup vehicle butwith larger storage spaceandbetterfuelefficiency.Itwasnotuntil1974thatKiareleasedtheKiaBrisa,itsfirstpassengervehicle,agoodthirtyyearsafterthecompanywasfounded.18

Kia’sstrategyoffirsttargetingnonconsumptionpreventeditfromcompetinghead-on with established auto manufacturers. By 1944, automobilemanufacturingtechnologywaswellunderway.Fordhadbeenaroundformorethan four decades; General Motors had acquired Oldsmobile, Cadillac, andPontiac;Mitsubishihadbeenmanufacturingautomobilesforalmostthirtyyears;andToyotareleaseditsfirstpassengervehicle in1936.Peopleknewwhatcarswere and had embraced them as part and parcel of modern society.Wealthycountrieshadvibrantautomarketswheremanycitizensunderstoodthevalueofowning a vehicle. Many businesses revolved around the car. Kia could haveeasily made the decision to leverage its low-cost labor and target existingconsumptionofcarsbycompetinghead-onwithothercarmanufacturers.

But instead, the company started with bicycles, then graduated to three-wheelers, and then, onlyyears later, passengervehicles—aproduct targeted atnonconsumption. The impact Kia has had and is still having on the Koreaneconomy is astounding. From makers of bicycles and three-wheeler vehicles,Kia has grown into one of theworld’s largest automanufacturers. Today, thecompany employs more than thirty thousand people directly and grossesrevenues of approximately $50 billion. In June 2015, forty years after thecompany’sfirstexportsoftenunitsofKiaBrisavehiclestoQatar,Kiaexporteditsfifteenmillionthvehicle.

Samsung,whichbeganin1938sellingdriedfish,flour,andvegetablesinadepressingly poor South Korea, has a similar story. After the war, Samsungventured into other sectors such as insurance, retail, textiles, and in 1969,electronics. Samsung Electronics’ first product, a black-and-white television,wasknownforsuchfuzzypicturequalitythatitwasoften“throwninfreewith

magazine subscriptions.”19 Soon after, the company produced its first cheapelectricfans,followedbylow-costairconditioners,andin1983it launcheditsfirstpersonalcomputer.

Much likeSony’s initialproducts,manyofSamsung’searlyproductswerealso poor quality. So poor, in fact, that Samsung CEO Lee Kun-hee told hisexecutivesin1993thateverythingneededtobeimproved.“Changeeverythingbutyourwifeandchildren,”hefamouslydeclared,orderingmorethan150,000electronicsproducts,includingphonesandfaxmachines,tobeburnedinfrontofthe employees that made them. This served as a wake-up call to Samsungemployeesthatlow-costdoesn’tmeanlow-quality.Itworked.

In1994,Samsungdevelopedtheworld’sfirst256-megabitDRAMchip,andby 1998 the company introduced the world’s first mass-produced digital TV.Samsungbecamethelargestandmostprofitableconsumerelectronicscompanyintheworldin2006.Itsdigitalresearchcenteralonehadfloorspaceequivalentto the size of thirty football fields. In 2017, Samsung spent $12.7 billion onresearch and development,more than any other company exceptAmazon andAlphabet(Google’sparentcompany).

Today,Samsungmakeseverythingfromwashingmachinesandrefrigeratorsto smartphones and smart TVs. By launching a continuous stream ofinnovations, it is widely recognized as an industry leader in technology andranksasatop-tenglobalbrand.

TheseinnovationshavenotonlypropelledSamsungtoglobaldominancebuthavealsohadasignificantimpactontheSouthKoreaneconomy.

MostpeopleoutsideofSouthKoreareallyonlyknowSamsungforitslaptopcomputersoritslineofGalaxysmartphones.ButSamsungissomuchmorethanjustanelectronicsgadgetmakertotheaverageSouthKoreanconsumer.Today,Samsung not only is SouthKorea’s leading electronicsmanufacturer, but alsohas significantmarketpresence innumerous industries through its subsidiariesand affiliates—home appliances, securities, life insurance, construction,packagedfoods,andchemicals,justtonameafew.IfyouliveinSouthKorea,there’s a good chance that you consume products and services that are eitherdirectlyorindirectlyproducedbySamsungonadailybasis.

Ifyou’restillhavingahardtimepicturingjusthowpervasivetheSamsungbrand is throughout SouthKorea, here’s a good example.NateKim,who hashelpeduswithresearchforthisbook,visitshisfamilyinSeouleveryyear.NatetellsmethatwhenhearrivesatIncheonInternationalAirport,hisparentscometo pick him up in their Renault Samsung SM5 sedan (which, by the way, isinsuredbySamsungFire&MarineInsurance).Theythenbringhimbackhometo their apartment, which was built by Samsung Construction and Trading

Corporation. Most of the appliances in their apartment—such as theirrefrigerator, washer and dryer, air conditioner, and television—are Samsung-made.OneofNate’scousinsisadoctorattheSamsungMedicalCenter,whileanotherworks atSamsungHeavy Industries,oneof the largest shipbuilders inthe world. While millions of parents in the United States take their kids toDisneyWorldfor familyvacations,Nate’sparents tookhimandhisbrother toEverland,athemeparkownedandoperatedbySamsung.

From its humble beginnings in 1938, when the company had just fortyemployees, Samsung has grown to more than $220 billion in revenues andapproximatelyhalfamillionemployeestoday.

Innovation is contagious, and it often feedsother innovations.OtherSouthKorean companies have followed suit, and companies such as Hyundai, LG,POSCO,andmanyothershavebeeninstrumentalinfuelingprosperityinSouthKorea.

Consider POSCO—formerly Pohang Iron and Steel Company, a criticalsuppliertomanySouthKoreancompaniesandnowamajorsteelexporter—andhow it has impacted development in SouthKorea. In 2016, POSCOproducedapproximately forty-two million tons of steel and is now one of the world’slargest steel manufacturers. Forty-five years ago, this would have beenunthinkable.

When the World Bank assessed the economic feasibility of building anintegrated steelmill inSouthKorea in the1960s, it concluded that theprojectwouldbepremature.Whocouldblamethem?Atthetime,SouthKoreawasnotonly poor, but also lacked iron ore (a critical input for steelmaking), and thecountry was not close to any easy-to-access supply. In addition, South Koreadidn’t have the technical capabilities necessary to build and maintain such aheavy industry. Then therewas the question ofmarkets: in the unlikely eventthatSouthKorea couldbuild all this steel, towhomwould it sell? Japanmayhavebeenthe logicalchoice,but thatcountryalreadyhadsomeof theworld’smostefficientsteelcompanies.20

So POSCO looked inward. POSCO’s initial strategy of meeting domesticdemand for steel helped the company get on its feet. As the South Koreaneconomy grew, several local industries emerged that would need steel as aninput. For example, POSCO supported the auto and construction industries asthey grew. Today, the South Korean auto industry accounts for roughly 25percentof the steelproductionwhile theconstruction industryaccounts for28percent. From its humble beginnings—when employees slept in makeshiftshelters at the company site and actually ate rice mixed with sand to helpthemselvesfeelmorefull—POSCOhasgrowntobecomeoneofSouthKorea’s

largestcompanies.Todaythecompanygrossesmorethan$60billionannually.POSCO’s impact on South Korea had a ripple effect on other industries

because the company had to integrate many of its operations. Observing that“you can import coal andmachines, but you cannot import talent,” POSCO’sfounder,ParkTae-joon, led thecompanytoestablish thePohangUniversityofScience and Technology (POSTECH) and Research Institute of IndustrialScience and Technology (RIST) to provide needed education in science andtechnology.Theschoolswere“established tomeet theneedsofself-developedtechnology for technology independence, creating a firm connection betweenacademiaandindustry,”accordingtoPOSCO’sleadership.

Although POSTECH began as a training ground for future engineers andtechnicians,tomeetthetechnicaldemandsofSouthKorea’sgrowingeconomy,it has evolved into a full-fledged university with more than twenty differentdepartments,includingmathematics,computerscience,lifesciences,andsoon.As SouthKorea’s economy grew and evolved, so did POSTECH. The schoolmorphed itself to respond to the demands of the economy. POSTECH nowconsistently tops domestic and international university rankings and has beenratednumberoneby theLondon-basedTimesHigherEducation’s“100Under50,”arankingofthetoponehundreduniversitiesunderfiftyyearsold.21

BecausePOSCOhad todevelopaschool to train itsworkers,SouthKoreanowbenefits fromhavinga top-notch institution.But this institutionhad tobepulledintoSouthKoreatoaccomplishaveryspecifictask.Ifithadbeenpushedonto the country, it would likely not have had the same impact. To remainsustainable, educational institutions need to be connected to the needs of amarket,localorglobal;POSTECHwas.

SouthKoreatodayisnotthesamecountryitwasrightafterthewar,orevenwhen I was there in the early 1970s. Many things have helped South Koreagrow,butthecontinuouscommitmenttoinnovationbySouthKoreanfirmshasbeen critical in helping it both create and sustain its prosperity. Today, SouthKorea has overcome debilitating poverty in many aspects of its economy,including governance, which has markedly improved since the 1960s. Theeconomic freedoms ignited by this growth in prosperity are giving way forpoliticalfreedomspreviouslyunthinkableinthecountry.

*

Thegrowthanddevelopmentofthesecountriesstunnedsomanythat,duringthe1997Asianfinancialcrisis,theonce-celebrated“EastAsianMiracle”wassaidtobe“nomorethanamirage,”withsuggestionsthatthechickenshadfinallycome

hometoroost.22Recoverywouldbequestionableasthereweresuggestionsthattheirgrowthhadbeenbuiltonatenuousfoundationwithoutthepropersystemsandstructurestosupportrobusteconomicdevelopment.23Buttheydidrecover,and have since thrived.The level of learning, innovation, and development ofmarketsinthesenations—andtheirresilienceinthefaceofeconomicsetback—pointstogrowthbuiltonastrongfoundation.Itishopeful.

Althoughthesenationsgotsomethingswrong—asdoeseverynation—theygottheinnovationpieceofthepuzzleright.

Market-creating innovationsarenot theonlywayforacountry todevelop.Taiwan, for example, initially focused on developing simple products such astextilesandprocessedfoodsfortheeightmillionpeopleonthesmallisland,but,very soon after, it targeted other markets outside its borders.24 And just asinnovationplayedacriticalroleinthedevelopmentofJapanandSouthKorea,italso played a critical role in the development of Taiwan, which eventuallyachievedprosperity.

There is,ofcourse,morework tobedone tobetterunderstand thespecificcircumstances inwhich different economies develop.However,whatwe havelearned is that prioritizing investments inmarket-creating innovations, even indifficultcircumstances,providespoorcountriesaviablepathtoprosperity.

NOTES1. WilliamK. Tabb,The Postwar Japanese System: Cultural Economy and Economic Transformation(Oxford:OxfordUniversityPress,1995),14.

2. Thatstereotypehaslongsincewashedaway.Infact,itdidsoratherswiftly.WhenMartyMcFly,themaincharacterinthe1985hitmovieBacktotheFuture,findshimselfaccidentallylaunchedbackintimeto1955, his partner laments that a key circuit in the car they’re trying to repair broke because it’s labeled“MadeinJapan.”McFlydoesn’tunderstandthereference.“Whatareyoutalkingabout?AllthebeststuffismadeinJapan.”

3. Sony Corporation 50th Anniversary Project Team, Genryu: Sony 50th Anniversary (Tokyo: SonyCorporation,1996).

4. JeffreyAlexander,Japan’sMotorcycleWars:AnIndustryHistory(Vancouver:UBCPress,2009),36.

5. Toyota, “Resumptionof automobile exports andToyota inOkinawa,” 75Years ofToyota, accessedMarch 30, 2018, http://www.toyota-global.com/company/history_of_toyota/75years/text/taking_on_the_automotive_business/chapter2/section9/item2.html.

6. At theoutset,Toyota’sexports tootherAsianandOceaniccountriesalsosurpassedexports toNorthAmerica,eventhoughthosemarketsweresignificantlypoorerthantheNorthAmericanmarket.From1956to1967,forinstance,ToyotaexportedtwiceasmanyvehiclestoAsiaandOceaniccountries(186,815)asitdid to North America. These numbers highlight President Toyoda’s commitment to a strategy of firsttargeting local and regional nonconsumption before going after global nonconsumption. Toyota beganexportingitsCoronamodel,theprecursortotheCorolla,toNorthAmericainthe1960sandwatchedsalesoftheaffordablecargrowrapidly.By1971,ToyotawasexportingmorethanfourhundredthousandcarstoNorthAmericaannually,andby1980almosteighthundredthousand.

Toyota, “Exports to the United States,” 75 Years of Toyota, accessed March 30, 2018,http://www.toyota-global.com/company/history_of_toyota/75years/text/entering_the_automotive_business/chapter1/section5/item5.html.

7. YukiyasuTogoandWilliamWartman,AgainstAllOdds:TheStoryoftheToyotaMotorCorporationandtheFamilythatCreatedIt(NewYork:St.Martin’sPress,1993),194.

8. Ibid.

9. Alexander,Japan’sMotorcycleWars,36.

10. Toyota, “Toyopet Crown: America’s First Japanese Car,” Toyota, December 16, 2016,http://blog.toyota.co.uk/toyopet-crown-americas-first-japanese-car.

“AfterToyopettrauma,CoronagotToyotauptospeedinU.S.,”AutomotiveNews,October29,2007,http://www.autonews.com/article/20071029/ANA03/710290307/after-toyopet-trauma-corona-got-toyota-up-to-speed-in-u.s.

11. David Henderson, research fellow at Stanford University’s Hoover Institution and professor ofeconomics at theNaval Postgraduate School inCalifornia, haswritten about the Japanese government’sinfluence in Japan’s rise.Hewrites in one of his pieces, “Manypeople believe that Japan’s outstandinggrowthisdueinlargeparttoMITI.TheybelievethatMITIhasdecidedwhatindustriestheJapaneseshouldinvestin,andthatMITIpersuadedotherJapanesegovernmentagenciestousetheircoercivepowertogetcompaniestogoalong.Buttheevidencegoesagainstthisview.Between1953and1955MITIdidpersuadethe government’s Japanese Development Bank to lendmoney to four industries—electric power, ships,coal,andsteel.Some83percentofJDBfinancingoverthatperiodwenttothosefourindustries.Buteven

withhindsight,whathasnotbeenestablishediswhetherthoseweregoodinvestments. . .Moreover,hadMITIsucceededinpreventingSonyfromdevelopingthetransistorradio,andincoercivelylimitingtheautoindustry,twoofJapan’smostsuccessfulindustrieswouldprobablyhavebeenmuchlesssuccessful.”

DavidHenderson,“Japanand theMythofMITI,”TheConciseEncyclopediaofEconomics,accessedApril9,2018,http://www.econlib.org/library/Enc1/JapanandtheMythofMITI.html.

12. Alexander,Japan’sMotorcycleWars:AnIndustryHistory,34.

13. Ibid.,91.

14. In the1930s, theJapaneseyenwasamuchstrongercurrency than itwas in the1950s.For instance,2,000yenin1935equatedtoapproximately352,109Japaneseyen($920)in1952.

Source:http://www.historicalstatistics.org/Currencyconverter.html.

15. BryanMezue,ClaytonChristensen,andDerekvanBever,“ThePowerofMarketCreation,”ForeignAffairs, December 15, 2014, https://www.foreignaffairs.com/articles/africa/2014-12-15/power-market-creation.

16. EzraVogel,TheFourLittleDragons(Boston:HarvardUniversityPress,1993),42.

17. While it is true that South Korea invested significantly in “heavy” industries, such as steel andshipbuilding, the country’s investment in heavy industries by itself does not account for South Korea’seconomictransformationfromlessthan$200inpercapitaincomeinthe1950stomorethan$27,000today.Korea’s economic transformation represents a 13,400 percent increase in per capita income. Surely, theheavy industrieshelped,but it isdifficult tomake thecase that theyare thecausesof sucha significanteconomic transformation, followed by social and political transformation, that has happened in SouthKorea.Taketheshipbuildingindustryforexample:accordingtoanOECDreport,numericallyspeaking,theindustrynowrepresentsjustunder2percentofSouthKoreanGDPandaround10percentofthecountry’sexports(thesteelindustryisaround2percentaswell).Fromanemploymentstandpoint,theshipbuildingindustry accounts for about 0.65 percent of SouthKorea’s total employment.There is no doubt that theindustry is important to the South Korean economy, but it is not enough to explain South Korea’stransformationfromlessthan$200inpercapitaincometomorethan$27,000injustoverfiftyyears.

CouncilWorkingPartyonShipbuilding,“PeerReviewoftheKoreanShipbuildingIndustryandRelatedGovernment Policies,”OECD (January 2015): 7–9, http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=c/wp6(2014)10/final&doclanguage=en.

18. Kia, “History of Kia,” accessed March 30, 2018,http://www.kia.com/worldwide/about_kia/company/history_of_kia.do.

19. “From Fish Trader to Smartphone Maker,” New York Times, December 14, 2013,https://archive.nytimes.com/www.nytimes.com/interactive/2013/12/15/technology/samsung-timeline.html#/#time298_8340.

20. AhnChoong-yong,“IronandsteelhelpedKorea’sindustrialtakeoff,”TheKoreaTimes,July19,2010,http://www.koreatimes.co.kr/www/news/biz/2016/05/291_69759.html.

21. BryanMezue,ClaytonChristensen,andDerekvanBever,“ThePowerofMarketCreation.”

22. Arno Tausch and Peter Herrmann, The West, Europe, and the Muslim World (New York: NovaPublishers,2006),123.

23. GaryDymski and James Crotty, “Can theGlobalNeoliberal Regime SurviveVictory inAsia? ThePoliticalEconomyoftheAsianCrisis,”PoliticalEconomyResearchInstitute,September1,2000.

24. For a short piece on the idea that not all exports are created equal, see: Efosa Ojomo, “Assessingexports through the lens of innovation,” Christensen Institute, June 5, 2018,https://www.christenseninstitute.org/blog/assessing-exports-through-the-lens-of-innovation/.

Chapter7

Mexico’sEfficiencyProblem

Mexico has been one of the losers of the 20th century. We tried many different alternatives todevelopment and unfortunately we have 40 percent of the population poor [that number is nowapproximately 44 percent]; we have a per capita income that is extremely low. It is the same percapitaincomewehadtwenty-fiveyearsago,sowemustchangethings.1

—VICENTEFOX,PRESIDENTOFMEXICO,APRIL2001

TheIdeainBrief

Alittleoveradecadeago,Americanbusinessheadlinesweredominatedbytalesofwoe—Americanmanufacturing jobsweremoving toMexico.ThousandsofAmerican jobs would be lost. But from the other side of the border, thingslooked very, very promising. US and international automobile companiesinvestedroughly$24billionintheMexicanmanufacturingmarket,accordingtotheCenterforAutomotiveResearch.Thathadthepotentialtocreatethousandsand thousands of jobs and, in turn, to spur ailing local economies anywhere afactorywasbuilt.HopeinMexicowaspalpable.

ButMexico today is not prosperous. In 2014 alone, an extra two millionMexicanswere added to those living below the national poverty line.What’sgonewrong?

When you look at Mexico’s economy not through the lens of investmentdollars, but through the lens of innovation, a pattern becomes clear. Manycompaniesinthecountry—domesticandinternational—haveinvestedheavilyinefficiency innovations. But in what should be a vibrant economy, flush withresources, there is adisappointing lackofmarket-creating innovations.AndasMexicopainfullyillustrates,anoverrelianceonefficiencyinnovationscanonlytakeaneconomysofar.

*

Burstingwithenthusiasmaboutaprojecthe’dbeengiventhechancetoworkon,JavierLozanocalledhismotherbackhomeinMexicotodiscussanassignmenthe’dstartedaspartofhismasterofbusinessadministrationdegree(MBA)attheMassachusettsInstituteofTechnology(MIT).Lozanowasinterestedinlearningeverything he could about innovation in the health-care arena and had cross-registered at the Harvard School of Public Health. He had begun helping aprofessor think about how to use technology to help diabetics in Zanzibarsufferingfromhealthcomplicationsintheirfeet.ToLozano,thediscoverythatthe then–newly introduced iPhone could potentially work with a device tomonitorbloodsugar, thecrucialmeasureofhealthfor type2diabetes,seemedlikesomethingfromthefuture.HisownmotherwasbattlingdiabetesbackhomeinMexico,sohewaseagertosharewhathewaslearninginschool.

“I was just so excited about the ways technology could help people withdiabetes,Iwantedtoshareitwithmymom,”herecalls.Foryears,hismomhadquietlydealtwithher type2diabetesdiagnosiswithout,Lozanoadmits,muchinterestorsupportfromherfamily.Butthisassignmenthadmadehimrealizehehad a perfect primary source of information right at his fingertips. “I startedpepperingherwithquestions,”herecallsnow.“Didyouknowabout this?Didyou know about that? Did you know about all these different devices?” Theanswertoeachquerywasno.Notonlydidhismothernotknowaboutanyofthedevices that might help her better monitor and control her diabetes, she toldLozanohowdeeplydisheartenedshefeltwithherownhealthstruggle.“Forthefirst timeshe started sharingwithmehowshe felt—andshe feltvery lonely,”Lozanorecalls.“Asafamilywedidn’tunderstandwhatshewasgoingthroughandworse,wekeptblamingher forherowndisease.Wethoughtshewas justeating too much sugar and that she didn’t really want to get better.” Moreworrying,Lozano’smothersaidshewassimplyexhaustedwiththefighttofeelbetter.“Shedidn’twanttogetcareanymore,”Lozanorecalls,hisvoicechokedwithemotion—evenifthismeantthatshecoulddiefromdiabetes.

Lozanowasshocked.Howhaditgottenthisbad?HisfamilyinMexicohadaccess to private health care—an advantage not shared by themajority of themillions ofMexicans dealing with the disease on a daily basis. If it was thisdifficult for his mother, it must be many times worse for the ten to fourteenmillion people believed to be living with diabetes in Mexico. “That was my‘aha!’ moment,” Lozano says. “Diabetes is a catastrophe in Mexico.” Mostpeoplecannotaffordqualityhealthcare, leaving thosewhocan’tmanage theirdiabetes with a litany of terrible health problems. In Mexico, uncontrolleddiabetes is the leadingcauseofdeath,amputations,blindness,and inLozano’shomestateofNuevoLeónitistheleadingcauseofsuicide.

Those problems were not ones Lozano was content to ignore. And so hebegan to plan his assault on the diabetes epidemic in Mexico. He initiallyimaginedstartinganonprofitthatwouldhelppoorpeoplegetaccesstodiabetescare—acost,heroughedout,of$1,000apersonayear.Askingpatientstochipin $200 a year seemed possible, but to come upwith the remaining $800 perperson hewould need a steady stream of donations and reliable backers whowould have to support his mission year after year. Having spent some of histeenage years working for a nonprofit helping indigenous communities gainbetteraccess to toolsand technology tocreatemoresustainable farms,Lozanofound that the thought of having to raise that money, consistently, wasoverwhelming. Such projects, he knew from his own experience, are verydifficult to scale anddependon thewhims andpriorities of donors. “You canhope to be the passion project of a couple of people,” he said, “including theindividualdonorsorpeoplerunningtheorganizations,butit’salmostimpossibletofindasustainablefundingsource,yearafteryear.”

SoLozanostartedtothinkaboutthechallengeentirelydifferently—throughthe lensesofnonconsumption and Jobs toBeDone, theorieshe learned inhisdaysatMITandoneshequicklyputtouseinMexico.Therewerenotthatmanyactivediabetespatientsusing theexistinghealth-careoptions.Likehismother,theywereoftendoingalmostnothing tomanage thedisease,notbecause theydidn’t care about their health, but because their options for improving theirsituation felt overwhelming. Lozano saw immense opportunity in thatnonconsumption.

After completing hisMBA in 2011, Lozano foundedClinicas delAzúcar,which directly translates to “sugar clinics.” If patients couldn’t afford privateinsuranceor$1,000ayearfordiabetescare,Lozanorealizedhe’dhavetomakea businessmodel thatworkedwithwhat they could afford. Lozano set out tocreatewhathecalls theMcDonald’sofdiabetescare—aone-stopshop todealwith all issues related to caring for diabetes. For an annual membership ofroughly$250,diabetespatientsandtheirsupporterscanvisitanycliniclocationand quickly run through various “stations” that address each challenge oftracking andmanaging their diabetes.Lozano says he considers the Job toBeDone of each individual station to select the best technology and humanresourcetoprovidethecareforthatmomentwithpatients.

The service is not pampering, but it’s effective in every way. As of thiswriting, the Clinicas del Azúcar are now the largest private care provider ofdiabetescareinMexico,withtwelveclinicsandonapathtoreachtwohundredin thenextfiveyears.Lozano’smotherwas,hereports,patientnumberfiveathis firstclinic:a statistic thatannoysher to thisdaybecauseshewanted tobe

patientnumberone,buttoomanypeoplewereaheadofherinlinethedaytheclinicopened.Shehasbeenamodelpatientineveryway.

Two years ago, when Lozano and his team were trying to improve theClinicas’ support for patients outside of their routine visits, they realized thatcallsfromwell-meaningdoctorsandnursesabouthowapatientwasdoingwereoften answeredwithwhat the patients thought the doctor wanted to hear, notwhatwasactuallytrue.“Mexicansdon’tliketohurtanyone’sfeelings,”Lozanosays. Borrowing a page from research that suggests complications fromchildbirth were dramatically reduced when the pregnant mother had a peercompanion to guide her through the process, Lozano decided to set up a callcenter staffed not bymedical professionals, but by other diabetes patients.Heaskedhismomif she’d like to run thecenter.Nowsheworks just threedoorsdownfromhisoffice,andheseesheronadailybasis—andshe’sthriving.“OnSundays,wealwayshaveabigfamilygatheringforlunch.Thesedays,mymomcan’t stop talking about what she learned and the patients she talked to eachweek,”Lozanoreports.Butit’sawelcomechangefromthetenorofthephonecall he had with his mother back when he was still at MIT. “I love thatenthusiasm.”

LozanoandClinicasdelAzúcararestillintheearlystagesofthejourneytocreating a scalable business from an unresolved Job to Be Done, and there’sworktobedonetoensurethatit’sanenduringsuccessstory.Asofthiswriting,theclinicshavetreatedmorethanthirtythousandpatients,95percentofwhomsayit’stheirfirsttimereceivingaccesstospecializedcare.Theclinicshavealsocreated hundreds of jobs, enabling people to help others and make a living.Lozanohascreatedanewmarketthatservespeoplewhoweredeemedtoopoor—amarketthatmanydoctorsandexpertsinitiallydismissedasimpossiblewhenLozanoapproachedthemwithhisidea.Whenthatkindofnewmarketiscreated,emulators and competitors follow, a process that triggers vastly moredevelopment.BesidesLozano’scompany, todate roughly tenmorecompanieshavebeguntospringupthroughoutthecountry,followingthemodelofClinicasdel Azúcar. That may be the most obvious sign that he’s hit on somethingimportant. Imagine what could happen if he is able to successfully scale hisbusinessnotonlyacrossMexico,butalsoacrossLatinAmerica.

Lozano’s success should inspire entrepreneurs across the country—look atwhat ispossiblewhenyou targetnonconsumptionwith an innovativebusinessmodel. But there are far too few stories of market-creating innovations likeClinicas del Azúcar in Mexico. In a country rife with nonconsumption, thequestionthenbecomesWhynot?

Mexico’sEfficiencyInnovationConundrum

Mexico is not a poor country.When compared with some African countries,such as Senegal and Lesotho, or some Asian countries, such as Nepal andBangladesh, or even countries in the Americas, such as Honduras andGuatemala,Mexicoisfaringquitewell,withseveralofthekeyingredientstobeprosperous.

First,fromageographicstandpoint,Mexico’sproximitytotheUnitedStates,the richest country in theworld, puts it in an advantageous position.Mexicancompanies can trade relatively easily with American firms and sell to richAmericanconsumersbecauseoftheirproximitytotheborder.

Second,MexicohashadafreetradedealwiththeUSandCanadasince1994(though, as of this writing, NAFTA’s future is unclear under the current USadministration).Thisfreetradedealessentiallyallowsallthreecountriestotradegoods relatively freely among themselves. In addition toNAFTA,Mexicohassigned twelve free trade agreementswith forty-four other countries, includingmanyintheEuropeanUnion.Itremainsoneofthecountriesmostopentotradeintheworld.

Third,accordingtoreportsbytheWorldTradeOrganization(WTO)andtheOECD,Mexicohas levelsof laborproductivitysimilar to thoseofmostmajoreconomic powers.2 Mexicans also consistently rank as the hardest-workingpeople,whenmeasuredbythenumberofhoursworked.3SouthKoreanscomeinsecond.

Fourth,Mexico’sindustrialandmanufacturingsectorisquiteadvanced.Thecountry’s main industries are aerospace, electronics, petrochemicals, andconsumerdurables.Inessence,Mexicoisnotsimplymakingandsellingsimpletoys, T-shirts, and basic raw materials to its rich neighbors; the country ismakingandexportingcars,computers,andcomplexaerospacecomponents.4

Finally, Mexico has maintained a relatively stable macroeconomicenvironmentandhaskeptinterestratesandinflationlowoverthepastcoupleofdecades.5 These factors are conscientiously monitored and meticulouslymanagedbyeconomists,financeministers,andinvestors.6

Butsomehow,evenwithallthesefactors,widespreadprosperitystillevadesMexico.7 Itmight be tempting to blameMexico’s underdevelopment on otherfactors,suchascorruptionortheeaseofdoingbusinessinthecountry.ButtheWorld Bank’s Ease of Doing Business rankings tell us Mexico is faringrelativelywellthereaswell.Itranks49thoutof190countries,higherthanItaly,

Chile,Luxembourg,Belgium,Greece,Turkey,andChina.AndalthoughMexicoisn’texcellingoneverymetric,itisdoingquitewellonacoupleofsubmetrics.For example, on “Getting Credit,” the country ranks sixth; on “ResolvingInsolvency,” it ranks thirty-first; and on “Enforcing Contracts,”Mexico ranksforty-first.Andthus,thepuzzleremains.8

But if we look at Mexico through the lens of the types of innovationsprevalent in thecountry,westart tosee thingsdifferently.Mexico isamagnetfor efficiency innovations. Many companies in Mexico—domestic andinternational—have pinned their hopes and dreams on investing primarily inefficiency innovations. Those innovations by themselves, as we described inChapter 2, do not often lead to vibrant economic development. Althoughefficiencyinnovationsarevaluable—theyreleasecashflowstoinvestors,makeorganizationsmoreefficientintheiroperations,andprovidetaxpaymentstothelocal economy for a time—they do not, on their own, create large enoughmarkets thatcanpull inandpayforother importantcomponentsnecessary forthelong-termdevelopmentofasociety.Asaresult,theymostlyonlysupportthecreation of what we described as global jobs, which can be easily movedelsewhere.

Forexample,FiatChryslerAutomobilesannounced inJanuary2018 that itdecidedtoshifttheproductionofRamheavy-dutypickuptrucksfromMexicotoMichigan in2020.FiatChryslersaid itwouldcreate2,500 jobsata factory inWarren,Michigan,nearDetroit, and invest$1billion in the facility.Until thatmove, Fiat Chryslerwas the third-largest producer of automobiles inMexico.TheexistingplantinMexicowillbe“repurposedtoproducefuturecommercialvehicles” for sale in global markets, but what, if any, future vehicles will beproducedthereremainsunclear.Justlikethat,FiatChryslermovedthousandsofglobaljobsoutoftheMexicaneconomy.

TheRiskofOverrelyingonEfficiency

Figure6:SouthKoreaandMexico,GDPpercapitafrom1960to2015

Source:TheWorldBank

In1960, fromamacroandGDPpercapitastandpoint,Mexicowasmore thantwice as rich asSouthKorea.Twentyyears later,Mexicowas still 58percentricherthanSouthKorea.9Buttoday,SouthKoreaismorethanthreetimesricherthan Mexico.10 Even more sobering is the fact is that there are more peoplelivinginpovertyinMexicotoday—approximatelyfifty-fourmillion—thantherearepeoplelivinginSouthKorea(aboutfifty-onemillion).11

Themostobviousexampleof theproliferationofefficiency innovations inMexicoisthepopularityofthemaquiladoras.Maquiladorasaremanufacturingoperations where factories import components from other countries, typicallytariff-free, to manufacture a product and export it to other markets. There’snothing wrong with maquiladoras, but they play a very specific role in theeconomy.12

Figure7:GrowthinExportsandFDIinMexico(inbillionsofUS$),1979to2015

For example, one of the visibly positive outcomes of the maquiladoraprogram,whichbegan in themid-1960s, is that it got a boon after theUnitedStates,Canada,andMexicosigned theNorthAmericanFreeTradeAgreement(NAFTA) in 1994.13 Maquiladora employment grew; exports boomed; andforeign direct investment in Mexico ballooned. The prospect of furtherindustrializingMexico with higher-value-addedmanufacturing was tantalizingtoinvestorsandpolicymakers.Audi,Ford,GeneralMotors,Nissan,andHondaare just a few of the auto manufacturers with operations in the region.14Electronics manufacturers, such as Sharp, LG, Philips, and Sony investedheavilyaswell.Attractingglobalbrandslikethisisthehopeofmostcountries.On the surface, these are all good economic indicators. However, theseinvestmentshavenotbroughtaboutthekindofprosperitymanyhopedforandenvisioned.15Wehaveidentifiedsomekeyreasonswhythisisthecase.

An efficiency innovation–based strategy—which enables companies tosqueezeasmuchaspossiblefromexistingandnewlyacquiredassets—typicallysellsitsproductsintothe“consumptioneconomy,”thosewhocanalreadyaffordexisting products on themarket.Because these innovations are not targeted atnonconsumption,theytypicallydonotcreatenewmarkets.Companiesstrugglefor market share with their competitors, because the market size can onlyincrease as the population in the consumption economy grows. Because thepotential market of those who can afford the product can only grow so fast,managerseventuallystartfocusinginsteadonincreasingtheirmarginsforeach

productsoldbycuttingcosts.Outsourcingisoneofthemosttangibleexamplesofefficiencyinnovations.16Forexample,whenFordmadethedecisionin2008tosetup theCuautitlánStampingandAssemblyPlant, theprimarypurposeoftheplantwasto“regainprofitability”forthestrugglingautomaker—theaverageMexicanworkermadeapproximatelyasixthofwhatanAmericanworkermade,whichhelpedFord saveon laborcosts.By2010, themanufacturing facility inMexicowasproducingFordFiestas and sellingmost of them to consumers intheUnitedStates.

Since Ford began manufacturing the Fiesta in Mexico in 2010 however,consumershavenotbenefittedfromthecostsavings.ThepriceofaFiestahasactually increased by 19 percent. The profits generated from increasing pricesand decreasing manufacturing costs have gone primarily to Ford and itsshareholders,as thecompanyhasnotfundamentallychangedthecoststructureofitsbusinessmodel.Withtheexceptionofintegratingcheapermanufacturing,everything else typically stays the same. In fact, in order to boost sales,investments inothercomponents in theorganization’sbusinessmodel, suchasadvertising,marketing,andsales,mightactuallygoup.Mexicowillseelittletononeof those investments; it is thecountrywhere thebulkof theproductsarebeingsoldthatwillreaptherewards,andinthiscasethat’stheUnitedStates.

SELLINGPRICEOFAFORDFIESTA

Figure8:Manufacturer’sSuggestedRetailPrice(MSRP)ofFordFiesta,2011to2017

Source:U.S.News&WorldReport

Another reason an overreliance on efficiency innovations has not broughtsustainedandwidespreadprosperitytoMexicoisbecausetheseinvestmentsareoften too easilymoved elsewhere, especially as lower wages emerge in otherregionsorasmountingpoliticalpressureinothercountriestocurboutsourcingprevails.Thefootloosenatureofefficiencyinnovationsdoesnotenablethemtocreatevibrantmarketsthatcanpullinothercomponentsofathrivingeconomy,suchasgoodschools,goodroads,oragoodhealth-caresystem,whichcanallbesustainedbythelocaleconomy.Inrarecircumstanceswheretheseinvestmentslead to investing in other supporting infrastructures, the infrastructures aretypicallyconnectedtooneparticularindustry.

ConsiderCarrier’sdecisiontohaltthetransferofhundredsofjobstoMexicoorFord’sdecisionnottobuildaplantinthecountryafterthosecompaniesfacedpressure from theUSgovernment.Suchdecisions aremoreeasilymadewhencompanyexecutivesdon’thavetoworryabouttheimpactonlocalmarketsandcanfocusonlyonimprovingsupplychainorlaborcostefficiencies.

Whenaneconomyisdependentonwagesofcitizensremaininglow,itisnotbeingdrivenbythrivingandvibrantmarketsthatcanenablethedevelopmentofnewproducts.Since1990,averageannualwages inMexicohave increasedbyjust13percent.Inthatsameperiod,wagesintheUnitedStatesandSouthKoreahaveincreasedbyapproximately37percentand65percentrespectively—evenwhenstartingfromamuchhigherbase.

AVERAGEANNUALWAGESBYCOUNTRY

Figure9:Averageannualwages,in2016constantpricesat2016USDPPPs

Finally,theproliferationofefficiencyinnovationsinMexicoisnotcreatingprosperity because efficiency innovations are typically targeted at growth thathas littleornothing todowithmarkets in thecountry,and thiscanbehard tomanage.Forexample,Mexicoisoneoftheworld’slargestoil-producingnationsandhashistoricallyexportedtensofbillionsofdollars’worthofcrudeoiltotheUnitedStates.However,thedropincrudeoilpriceshasdrasticallyreducedthevalueofMexico’scrudeoilexports,fromapproximately$37billionin2012to$7.6 billion in 2016.17 Because a significant part of its economy ultimatelydependsonsomethingithaslittlecontrolover(thefluctuationofoilpricesanddemand from other nations) Mexico struggles to have control over a criticalcomponentofitsowneconomicgrowth.

AsimilarphenomenonisalsoplayingoutinRussia.From an export standpoint, Russia’s economy is very different from

Mexico’s. In fact, they appear to be polar opposites. For instance, Mexico’slargestexportsarevehiclesandautomobileparts(approximately24percent)andelectricalmachinery (approximately 21 percent);Russia’s are crude petroleum(26 percent), refined petroleum (16 percent), and several other commodities.Mexico’s exports suggest a more industrialized and thus more economicallyadvancedcountry,whileRussia’ssuggestanoverlyresource-dependentcountrywithoutmuch industry.Uponcloserobservation,however, thephenomena thatdrivebotheconomiesareidentical:efficiencyinnovations.

AswedescribedinChapter2,resourceextractionindustriesarenotoriousforfuelinginvestmentsinefficiencyinnovations.Managersintheseindustriesseektosqueezeoutasmanyresourcecostsastheycan.Althoughthiscanbeagoodthingfromthecompany’sperspective,itdoesnotoftenleadtovibranteconomicdevelopment, exceptwhen thenation’spopulation isvery small, like inQatar.Andeventhen,jobshavetobecreatedfromothersectorsintheeconomyastheindustrydoesnotcreateenoughjobstokeeppeoplemeaningfullyemployed.

AtthecoreofRussia’seconomy,muchlikeMexico’s,isanoverrelianceonefficiency innovations.Consider, for instance,how themovement inoilpricesimpacts the Russian economy. From 1998 to 2008, while oil prices increasedfromapproximately$18to$103,in2017dollars,18Russia’seconomyaveragedagrowthrateof7percent.However,thatkindofgrowth,fueledinlargepartbytheincreaseincommodityprices,doesn’tnecessarilytranslatetoanincreaseinjobs or a notable development impact on Russia. And because the growth isoftenunpredictable,itcancreateshockwaveswhenthecommoditypricesdrop,somethingwesawhappeninRussiaafewyearsago.Asoilpricescooleddown,Russia’seconomycontractedby2.8percentin2015andanother0.2percentin

2016.Onthesurface,efficiencyinnovationsseemtoholdalotofpromiseinpoor

countries because they are typically characterized by manufacturing,industrialization,and,sometimes,heavy industries.But insteadof realizing thepromiseofprosperity,anoverrelianceonefficiencyinnovationsoftenpromotesshort-term,fragileinvestmentsthatleavesocietiesinaprecariousposition.

ThroughaDifferentLens

Mexico’s population is approximately 127million and it has a GDP ofmorethan$1.1trillion;LatinAmericaishometoover600millionpeopleandhasaGDP of more than $5.5 trillion. When many people analyze the potential ofthese regions, they note the GDPs, per capita incomes, levels of education,infrastructure,orpovertyrate—whichdonotprovidealotofhope.Butweseesomething different. We see nonconsumption and its enormous potential. Intheseregions,wearelookingforthedailystrugglesthathundredsofmillionsofpeopleface,andthereweseeopportunity.

Mexicoandmanyothernationsthatarenotyetprosperoushavetheabilitytobecome thriving nations. But for prosperity to come about, especially incountries as populated asMexico, we have to think about how to create newmarketsthatservethevastnonconsumption.Andwedoseesomehopefulsigns.

MichaelChu,managingdirector of the IGNIAFund and senior lecturer atHarvardBusinessSchool,sitsinanofficetwodoorsdownfrommine.19WhenIspokewithhimaboutsomeofourideas,heintroducedmetoacompanycalledOpticasVerDeVerdad(Opticas),whichistargetingMexico’snonconsumptionofvisioncare.Opticaswasfoundedin2011withabusinessmodeldesignedtoprovide affordable prescription lenses and eye-care services for the averageMexican.Approximately 43 percent ofMexicans have a visual deficiency forwhich they need corrective eyeglasses.Many of the existing solutions on themarket,whichonaveragecost$75,are tooexpensiveformostpeople.AndsotoomanyMexicanssimplygowithoutglassesandlivewithoutgoodsight.

Instead of analyzing the potential in Mexico through the lens of poverty,Opticas is analyzing it through the lens of struggle.Howmight a newpair ofglasses impact the lifeof an electrician, or aplumber, or anurse?Howmightaffordableglassesaffectthelifeofabrillianttwelve-year-oldgirlwhoisunabletoseeclearlywhatshereads,andasaresultisdoingpoorlyinschool?

AsopposedtobuildingabusinessthattargetsthewealthiestMexicans,who

can afford high-end brands such as Ray-Bans, Opticas is focusing on solvingthatstruggle.Thecompanyhasdevelopedasimplebusinessmodelthatallowsittoprovideprescriptionlensesforaround$17.Itsmarginsmightbelow,butitsvolumeshavethepotentialtobeveryhigh(atonepoint,FordMotorCompanymade just two dollars on eachModel T car the company sold—but also soldmillions of them). And Opticas’s fiercest competitor for this market onnonconsumerswouldbenothing:peoplewhowouldrathersufferpooreyesightand do nothing than try to find the money (and time) to acquire prescriptionglasses they can’t afford. Opticas opens stores in convenient locations, offerscustomers freeeyeexams,andprovides inexpensiveprescriptions.Thiscanbelife-changingforpeoplewhohadpreviouslyresignedthemselvestolivingwithpoor eyesight. Now anyone can walk into a store, get tested quickly, andpurchaseprescriptionlenses.

Sinceopening its firststore,Opticashasperformedmore than250,000eyetestsandhassoldover150,000pairsofglasses—meaning150,000peoplewhopreviouslywere not buying any prescriptions glasses have now come into themarket.Thecompanyisslowlymakingthenonconsumptionof“sight”athingofthepastinMexico.AndMexicansarerespondingtotheopportunityverywell.As of this writing, Opticas is planning to operate over 330 stores across thecountryby2020.

BreadandDevelopment

Emergingmarketsarepepperedwithampleopportunitiestocreatenewmarketsthat canyield significant returns if youknowwhere to look for them.But thecreation of new markets typically requires patience as the nonconsumers arefound, understood, and then served. Once a market is created, however, it isdifficult to destroy. Markets fundamentally change the way people live theirlives, andwhenyou are responsible for creating amarket, the rewards canbeabundant.TheServitjefamily,whoowns37percentofGrupoBimbo,canattesttothatfact.Today,theyareworthmorethan$4billion.20

ThenameGrupoBimbomightnotbefamiliartoyou,butit’sthesourceofsome of the world’s most beloved baked goods, including Thomas’ EnglishMuffins,SaraLee,Entenmann’s,andCanadaBread, just tonameafewof thebrands thisMexicanbakerygiant owns andmanages.Today,GrupoBimbo isthe largest bakery in the world. The company grosses more than $14 billionannually,operates165plants in22countries, andemploysmore than128,000

peopleglobally.21Withamarketcapitalizationofover$11billion,BimboalsoownsmorethanonehundredbrandsandsellsitsproductsinEcuador,Colombia,andPeru,aswellasintheUnitedStates,theUnitedKingdom,andChina.Itistruly a global company.But in 1945,when the founders ofBimbo started thecompany, they didn’t set their sights on exportingAmerican favorites to theirwealthierneighbors to thenorth. Instead, they envisionedways tomakebreadanddistributeittotheaveragepersoninMexicoCity.Inotherwords,theywerefocusedoncreatinganewmarketforfreshbreadinMexico.

It’seasytoassessBimbo’ssuccesstodayandnotappreciatethecompany’shumblebeginnings.In1945,Mexico,likemanyothercountriesatthetime,wasverypoor—muchpoorerthanitistoday.Lifeexpectancywasaroundforty-fiveyears and more than half the country lived in rural areas and engaged inagriculture—typicallyasignofpoverty.But itwas in thesecircumstances thatthe founders of Bimbo saw immense opportunity to create a market for theaverageMexicanforwhomfreshbreadwasaluxury.

AlthoughBimbosellsmore than ten thousanddifferentproducts today, thecompany started by baking and selling small loaves of white and rye bread.BimbofocusedontargetingaverageMexicanswho,in1945,mostlyhadaccessonly to moldy bread wrapped in opaque packaging. Capitalizing on thisopportunity to differentiate itself, Bimbo’s first product innovation waswrapping itsbread incellophanebags—socustomerscould see that theywerebuyingmold-free bread before they brought it home.Aswe described earlier,innovationisnotonlyabouthigh-techsolutions;itisthechangeintheprocessesbywhich an organization transforms labor, capital,materials, and informationinto products and services of greater value. That doesn’t necessarily involvecutting-edge technology. In this case,making fresh bread and packaging it intransparentbagswastherelevantinnovationnecessarytohelpBimbocreateandgrowthismarket.Butevenmoreimportantthanfindingawaytosellmold-freebreadorbetterpackagingwasBimbo’sdecisiontotargettheaverageMexican—who simply wanted the experience of providing good, fresh food for theirfamilies.

IfBimbohaddecidedtoserveonlythosewhocouldaffordexpensivebread,itmightnothavemadesomeoftheinvestmentsnecessarytocreateandgrowamarket inMexico. For instance, in order to guarantee a predictable supply ofqualityflourforitsfactories,Bimbobuiltandacquiredseveralflourmills.Withamillingcapacityoftwothousandtonsperday,Bimbohadbecomethenumbertwoflourmillinthecountryby1997.Integratingmillingintoitsoperationswasnot an option for Bimbo, just as integrating steelmaking and mining into hiscompany’s operationswas not an option forHenry Ford. These things simply

had tobedone inorder to create and serve themarkets thesecompaniesweretargeting.

Although the up-front investment was high, Bimbo’s mills quicklytransitioned fromacostcenter toaprofit centeras thecompanybegansellingexcess output to outside customers.Bimbo also needed to integrate the actualfarming and cultivation of wheat. In the 1980s, more than 60 percent of thewheatBimbousedwas imported. Inorder to reduce itsdependenceonforeignwheat, Bimbo decided to invest in Mexican farmers. The company providedcapitaltoMexicanfarmerstopurchasequalityseedstockandthenpurchasedtheharvestfromthefarmers.

As the company grew, scaling human capital to manage the growth alsobecame a problem. Bimbo executives realized they needed to supplement theeducationtheirnewhireswerereceivingfromthetraditionalMexicanschoolingsystem.Andsotheycreatedastructuredtwo-yearmanagementprogramwhereemployees learned both technical skills and the intricacies of the Bimbobusiness.

In order to grow and sustain a successful bread market that caters to theaverage Mexican, Grupo Bimbo has directly supported many markets andindustries, including agriculture, milling, financial services, education,distribution and logistics, packaging, and several others. Indirectly, it hasenabledtheflourishingof themarkets that its thousandsofemployeessupport,includingtheirhousing,education,healthcare, transportation,andleisure.Andthesearenotsimplymarkets thatcanmovefromonecountry toanotherwhenwagesincrease.Thesearevibrantmarketsdeeplyrootedinthelocaleconomy.

Thesemarketsarevibrant largelybecause they integratemanycomponentsin Grupo Bimbo’s value chain, including sales and distribution, marketing,advertising, and so on. And these markets are sustainable because they areconnecteddirectly to the localpopulation.IfGrupoBimbo’s impact isstillnotimpressive enough, consider this: Grupo Bimbo pays its lowest-ranking staffmorethanthreetimestheMexicanminimumwage.22Andthecompanyhasstillbeenable tokeep itsprices15–25percent lower than thoseof itscompetitors.GrupoBimbohasbecomesomuchmorethanabreadcompany.

Investors, development practitioners, and policy makers should see GrupoBimboasasymbolofwhatispossible.ButthegapinyearsandscalebetweenBimbo and the smaller, hopeful success stories of companies likeClinicas delAzúcarorOpticas is still far toowide.Werecognize that thesecompanies,bythemselves, cannot single-handedly make a nation as large as Mexicoprosperous.Buttheprinciplesguidingthem—developingproductsandservicesfortheaverageMexicanandpullinginthenecessaryresourcestosucceed—can.

HitchingitsfuturetotheprospectofcontinuedexportandtradewiththeUSandothersuperpowers—tradebasedprimarilyonefficiencyinnovations—isnota long-term strategy for stable prosperity. In 2018, Bloomberg BusinessweekestimatedtheenormouspotentialhittoMexicoshouldthepoliticalhotpotatoofNAFTA disappear. “The greatest job loss could come from U.S. companiesshuttingdowntheirMexicanfactoriesandmovingthemtoanothercountry,likeForddidlastyearwhenitcanceledplanstobuildacarplantinthecityofSanLuis Potosi, and built it in China instead. The $1.6 billion investment wouldhavedirectlyemployedalmost3,000peopleandwouldhaveprovided indirectjobs to about 10,000 more.”23 Oxford Economics, a global forecasting andquantitative analysis think tank, estimated that, should theNAFTA agreementcollapse,Mexico’s gross domestic productwould lose 4 percentage points by2022andfallintoatechnicalrecessionbymid-2019—takingdecadestorecover.

Foryears, internationalscholarsandmediapunditshavepointedtoMexicoas the next potential superpower—but it’s always stuck there. Potential. Webelieve that Mexico does, indeed, have the potential to become one of theworld’s great success stories in creating prosperity, and the efforts ofClinicasdel Azúcar and Opticas give us hope that the country can break the cycle ofalmost,butnever fully,getting there.But that isnotgoing tohappenuntil thecountry recognizes that different types of innovations impact its economydifferently.It’snotgoingtogettherebyrelyingonefficiencyinnovationsalone.

NOTES1. “Vicente Fox,” PBS interview Commanding Heights, interview conducted April 4, 2001,http://www.pbs.org/wgbh/commandingheights/shared/minitext/int_vicentefox.html.

2. FromtheOECDwebsite:“GDPperhourworkedisameasureoflabourproductivity.Itmeasureshowefficiently labour input is combinedwithother factorsofproductionandused in theproductionprocess.Labour input is defined as total hoursworkedof all persons engaged inproduction.Labourproductivityonly partially reflects the productivity of labour in terms of the personal capacities of workers or theintensityoftheireffort.”

“GDP per hour worked: OECD Data,” OECD, accessed April 10, 2018,https://data.oecd.org/lprdty/gdp-per-hour-worked.htm.

3. David Johnson, “These Are the Most Productive Countries in theWorld,” Time, January 4, 2017,http://time.com/4621185/worker-productivity-countries/.

4. In 2015, according to theObservatoryofEconomicComplexity,Mexico’s five largest exportswerecars,$31.4billion;vehicleparts,$26.2billion;deliverytrucks,$23.4billion;computers,$21.2billion;andtelephones, $15.7 billion. More than 80 percent of Mexico’s exports end up in the United States. SeeMexico’s profile on the Atlas for Economic Complexity site here:https://atlas.media.mit.edu/en/profile/country/mex/.

5. Mexicohasmaintainedanaverageinflationrateof3.9percentsince2006.Realinterestratesin2015hovered around 0.9 percent; Iceland, the United States, and Switzerland had real interest rates of 1.6percent,2.2percent,and3.3percentrespectively.

6. FDI inMexico in1993wasapproximately$4.3billion; twentyyears later, in2013, ithad increasedmore than eleven times, reaching approximately $47.5 billion. This increase in FDI is due in part toMexico’srelativelystablemacroeconomicenvironment.

7. The fact that Mexico doesn’t simply export toys and T-shirts is important. Research by HarvardUniversity’sRicardoHausmannandMIT’sCésarA.Hidalgohashelpedusunderstandthatthecomplexityof a country’s economy (how sophisticated the products it makes are) is highly correlated with itsdevelopmentlevel.Morecapablecountriesthatcanproducemoresophisticatedproductstendtobericher.

CésarA.HidalgoandRicardoHausmann,“Thebuildingblocksofeconomiccomplexity,”ProceedingsoftheNationalAcademyofSciences106,no.26(June2009).

8. “Economy Rankings,” Doing Business, The World Bank, accessed April 2, 2018,http://www.doingbusiness.org/rankings.

9. For a more in-depth economic history of Mexico pre-1960, read Section 2 of “Catch-up GrowthFollowed by Stagnation: Mexico, 1950–2010,” written by Timothy J. Kehoe and Felipe Meza,https://www.minneapolisfed.org/research/wp/wp693.pdf.

10. From a business standpoint, even thoughMexico hasmore than twice the population ofKorea andenjoys thebenefitswementionedabove, thecountryhas justninecompaniesonaForbes listof theonethousandbiggest public companies, comparedwithSouthKorea’s thirty-one.Also,SouthKorea’s creditrating is currently AA2, the third highest, according toMoody’s Investors, and AA-according to Fitch.Mexico’sisA3withanegativeoutlookaccordingtoMoody’s,anditisBBB+accordingtoFitch.Bymostmeasures,SouthKoreaisoutperformingMexicoeconomically.

11. AnahiRamaandAnnaYukhananov,“Mexicangovernmentsayspoverty rate rose to46.2percent in2014,” Reuters, July 23, 2015, http://www.reuters.com/article/us-mexico-poverty-

idUSKCN0PX2B320150723.

12. GordonHanson,of theUniversityofCalifornia inSanDiegoand theNationalBureauofEconomicResearch,haswrittenextensivelyaboutMexicoandtheroleofmaquiladorasintheireconomy.His2002paper,“TheRoleofMaquiladorasinMexico’sExportBoom,”forinstance,highlightssomeoftherisksandrewardsassociatedwiththiscomponentoftheMexicaneconomy.

GordonH.Hanson,“TheRoleofMaquiladoras inMexico’sExportBoom,”UniversityofCalifornia,SanDiego,accessedApril30,2018,https://migration.ucdavis.edu/rs/more.php?id=8.

13. ThefiveyearsbeforeNAFTA,employmentinmaquiladorasgrewby47percent,butinthefiveyearsfollowing the enactment of NAFTA, employment increased 86 percent. Additionally, in themid-1980s,maquiladoras employed approximately 180,000 people; by 2000, the system employed more than onemillionandgeneratedapproximately50percentofMexico’sexports.Hanson,“TheRoleofMaquiladorasinMexico’sExportBoom.”

14. GaryHufbauer,formerlyoftheCouncilofForeignRelationsandprofessoratGeorgetownUniversity,notesthat“thetransformationoftheautoindustryinMexico,asaresultofNAFTA,wasnothingshortofdramatic.Itwas,infact,thebiggesttransformationofanyindustryinallthreeofourcountries[theUnitedStates, Canada, and Mexico].” Prior to NAFTA, auto manufacturing in Mexico was a very protectedindustrywhere cars could cost two to three times the cost of production in theUnited States.NAFTA,whichpromotedefficiency innovations in the region, reduced thecostofproductiondramatically.SonariGlinton, “How NAFTA Drove the Auto Industry South,” NPR, December 8, 2013,http://www.npr.org/templates/story/story.php?storyId=249626017.

15. We focuson exports herebecause,while they arenot the entiretyofMexico’s economy, they are amicrocosmofit.Exportsaccountformorethan35percentoftheMexicanGDP,thefourthhighestamongtheworld’stoptwentymostpopulouscountriesandthehighestofanycountrywithapopulationofmorethanonehundredmillionpeople.

16. Morebroadly,Mexicoexports threeoutofevery fourcars itmanufactures,mostofwhichgo to theUnitedStates.SaraMillerLlana,“Mexicopreparesfor(Ford)Fiesta,”TheChristianScienceMonitor,June2,2008,http://www.csmonitor.com/World/Americas/2008/0602/p06s02-woam.html.

17. In2015,about9percentofthecrudeoilimportedbytheUnitedStatescamefromMexico.Earningsfrom crude oil sales represent a significant portion of Mexican exports and the Mexican economy,providingalmost$20billionannually.

“U.S.energy tradewithMexico:U.S.exportvaluemore than twice importvalue in2016,”Today inEnergy, U.S. Energy Information Administration, February 9, 2017,https://www.eia.gov/todayinenergy/detail.php?id=29892).

18. Tim McMahon, “Historical Crude Oil Prices (Table),” InflationData.com, August 27, 2017,https://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp.

19. IGNIA Fund is a venture capital firm in Mexico dedicated to investing in innovative companiesdeliveringhigh-impactgoodsandservicestolow-incomepopulations.Thecompanyhasraisedfundstwice.In2008,IGNIAraised$102millionfromOmidyarNetwork,JPMorgan,InternationalFinanceCorporation,andtheInter-AmericanDevelopmentBank.In2015,itraisedasubsequentfundworth$90millionthroughMexican publicly traded certificates known as CKDs. IGNIAwas also the first venture capital fund inMexico to raise capital fromMexican pension funds, signaling investors’ “confidence in IGNIA’s trackrecord, aswell as the accelerated economic growth found at the base of the socio-economic pyramid inMexico.”

20. “Daniel Servitje Montull & family,” Forbes, accessed April 30, 2018,https://www.forbes.com/profile/daniel-servitje-montull/.

21. Somemight look atGrupoBimboand suggest that the companyputmanyMexicanbakeriesout ofbusinessandthat,ineffect,itwasbadfortheMexicaneconomy.Whilethatistrue,itmissesthesignificantimpactGrupoBimbohashadandishavingontheMexicaneconomy.GrupoBimbocanbelikenedtotheFordMotorCompany,specificallyduringtheeraoftheModelT.BeforetheModelT,thereweremorethanonethousandautomobilemanufacturersintheUnitedStates.Manyofthemweremakingcustomcarsforwealthyindividuals.WhenFordintroducedtheaffordableModelT,almostallwentoutofbusinesssaveafew.ButitwouldbehardtoarguethatFordwasnotgoodfortheAmericaneconomyasaresult.Considerhow he impacted steel production, glass manufacturing, R&D for engines and automobiles, regulation,agriculture, road construction, gas stations, auto-repair shops, iron ore mining, paint production, higherwages,andmanyotheraspectsoftheAmericaneconomy.AlthoughbreadisnoModelT,GrupoBimbohasalso positively impacted theMexican economy, even though smaller and perhaps less efficient bakerieshavebeenputoutofbusiness.Thecompanyhasimprovedagriculture,distributionandsupplychain,andeducation,andhasalsoincreasedwages.

22. Infact,GrupoBimbodoesn’tjustpayitsMexicanworkerssubstantiallymorethantheminimumwageinMexico;itpayseverybody,includingitsAmerican,European,LatinAmerican,andAsianworkers,more.On average,GrupoBimbo pays its lowest-ranked staff about twice theminimumwage in the countrieswhere it conducts business. “Grupo Bimbo Annual Reports,” Grupo Bimbo,https://www.grupobimbo.com/en/investors/financial-information/annual-information.

23. Andrea Navarro, “This Mexican Town Paid the Price for Trump’s Attacks on Ford,” Bloomberg,February1,2017,https://www.bloomberg.com/news/articles/2017-02-01/when-trump-s-taunts-cowed-ford-this-mexico-town-paid-the-price.

Section3

OvercomingtheBarriers

Chapter8

GoodLawsAreNotEnough

Liberalizing states will have to actively create the institutional structures within which marketeconomiesoperateandredefine theparticularrights,entitlements,andresponsibilities thatunderlieeconomicactivity.

—WILLIAMROY,SOCIALIZINGCAPITAL:THERISEOFTHELARGEINDUSTRIALCORPORATIONINAMERICA

TheIdeainBrief

The lack of “rule of law” and “institutions”1 is a plague that affects poorcountries. These countries can’t hope to make progress until they fix theirinstitutions—which often means they should adopt Western-style systems,conventional wisdom suggests. “If only we had X or Y institution in place,people could finally build and sustain businesses.” To that end, billions ofdollars are invested annually by many organizations to help poor countriesimprove their institutions. Institutionsarepushedonto thesecountrieswith thebestofintentions,butcouldtherebeareasonwhysomany“pushed”institutionsinemergingeconomiesendupbeingineffective,or,worse,corrupt?Wecannotfix problemswith the law, systems, and institutions by simply adding anotherlaw, system, or institution. Effective institutions are not just about rules andregulations.Ultimately, institutions are about culture—howpeople in a regionsolveproblemsandmakeprogress.Attheircore,institutionsreflectwhatpeoplevalue.Andthat,itturnsout,hastobehomegrown.Innovationcanplayacriticalroleinthisprocess.

*

In thespringof1990, twodozenof theWesternworld’s leadingconstitutionalscholars,lawyers,andjudgesgatheredinPragueforwhatseemedlikeaonce-in-

a-lifetimeopportunity:tohelpguidethedraftingofacountry’snewconstitution.InthemonthsafterthedownfalloftheformerSovietUnion,Czechoslovakia(aswellasvirtuallyeveryother formerSovietBloccountry)began theprocessofredefining its values, in a post–Soviet Union world, through the process ofcreatinganewconstitution.TheWesternscholarswhowereinvitedtoguideandadviseonthisprocesscouldn’tgettherefastenough.AstheNewYorkTimesputit, a constitutional convention is hard to resist. “I rescheduled three classes tocometothis,”HarvardLawSchoolprofessorLaurenceTribetoldtheTimes.“Ihaven’teverrescheduledaclassforaSupremeCourtcase.”

Among the legal luminaries:LloydCutler, former counsel toUSpresidentJimmy Carter; retired Senator Charles Mathias Jr.; Charles Fried, the formersolicitor general under US president Reagan; former Canadian primeministerPierreTrudeau;andMartinGarbus,atthetimeoneoftheUS’sleadinghumanrights lawyers. The invited delegates, from eight different countries, spent aweek debating and discussing the merits of various approaches to crafting aconstitutionthatwoulddividepowerbetweentheCzechandSlovakregionsofthecountry.Itwasanexcitingendeavor,onethatledtolargeandsmalldebatesattheconference,onthebusbetweenvenues,andinthehallwaysfordays.AsUniversity of Virginia law professor Dick Howard put it at the time, “Forsomebodywhocouldn’tbetherein1787[whentheUScreateditsconstitution],thisisthenearestthingtoit.”

Twoyears later,with thebenefitof theconstitutionaldream team’sadviceand months and months of work by leading Czechoslovakian politicians andscholars, a new constitution was finally drafted and adopted as part of thepeaceful breakup of the country into two new ones: the Czech Republic andSlovakia.

Similar rituals happened throughout the formerCommunist bloc countries,includingRomania,Hungary, the formerYugoslavia, andBulgaria, to name afew.Westernconstitutionalscholarsjumpedatthechancetoguidethesenewlyformeddemocraciesonhowtogettheirinstitutionalvaluesrightfromthestart.Good economic and political institutions protect secure property rights,democratic pluralism, openmarkets, consumers, and so on.Alternatively, badeconomic and political institutions protect oligarchies, single-party systems,cronycapitalism,nepotism,dysfunctionaljudiciaries,rampantcorruption,andsoon. In general, poor countries are overwhelmed with bad institutions, whileprosperous countries are filled with good ones, or at least much better ones.Conventionalwisdom suggests that countries thatwant to tackle povertymustfirstestablishruleoflaw,fixtheirinstitutions,andadoptWestern-stylesystemsbeforetheycanmakeprogresstowardprosperity.

But that is often not how the march to healthy institutions plays out inreality.Onthesurface,itseemslogicalthatestablishingtherightinstitutions—whatNobel laureate Douglass North describes as “the rules of the game in asociety or, more formally, the humanly devised constraints that shape humaninteraction,”2—is important to building economic prosperity. Seen this way,institutionsmight logicallybepushedontoasociety,perhapsbyagovernmentoraveryinfluentialNGO,tohelppavethewayforgettingthisright.

Though the former Czechoslovakia has made enormous strides since thatconstitutionalconvention, thenewconstitutiondidn’tmagicallycreatean idealcountry.Forexample,corruptionisstillprevalentinvaryingdegreesthroughouttheCzechRepublic.3Morethantwo-thirdsofbusinessesconsidercorruptiontobewidespreadinnationalandlocalpublicprocurement,forexample,accordingto a 2014 European Commission report. That’s not to say that the CzechRepublicisawhollybadormorallybankruptcountry.Itisanevolvingcountry,withevolvinginstitutions.

Oneofthedistinctfeaturesofaneconomywithvastnonconsumptionisthelack of infrastructural and institutional competency. Harvard Business SchoolprofessorsTarunKhannaandKrishnaPalepucallthese“institutionalvoids.”Tothat end, in the world of economic development, there is intense focus oncreating good institutions in poor countries as a necessary precondition ofhealthyeconomicgrowth.From2006 to2011,more than$50billion inWorldBank–sponsoredprojectshadsomefocusoninstitutionalreforms.4ExamplesofinstitutionsthathavebeenpushedrangefromWesternlawyersrewritingEasternEurope’slawsasaconditionfordisbursingforeignaid,totheBritishinitiatingprivatepropertyrightsinpartsofKenyainthehopesofincreasingtransparencyand certainty. However, without understanding the complex local socialstructuresinwhichthesesocietieshaveevolvedovertime,manyofthepushedinstitutions fail to deliver on their promise of efficiency and transparency.Instead,theyunintentionallyoftenbreedconfusionandcorruption.

The problem is, the institutions of a society reflect its values rather thancreate them. So building strong institutions—ones that will shape and hold acountry’s values for generations—is not as simple as “export what workselsewhere,addwater,andstir.”5

That’s because there’s a fundamental mismatch between the efforts to“import” institutional underpinnings—such as court systems, forms ofgovernance,financialsystemslikestockmarketsandbankingpractices,andlawenforcementsystems—forapoorcountryandtherealityofhowinstitutionsandvalues are formed in any country, says Lant Pritchett, a senior fellow at

Harvard’s Kennedy School of Government and longtime economist with theWorld Bank. Outside experts “tend to focus on the rules because it’s theircomparative advantage,” explains Pritchett. “We tend to bring experts in tocreate rules that work elsewhere, but make no sense in a different context.”There may be, say, two hundred pages of legislation about health care inDenmark,forexample.ButthosepagesdonotexplainwhatmotivatesaDanishdoctororwhyfundinganationalizedhealthsystemisapriorityinthatcountry.That,Pritchettsays,“isanormativestory.”

Pritchett is right. Institutions are not something that can be pushed in byvirtueofgoodintentions,evenwithalltheexpertiseintheworld.Institutionsarenot absolutes. Theymorph and evolve in context. A society’s institutions aretypically a reflection of the culture and values of the people of that society—valuesthatdictatehowproblemsaresolvedandhowpeoplechoosetoworkandlive together. And even when the intentions are to help spur an economy’sgrowth,effectiveinstitutionscannotsimplybepushedin.Theyrequirepull.

Thereisgrowingevidencethatpushinginstitutionsisn’thavingthedesiredeffects on creating and sustaining well-functioning systems in many poorcountries.Bysomeestimates,asmuchas70percentofreformshavehad“mutedresults.”6Ineffect,ifthefundamentaldynamicsofasociety—whatpeoplevalueand how they choose to make progress—have not changed, newly imposedinstitutionsaredoomedtofail.

HowNottoFixProblems

InarecentWorldBankpapertitled“How(Not)toFixProblemsThatMatter,”development specialists Kate Bridges and Michael Woolcock go into detailabout this phenomenon. Using Malawi as a case study, they profile severallearningsfromthecountryoverthepastfewdecades.Therewasheavyemphasison institutional reform in Malawi: the number of projects focused oninstitutional reform in some manner (171) far outweigh those focused on thenext four development areas—industry and trade; agriculture, fishing, andforestry;healthandsocialservices;andeducation—combined(151).Onitsown,perhaps thatwouldn’tbesuchaproblem.However,what thepapergoeson toillustrate is that not only domanyprograms focused primarily on institutionalreformeventuallyfail,butalsothatwekeepdoingthesamethingoverandoveragain.Andfailing,overandoveragain.7

Partoftheproblem,BridgesandWoolcocksay,isthatweoftendon’tstudy

and understand the full complexity of the problem, and as a result fail to“deinstitutionalize the status quo.” InMalawi, for example, the newly createdanticorruption bureauwas largely a “wholesale transfer of structures and lawsfrom countries with very different contexts (specifically Hong Kong SAR,China,andBotswana).”8 In focusingonadopting“bestpractices” that seem towork in other parts of the world we often fail to understand the contextualcomplexities specific to a particular region. As a consequence, we measuresuccessonhowmuchasystemresemblesanothersystemthatworksversusonwhetheritactuallysolvesaparticularproblem.

Unfortunately,thismodelofsolvingproblemsisnotlikelytoyieldpositivelong-term results in either institutional reform or themore important issue ofeconomicdevelopment.9Forthat,wehavetogettotherootofasociety’svaluesandculture.Andtodothat,wehavetounderstandhowcultureisformed.

SolvingProblems,Together

“Culture,”muchlike“innovation”or“institutions,”isawordwehearonaday-to-daybasis,andmanyofusassociate itwithdifferent things. In thecaseofacompany,it’scommontodescribecultureasthevisibleelementsofaworkingenvironment: casual Fridays, free sodas in the cafeteria, or whether you canbringyourdogintotheoffice.ButasMIT’sEdgarSchein—oneoftheworld’sleadingscholarsonorganizationalculture—explains,thosethingsdon’tdefineaculture.They’rejustartifactsofit.Scheinhasoneofthemostusefuldefinitionsofculturethatwe’veseen:

Cultureisawayofworkingtogethertowardcommongoalsthathavebeenfollowedsofrequentlyandso successfully that peopledon’t even thinkabout trying todo thingsanotherway. If a culturehasformed,peoplewillautonomouslydowhattheyneedtodotobesuccessful.10

Those autonomous instincts are formed neither overnight nor with theimplementation of a new law or system.Rather, they are the result of sharedlearning—ofpeopleworking together tosolveproblemsandfiguringoutwhatworks.

The same is true in forming culture in a society. In each instance of aproblemortaskarising,thoseresponsiblereachedadecisiontogetheronwhattodoandhowtodoitinordertosucceed.Ifthatdecisionanditsassociatedactionresulted in a successful outcome—a “good enough” decision to navigate adispute,forexample—thenthenexttimethoseinthatsocietyfaceasimilartype

of challenge, they return to the same decision and same way of solving theproblem.If,ontheotherhand,itfailedandthedisputewasnotresolved,thosepeopletryingtosolvetheproblemwouldbehesitanttotakethatapproachagain.Everytimetheytackleaproblem,theyaren’tjustsolvingtheproblemitself;insolving it, they are learning what matters. They are creating or dismantlingculture.

An institution is really a reflection of the culture, or a pattern of behaviorthathasbeencodified.Whenoneobservesthecultureofacountryandtriestopushaninstitutionthatdoesnotalignwiththeculture,itwillbeverydifficulttosustain.

The importance of culture and norms in dictating and perhaps evenpredicting the strength of institutions cannot be overstated. Katrin Kuhlmann,whofoundedthelawanddevelopmentcenterattheNewMarketsLabandalsoteaches at both Harvard and Georgetown law schools, experienced this whenworkingonaprojectinKenyatohelpinvestorsandentrepreneursnavigatethecomplexitiesoflawsandregulationsthere.Shequicklysawthatapproachesthatmightwork inonecountrycouldsend thewrongsignalelsewhere. InNairobi,for example, anumberof entrepreneurs indicated that “overcontracting”mightimplyadistrustamongbusinesspartners.“Thisprojecthighlightedthatthelegalsystem surrounding the market is so much more intricate than a singletransaction,”Kuhlmannsays.“Asisalwaysthecasewithourwork,wehavetounderstandhowlaws—bothinletterandinpractice—impactdifferentaspectsofhuman behavior.” In effect,whatmight seem simple and obvious—creating alegal framework and enforcing contracts—turns out to be more nuanced.Kuhlmann’sexperienceisnotunusual.

DemocratizingRisk

Still, even with most institutional reform projects failing, it is understandablewhytryingtochangeapoorcountry’sinstitutionsfeelssourgent.Inmanypoorcountries,thegovernmentisoftentheonlygameintownandwieldssignificantinfluence on the economy. In addition, think about the well-functioninginstitutionsintheUnitedStates,theUnitedKingdom,Japan,orthemanyotherprosperous nations in the world. Prosperity and good institutions seem to gohand in hand. Consider, for instance, the legal systems in theUS or theUK,wherecitizenscangenerallydependontheenforcementofcontractsandtheruleof law. This, in turn, creates trust not only among citizens, but also between

citizensand theState.Conversely,Angola,Ecuador,andBangladeshmightbeseen, broadly speaking, to have institutions that prevent their economies fromflourishingbecause their institutionshavenotbeenable toengender that trust.Howlikely,forinstance,areyoutotrustthelegalsysteminAngola?Whowouldchoosetoinvestmillionsofdollarsinacountryinwhichtheycouldn’ttrustthegovernmentorotherprivatesectorplayers in thesamewaytheywould if theyoperated in Japan, or Singapore, or Germany?11 Fixing institutions is veryimportant.

Butwillingeconomies tohavebetter institutionsandensuring that theydoactually have them are two different things. We have found that the mostsuccessfulinstitutionsgrowoutofculture,nottheotherwayaround.Historyisfullofexamples.

We now consider the institutions of Europe to be among the mostsophisticated and valued in the world: look no further than the complexnegotiations going on as wewrite this book to extricate theUnitedKingdomfrom the binding obligations of the European Union. As difficult as thosenegationsmaybe,what’snotinquestionisthatbothsidesvaluetheprocessandwillhonortheultimateagreement.Europe,however,didnotgetthereovernight;ithastakenhundredsandhundredsofyearsoftrialanderror,andofsuccessandfailure,tobuildsuchaculture.

ThedevelopmentofdomesticinstitutionsinVenicehelpeditbecomeoneofthe world’s capitals of trade as far back as 800 AD. “Long-distance tradeenrichedalargegroupofmerchantsandthesemerchantsusedtheirnew-foundmuscle to push for constraints on the executive i.e., for the end of a de factohereditaryDoge(theVenetianheadofstate)in1032andfortheestablishmentofaparliamentorGreatCouncil in1172,”12accordingtoeconomistsDiegoPugaandDanielTrefler.ThisperiodinVenice,fromthe1000stoaround1297,sawtheriseofmanymodern-dayinstitutions,oneofwhichwastheColleganza.

The Colleganza was essentially a joint stock company created to financelong-distanceexpeditions.Consideringthesignificantrisksassociatedwithlong-distance travelat the time, theColleganzawasan innovativeway todistributeand democratize the risk across a larger number of people than ever before.More important, however, it alsodemocratized the rewardsbycreatingwealthfor many Venetians for whom investing in such trade expeditions had beenhistoricallyimpossible.“TheColleganzawassoinnovativebecausetheylimitedliability for each partnership and to the joint stock of the partners,” journalistMax Nisen writes about the institution. “It was incredibly important to thehistoryofthecity[Venice]becauseitallowedpoorermerchantstogainaccess

tointernationaltradebytakingonriskastravelingpartners.”13Allofasudden,poorer merchants could now partake in investing in profitable long-distancetrade,anactivitythatwashistoricallyreservedfortherich.

As we noted earlier, market-creating innovations make historicallyexpensive,complex,andout-of-reachproductsandservicesaccessibletoanewclassofconsumerswhocouldnotaffordthem,therebycreatinganewmarketforthedemocratizedsolutions.Becausethepoorinmostsocieties,andcertainlyinVeniceat the time,“outpopulate” the rich,whenanewsolution isable topullthepoor intoconsumptionofaparticularproductor service, thatnewsolutioncanhaveavast impactonsociety.TheColleganzaprovidedamechanism thatbroughtmanypoorermerchants,whohadneither thecapitalnor thecollateral,intotheinvestingclass.Asaresult,thisinnovationincreasedeconomicmobility,internationaltrade,wealth,and,ultimately,politicalpower.

Take, for example, the impact the Colleganza had on the shipbuildingindustry. Many people were employed in supplying parts to build ships, indesigningtheships,insellingorleasingtheships,instaffingtheshipsforthesetradeexpeditions,andmanyothercomponents thatcontributedproductively totheeconomy.Andthat’sjustoneoftheindustriesthatwasaffected.Asdemandfortradeablegoodsincreased,farmersandtraderswerepressuredtoinnovatetomeet thosedemands.Theimpactofcreatingnewjobs,especiallyforpeople inimpoverishedcities,isimmense.Overnight,ajoblesspersonistransformedintoa productive contributor to that society. As Schein notes, the rewards andpunishmentsystemsinorganizationsandsocietiesmatteraswelooktoimproveeconomies.Iftherearenojobsthatrewardpeople,theywillfindothermeansofgettingrewards,manyofwhichwillnotbeproductiveforsociety.

AsmoreandmorewealthwascreatedformanymoreVenetiansandthecitybecameoneoftherichestinEurope,thepoliticalstructuresinVenicebegantochangeaswell.Historically, theofficeof thedogewasheldbysomeonefromoneofthreeelitefamilies,wieldingabsolutepoweroverthecity.14Oncewealthbegan tobedemocratized, thebalanceofpowerbegan to shift, andagrowingnumberofwealthymerchantswerecapableofchallenging thedoge.And theydid.Someoftheinstitutionalreformspushedbythisnewandgrowingmerchantclass included: banning doges from appointing their successors; enacting andenforcing a systemof elections; ensuring the office consultedwith judges andabided by the judicial decisions; and establishing a parliament known as theGreat Council.15 These institutions then gave rise to other institutions, whichreinforced the role of business, innovation, and investment in societaldevelopment.16

Bytheearlyfourteenthcentury,financialinnovationsinVeniceincludedtheforerunnersof limited-liability joint-stockcompanies;markets fordebt, equity,andmortgage instruments; bankruptcy laws that distinguished illiquidity frominsolvency;double-entryaccountingmethods;businesseducation(includingtheuseofalgebraforcurrencyconversions);depositbanking;andareliablemediumofexchange (theVenetianducat).17Whileall these innovationsconnect to the“demands of long-distance trade,”we believe theymore accurately reflect the“democratization”oflong-distancetrade.

Thatisthekindofimpactmarket-creatinginnovationscanhaveonasociety.

CartBeforetheHorse

By contrast, consider the failure of many well-intended institutional reformprograms in the world today. In his book on institutional reform anddevelopment,HarvardUniversity’sMattAndrewslistsseveralnotablefailures.Forexample,in2003,manyinternationalexpertshopedthatinjustsevenyears,institutionalreformwouldtransformAfghanistanintoanewSouthKorea.Thattheory led to pouring billions upon billions of dollars into the country to firstchangetheprevailinginstitutionsingovernment,whichmanyhopedwouldleadto change in the country.Timehas passed; billions have been spent; and newlaws, regulations, and “institutions” havebeenpushed, butAfghanistan is stillcitedasoneofthemostcorruptcountriesintheworld.ButperhapsAfghanistanistooextreme;thecountryisnotonlyverypoor,butisalsoactivelyatwarandhastheTaliban.SoAndrewscitesanotherexample:thecountryofGeorgia.Heexplains that the governmentwent through the arduous efforts of streamliningtaxesandcuttingregulationsto“catalyzeprivateindustryandcreatejobs.”Thehopewas that the small countrywould become a “CaucasianSingapore.”Thereforms seemed to work, and Georgia leapt up in theWorld Bank’s Ease ofDoingBusinessrankings.Unfortunately,thisdidnotspurdomesticinnovationinthe way many hoped. Andrews concludes, “Government regulations may nolonger burden entrepreneurs, but reforms have not led to a government thateffectivelycatalyzesemployment-generationproductioneither.”18

AnotherexampleisinIndia,wheretheKarnatakaProject,undertakenbytheIndian Ministry of Rural Development, designed to register and computerizeland records in about six hundred districts in the country, was implemented.Much like the institutional reformprojects inGeorgia, therewassomesuccesswiththeproject(itreducedthetimeittooktoregisterpropertyfromthirtydays

to thirty minutes), but there’s little evidence of any progress in reducingunderlying conflict over land ownership in the region. In addition, thecomputerizationofrecords,whichwassupposedtoleadtoeasiertransferoflandbetweenpartiessoastospureconomicactivity,didn’tquitematerialize.19

The major difference between these, and many other well-intendedinstitutionalreformprojects,andtheVeniceexampleisaninsightcentraltothisbook. No matter how well-intentioned an institutional reform, if it is notconnected to innovations that create or connect tomarkets that serve asmanypeopleinaregionaspossible,itwillbedifficulttosustain.Whenweputthecartbeforethehorse,neitherthecartnorthehorsemoves.

WhatWouldBeMoreEffectiveInstead?

We have learned three important lessons as we’ve studied institutions andinnovation. The first is that innovations, especially those that create newmarkets,typicallyprecedethedevelopmentandsustenanceofgoodinstitutions;the second is that institutions must be built with the local context in mindbecause, if they do not solve local problems, they are almost always rendereduselessbythoseforwhomtheyaredesigned;andthird,innovationservesasthegluethatkeepsinstitutionstogether.

VibrantMarketsTypicallyPrecedeGoodInstitutions

One of the most common pushbacks we get when discussing our ideas withpeoplewhoworkinregionswithless-developedinstitutionsisthatinnovatinginpoorcountriesisnotjusthard,it’simpossible.Andsowefindourselveswithaclassicchicken-or-the-eggproblem:Whichshouldwefocusonfirst inordertofoster innovations and thereby create economic prosperity? Many people areadamant that institutions must come first.20 “How can one innovate in anenvironmentwithoutgoodpoliticalandeconomicinstitutions?”istheircommonrefrain.Wecertainlyunderstandthatpointofview.

But there are several problems with that argument, chief of which is thatgood institutionsarenotonlyveryexpensive tocreateandmaintain,butoftendon’tworkwhenplacedinasocietywithouttherelevantmarketstoabsorbwhattheyhavetooffer.HowdoesapoorcountrysuchasMali,withroughlyfifteen

million people and a GDP per capita of approximately $900, pay for a legalsystemmodeled after France’s, a country with sixty-six million people and aGDP per capita of around $44,000? In addition, the French system has hadhundreds of years to evolve so that itmakes sense in the context of France’sincreasingprosperity.HowcanMalisimplyadoptasystemthatisexpensiveandfails to solve many of the problems that present-day Malians face? Schein’stheoryofculturepredictsthatitisgoingtobeincrediblydifficult.

Histheoryalsopredictsthatthereisabetterway.Itmaybecounterintuitiveandevenuncomfortable,butwebelievethatifwebeginbyhelpingpeoplemakeprogress in their local economies, then change in their culture and institutionswillfollow.Historyhasbornthisout,timeandagain.21

InnovationasaGlue

Justasitisonethingtohaveachildandquiteanothertoraiseasuccessfulandproductive member of society, it is one thing to create institutions and quiteanothertosustainthem.

Aswehavenoted,prosperityisaprocess,notanevent.Institutionsarethesame.Theyarenotmarkedbybuildingsorplaces;theyaremarkedprimarilybyprocesses.ThelessonfromVenicehelpsusseethepivotalroleofinnovationnotonlyincreatinginstitutions,butalsoinsustainingthem.

Asquicklyasmanyoftheprosperity-supportinginstitutionsinVenicewerebuilt,theyweredestroyedbyagroupofverywealthyandinfluentialmerchantswhosoughttocurbcompetition.Severalwealthymerchantsbeganwieldingtheirinfluence to change existing laws. For instance, they sought to make“parliamentaryparticipationhereditaryanderectbarriers toparticipation in themost lucrative aspects of long-distance trade.”22 Over time, fewer merchantswereabletoparticipateinlong-distancetrade.ThiskilledthemarketinVenice,ultimatelycausingthecitytobecomelessprosperous.WhiletherestofEuropegrewintheseventeenthandeighteenthcenturies,Venicecontinuedtodeclineinpopulationandwealth.

The institutions in Venice were developed, but they did not last, becausesomewealthymerchantsreversedthe laws.Whydid themerchantsreverse thelaws if the laws were good for Venice? The laws might have been good forVenice, but they were not good for the merchants who were focused onfeathering theirownnestsandnotothers’.So inorder tomaintain theirprofitsandpositioninsociety,theychangedthelawstobenefitthemselves.Institutions

reflectaculture,theydon’tcauseit.SowhenthecultureinVenicewasallowedtochange—thewaymerchantswereallowedtosolvetheirproblems—sodidtheinstitutions.Andinthelongrun,Venicepaidtheprice,fallingbehinditspeersineconomicdevelopment.

This behavior, by the way, is not anomalous—it is the norm in manysocieties. History tells us that those who can use the law to their advantagealmostalwaysdo.Butwhenthelawismanipulatedtoserveonesideoverothers,theplaying field is no longer level. Just lookat theUnitedStates,where totallobbying spending in 2017 topped $3.4 billion.23 But there are almost alwayslong-termconsequencesfortheseactions.

WhatmighthavehappenedifthewealthymerchantsinVenicehadnewandexciting opportunities (new innovations) to increase theirwealth and status insociety?We believe theymay not have been as quick to change the laws fortheirprofit.Innovation,therefore,canserveasagreatequalizer.Themorethatinnovators democratize solutions for the masses, thereby creating opportunityandpotential for growth andwealth creation, themore institutions can remainstrong.24

FromGrayMarkettoFormalEconomy

Why would hundreds of millions of people in lower-income countries andemerging markets remain in the “informal economies”—the gray-or black-marketeconomies—evenwhentheyknowitisillegaltodoso?Itisbecause,intheirparticular context, itmakes little sense for them to insert themselves intothe formal economy.Their common experiences have informed theways theysolve the problems of running their businesses. Some of their commonexperiences are related to cost, difficulty, and lack of benefits they get whenthey,orpeopletheyknow,havetriedregisteringbusinessesinthepast.Andnotuntilthisexperiencebecomeseasierforcompanies.Whenthathappens,theshiftcanbeprofound.

WhenMatiasRecchiareturnedtohisnativeArgentinain2013afteryearsofstudying and working abroad, he looked forward to settling down in a newapartment and making it feel like home. An alumnus of Harvard BusinessSchool and McKinsey & Company, Recchia had spent years navigating thecomplexityofbuildingthelargestonlinegamingcompanyinLatinAmerica.Butwhat should have been a simple process by contrast—planning his ownapartmentmove—turnedout tobeoneof themorechallengingexperiencesof

his adult life. “The experience was terrible for me,” he recalls. “Finding amovingcompanyinArgentinaisextremelypainfulbyitself.Butthenaddontopofittheexperienceofneedingtofindaplumberandelectricianandpainter...itwasjustawful.”Notonlywastherenopricetransparency—hehadnoideawhatthese tradesmen would charge in advance—but they also wouldn’t stick towhatever roughagreement they’dmade initially, and theywould simplynevershowupontime.

Recchia spent hours in frustration, trying to track people down, grumblingaboutanunjustifiedbillhe’djustbeenpresented,andlamentingtofriendsabouthowone-sidedthesystemfelt.NearlyeverycontractorRecchiahiredoperatedinthe“informal”sectoroftheeconomyofArgentina;theybuilttheirone-ortwo-person businesses mostly by word of mouth, they priced each job in whatseemed to be a total random guess, and they did not bother to encumberthemselveswithformalities,suchasreportingearnings,payingtaxes,abidingbyhealthandsafetyregulations,orallowingthemselvestobeheldresponsibleforinferior work. Even though there were laws on the books that explained therequirements in starting and running businesses, these business owners didn’tsee theneed toobey them.Thiswasnot justanArgentinianproblem. InotherLatinAmericancountries,asmuchas70percentof laborwasoperating in theinformal economy. In SouthAsia and sub-SaharanAfrica, the percentage thatoperatedintheinformaleconomyhoveredaround90percent.25

But inhis struggle tomanagewhatshouldhavebeensimplehomerepairs,Recchia recognizedaJob toBeDone,not just forhimself,but formanyotherpeople, too. All this pain caused half of the 120 million households in LatinAmericathatneededhomeimprovementservicesnottopursuethem.26

As it turned out, disgruntled homeowners were not the only ones seekingprogresswith their struggle.AsRecchia began to share the idea of creating aformal marketplace for buyers and sellers of contractor services with serviceproviders, he realized that the pain ran deep on both sides. “Therewere verygood reasons that these people didn’t want to participate in the ‘formal’economy,”Recchiasaysnow.“Theirliveswereverydifficult.Itwasveryhardto get new customers. They lived hand-to-mouth, day-by-day. Because theywere not part of the formal economy, they could never access financing toactuallybuildorgrowarealbusiness.Theywererelegated tosimply trying tomake asmuch as they could, whenever they could, and hoping for the best.”Whatwastherewardforthesecontractors,Recchiarecognized,iftheyabidedbythe rules of the formal economy and stood behind their work? “There wasabsolutely no benefit to being an honest guywho showedup on time, did his

bestwork,andchargedafairprice.”Whatwasrewarded,instead,wasfocusingonmakingasmuchaspossibleinwhateverwayworkedbestfortheindividualcontractor.Ifacontractorwaslikelytofinishajobat,say,threep.m.onagivenday, he was probably unable to get to another job that same day because ofArgentina’snotoriouslydifficulttraffic,especiallyinthecapitalcityofBuenosAires. So he would simply charge the first customer as much as he possiblycouldtomakehisdayworthwhile.Thatneitherledtogoodwordofmouth,nordid it, understandably, lead to more business opportunities. It was a viciouscycle, one inwhich tradesmencouldnever realisticallyhope to create abetterlife for their families. They simply hoped towork enough to survive. “If youwere born poor in some of these countries,” Recchia recognizes, “there wassimplynoway foryou tomoveup the social chain.Peopledidn’t even try. Itbecame a self-fulfilling prophecy.” And no amount of laws, rules, andregulationsseemedtobeabletochangethat.

Butfouryearsafterhisownfrustratingexperience,Recchiaishopinghewillbe more successful. He and partner Andrés Bernasconi started IguanaFix, anonlineserviceconnectingconsumerswithreliable,transparentcontractors.Initsfirst three years alone, IguanaFix generated some $25 million and directlyemployed 140 people.But perhapsmore significantly, IguanaFix has attractedmore than twenty-five thousand contractors in four countries (Argentina,Mexico,Brazil,andUruguay)intotheformaleconomy,withthousandsmoreonawaitinglist.Notonlyarethesecontractorsnowreportingearningsandpayingtaxes (both of which are part of the service that IguanaFix both requires andprovides),but someof themarealsobeginning toexpandandbuild theirownbusinessesinwaystheycouldn’thaveimaginedbefore.

Thisleapintotheformal,tax-paying,rule-abidingeconomyhasnotbeenoneborn of a sudden sense of civic responsibility or crushing penalties for notabiding by the established rules of business. After all, what incentive does ahand-to-mouth contractor have for reporting his income? So the governmentmighttakesomeofitawayintaxes?“Mostofourserviceprovidersdon’tseethedirect benefit of paying taxes; and the fear of penalties is not enough of anincentive,”Recchiasays.“Itwasextremelyhardtogetpeopletobreakthehabitsthat they’ve been used to for generations.” But IguanaFix has succeeded atsomethingmany governments and large development organizations have beentrying to do for decades: bringing people into the formal economy. How?Through Recchia’s understanding of the struggle of both customers andcontractors,andhiscreationofanewmarketthathasnowmadeitprofitabletobemorehonestandtransparent.“Byjoiningtheformalmarket,serviceproviderscanaccesscorporatecustomers,getaccess tohealthandwork insurance,open

their first bank account and access financing. We emphasize the positiveconsequencesofjoiningtheformaleconomy.Wedonotforcethemtodoitnorhighlightthenegativeconsequencesofnotdoingso.”

IguanaFix’scontractorshavecometounderstandthatbyjoiningtheformaleconomy, theywillbeable tohavemorecontrolof theirworkschedules, theirlives, and theirwallets.Asmore innovative companies like IguanaFix start tomakeclear to themarket thatparticipatingformally in theeconomyisactuallygood for everyone, the stronger andmore successful the formal economywillbecome. As management expert Peter Drucker once reminded us, proceduresare not instruments of morality; they are exclusively instruments of economy.They never decide what should be done, only how it might be done moreexpeditiously.

IguanaFix is creating a new market that is enabling tens of thousands ofhomeimprovementserviceproviders—electricians,plumbers,carpenters,andsoon—to pull into their lives the legal, economic, and political institutions thatseveralLatinAmericangovernmentshave,foraverylongtime,beentryingtopushontotheircitizens.

There is no one company or one innovation—not even one as hopeful asIguanaFixoroneasestablishedasMexico’sBimbo—thatcan,single-handedly,change a country’s underlying culture and respect for institutions. It’s acumulative process. But understanding what can create and sustain healthyinstitutionsisakeyquestiontoanswerontheroadtoprosperity.

NOTES1. The late American political scientist Samuel Huntington defines institutions as “stable, valued,recurringpatternsofbehavior.”Institutionscanbepolitical,economic,orsocialinnature.Theycanalsobeformal (systems set up by the governing bodies) or informal and represent customs in a region (how asociety celebrates weddings or childbirth). Some examples are a country’s legal system, government orpublicorganizations,andfinancialsystems.

2. Thisdefinition,ashighlightedbyDaronAcemogluandJamesRobinson,MITandHarvardeconomistsrespectively,hasthreeimportantfeatures.First,theyare“humanlydevised.”Second,theyare“therulesofthe game,” effectively setting constraints on human behavior. Third, their major effect will be throughincentives.

DaronAcemoglu and JamesRobinson, “The role of institutions in growth and development,”WorldBankWorkingPaper1,no.1(January2008).

3. In one corruption case, an aide to former prime minister Mirek Topolánek had been charged fordemanding a multimillion-dollar bribe from a foreign company in return for a government defenseprocurement contract (Reuters, February 2016). After a lengthy trial, including a conviction that wasoverturnedbutultimatelyreinstatedbythecountry’sSupremeCourt, theaidewashandedafive-yearjailsentence(RadioPraha,May2017).

4. Kate Bridges and Michael Woolcock, “How (not) to fix problems that matter: Assessing andrespondingtoMalawi’shistoryofinstitutionalreform,”WorldBankPolicyResearchWorkingPaper1,no.8289(December2017).

5. ShakingoffthewaysofgettingthingsdoneprevalentunderCommunist-ruledCzechoslovakiawasnotsolvedbywritinganewconstitutioninthecountry—norwasthatthesolutioninanyoftheotherhopefulreneweddemocraciesinthepost-Sovietera.InJanuary2018,morethanfiftythousandpeoplemarched,inheavysnow,totheparliamentbuildinginBucharest,Romania,chanting,“Thieves,”andholdingsignsthatread,“Demisia,”whichmeans“Resign” inRomanian.Theywereprotesting the lackof lawenforcementand the prevalence of corruption in their country. The situation is not much better for Hungary, as thecountrysliddownintheTransparencyInternationalcorruptionrankingsin2018.Sofardown,infact,thatHungary,which is amember of theEU, nowhas aworse corruption ranking thanMontenegro, a smallcountry thathasnotbeenallowed to join theEUpartlybecause it isdeemed toocorrupt.AndreaShalal,“Hungary slides deeper down corruption index, watchdog says,” Reuters, February 21, 2018,https://www.reuters.com/article/us-global-corruption/hungary-slides-deeper-down-corruption-index-watchdog-says-idUSKCN1G52E6.

6. MattAndrews,anassociateprofessorattheCenterforInternationalDevelopment,wroteanarticleintheGuardian thathighlightedthispoint.Inthepiece,Andrewswrites,“Billionsofdollarsarespenteachyear on institutional reforms in development, aimed ostensibly at improving the functionality ofgovernmentsindevelopingcountries.However,evaluationsbythemultilateralandbilateralorganisationssponsoringsuchreformsshowthatsuccessisoftenlimited.Theseevaluationsrevealthatasmanyas70%ofreformsseemtohavemutedresults.Theyproducenewlawsthatarenotimplemented,ornewbudgetsthatarenotexecuted,ornewunitsandagenciesthatgounstaffedandunfunded.Inshort,newformsmayemergebuttheyfrequentlylackfunctionality:whatyouseeisnotwhatyouget.”

MattAndrews,“Whyinstitutionalreformsinthedevelopingworldaren’tworking,”Guardian,March8, 2013, https://www.theguardian.com/global-development-professionals-network/2013/mar/08/institutional-reform-international-development.

7. Kate Bridges and Michael Woolcock, “How (not) to fix problems that matter: Assessing and

respondingtoMalawi’shistoryofinstitutionalreform,”4.

8. BridgesandWoolcocknotethat,ofalltheprojectstheyanalyzed,92percentofthemwereregulative(i.e., activities focused on strengthening laws and regulatory bodies), 3 percent were normative (i.e.,activities that tried to understand cultural practices and professional norms), and 5 percentwere culturalcognitive (i.e., activities education or guidance toward compliance with international standards). Theiranalysisshowsthatsolutionsthatareoverwhelminglyregulativewithoutappreciatingtheculturalcognitiveornormativenatureoftheenvironmentsinwhichtheyareimplementedareoftenpartoftheproblem.

KateBridgesandMichaelWoolcock,“How(not)tofixproblemsthatmatter:AssessingandrespondingtoMalawi’shistoryofinstitutionalreform,”12–17.

9. Whenthe2017WorldBankEaseofDoingBusinessrankingscameout,Nigeriacelebrateditsprogress.The countrymoved up the rankings by twenty-four points and is now the 145th “easiest country to dobusinesswith”outof the190countriesmeasured.Forthepreviousyearandahalf, thecountryhadbeenpushing regulations and institutional reform tohelp itmoveup the rankings.When the country’s effortswererewardedbyanincreaseinitsrankings,understandablytherewasexcitement.ButhowdoesNigeriamovingupintherankingsaffectaverageNigeriansforwhomdailylifeisaboutmakingprogressas theyinterfacewith the local police, the local judiciary, and the local systems in place? The response to thatquestion could be that “the reforms will have long-term effects.” But in 2016, the Nigerian economycontractedand,asa result, shed tensof thousandsof jobs.TheeverydaycultureofhowNigeriansmadeprogress and solved their problems would remain unaffected even as the country moved up in the“rankings.” Change will come when there is a strong imperative from within the country to make theinstitutionsreflectanewrealityofdoingbusinessinNigeria.

10. EdgarSchein,OrganizationalStructureandLeadership(SanFrancisco:Jossey-BassPublishers,1988).

11. ThisisoneofthemanyreasonsSudaneseentrepreneurMoIbrahimstruggledtoraisemoneytofundthebuildingofhistelecommunicationscompanyacrossAfrica.ThequestionofeffectivegovernanceissopowerfulforIbrahimthathehas, in theyearssincehissuccess,createdtheMoIbrahimFoundation.ThefoundationpublishestheIbrahimIndexofAfricanGovernance,anindexthatratesAfricangovernmentsonseveral metrics including safety and rule of law, public management, human rights, and others. Seehttp://mo.ibrahim.foundation/iiag/.

12. Diego Puga and Daniel Trefler, “International Trade and Institutional Change: Medieval Venice’sResponse to Globalization,” Quarterly Journal of Economics 129, no. 2 (May 2014): 753–821,http://www.nber.org/papers/w18288.

13. Max Nisen, “How Globalization Created and Destroyed the City of Venice,” Business Insider,September8,2012,http://www.businessinsider.com/the-economic-history-of-venice-2012-8.

14. Ibid.

15. Diego Puga and Daniel Trefler, “International Trade and Institutional Change: Medieval Venice’sResponsetoGlobalization,”753–821.

16. A similar occurrence of increasing incomes leading to institutional change was observed in theNetherlands,anotherearlydeveloper.Inaseminalpaper,“TheRiseofEurope:AtlanticTrade,InstitutionalChange, and EconomicGrowth,” Acemoglu et al. write, “Critical was the Dutchmerchants’ improvingeconomic fortunes, partly from Atlantic trade, which were used to field a powerful army against theHabsburgEmpire . . .Overall, both theBritish andDutch evidence, therefore, appears favorable to ourhypothesis that Atlantic trade enriched a group of merchants who then played a critical role in theemergenceofnewpoliticalinstitutionsconstrainingthepowerofthecrown.”

Daron Acemoglu, Simon Johnson, and James Robinson, “The Rise of Europe: Atlantic Trade,InstitutionalChange,andEconomicGrowth,”AmericanEconomicReview95,no.3(June2005):546–579.

17. Diego Puga and Daniel Trefler, “International Trade and Institutional Change: Medieval Venice’sResponsetoGlobalization,”753–821.

18. Matt Andrews, The Limits of Institutional Reform in Development: Changing Rules for RealisticSolutions(Cambridge:CambridgeUniversityPress,2013),1–3.

19. Matthew McCartney, Economic Growth and Development: A Comparative Introduction (London:PalgraveMacmillan,2015),219.

20. The late William Baumol of Princeton wrote extensively about innovation, entrepreneurship, andeconomicgrowth.Baumolwasoftheviewthattheconditionsonthegroundarewhatmostaffectsthekindsof innovations thatentrepreneurspursue.Baumolwrites,“Howtheentrepreneuractsatagiven timeandplace depends heavily on the rules of the game—the reward structure in the economy—that happen toprevail.” Although we generally agree with Baumol, that the rules of the game matter, the importantquestionwe ask is “How do the rules of the game get formed?How do they get changed?”When youobservecircumstanceswhere the ruleshavechanged,youwill see that innovations, especially those thathavecreatednewmarkets,havebeenmajordrivers.

WilliamJ.Baumol,“Entrepreneurship:Productive,Unproductive,andDestructive,”JournalofPoliticalEconomy98,no.5(October1990),http://www.jstor.org/stable/2937617?seq=1#page_scan_tab_contents.

21. Althoughitbeganhappeningmorethan150yearsago,thispatternofgettingprosperitybeforegettinginstitutions that can actually work for the average citizen is what we observe in the United States. AsAmericawasbeginning to industrialize,manyof the institutions in thecountry,much like inmanypoorcountries today, worked for the rich. This is because the rich had markets that could fund their own“institutions,”butaverageAmericansdidnot.Hardasitmaybetobelieve,trainsandindustrialaccidentsregularlykilledormaimedmanyAmericanswhohadlittletonorecourse.ButasmoreandmoreAmericansbegan developing markets for average citizens, these markets pulled in good institutions. And thus avirtuouscyclewascreated.Hardlyeverdoestheenforcementofinstitutions,withoutmarkets, leadtothedevelopmentofgoodinstitutionsthataresustainable.

22. Diego Puga and Daniel Trefler, “International Trade and Institutional Change: Medieval Venice’sResponsetoGlobalization,”753–821.

23. “Lobbying: Overview,” OpenSecrets.org, Center for Responsive Politics, accessed March 5, 2018,https://www.opensecrets.org/lobby/.

24. WhataboutcountrieslikeChina,orChile,orSouthKorea,thatwereabletodevelopinstitutionsthatfueled economic growth? These countries coupled the development of their institutions with intenseinvestments in innovations that created markets. These markets ultimately paid for the creation andsustenance of the institutions. And even then, it wasn’t that straightforward. Oxford professorMatthewMcCartneynotesthatinthe1980s,fast-growingEastAsiancountrieshadcorruptionscoressimilartothoseofmany “developing countries” today. SouthKorea, for instance, had the samemeasure of institutionalquality asCôted’Ivoire.He concludes that the implicationof this is that “improving institutionswas anoutcomenotacause,ofrapidgrowthinEastAsia.”

MatthewMcCartney,EconomicGrowthandDevelopment:AComparativeIntroduction,217.

25. “New Study Reveals the Complexity of the Informal Sector,” The World Bank, July 20, 2016,http://www.worldbank.org/en/news/feature/2016/07/20/new-study-reveals-the-complexity-of-the-informal-sector.

26. Frank V. Cespedes, Thomas R. Eisenmann, Maria Fernanda Miguel, and Laura Urdapilleta,“IguanaFix,”HarvardBusinessSchoolCaseStudy,November10,2016,2.

Chapter9

CorruptionIsNottheProblem;It’saSolution

Inourtheory,whateverlawenforcementstrategythesocietychooses,privateindividualswillseektosubvertitsworkingstobenefitthemselves.

—EDWARDL.GLAESERANDANDREISHLEIFER,“THERISEOFTHEREGULATORYSTATE”1

TheIdeainBrief

Corruption.Askinvestorswhytheychoosenottoinvestincertainregionsoraskcitizensofthoseregionswhytheircountriesarenotdeveloping,andcorruptionis almost always at the top of the list. A recent InternationalMonetary Fundestimate put the annual cost of bribery alone at about $1.5 to $2 trillion. Theoverall economic and social costs of corruption are likely much larger, sincebribesconstituteonlyoneof thepossible formsofcorruption.Theproblemofcorruptionissocorrosiveandwidespreadthathundredsofmillionsofdollarsarespent annually trying to eradicate corruption around the world—and yetcorruptionisstillstubbornlypervasive.

Inthischapter,weexaminetheproblemofcorruptiondifferently.Insteadofasking,Howcanweeliminatecorruption?weask,Whydoescorruptionpersistinthefirstplace?Theanswer,webelieve,liesnotsolelyinsomefundamentalmoral failings, but rather in understandingwhymany people choose to “hire”corruption. History has shown that successful economies develop in spite ofwidespread corruption. Seen through a new set of lenses, wemay understandcorruptionbetter,and,wehope,begintofindnewwaystomitigateit.Intoday’smost prosperous countries, proper enforcement of laws against corruptionfollowedinvestmentsininnovationsthateithercreatednewmarketsorgrewandconnectedtoexistingones.Ifwegetthesequenceright,wecanbegintostoke

progressineventhemostcorruptcountries.

*

When Iwas amissionary inSouthKorea,wewere visitedmonthly by amanwho was selling “safety” insurance. If you paid him (and it was not a smallamount of money from our perspective), he would guarantee that your homewouldnot be robbed. If youdidn’t buy that insurance, somebodypickedyourhouseclean.Makingsurethatourmodestpossessionswerenottakenawayfromuswas important forour survival, sowepaid. It’sonly inhindsight that I seethatwewereallwillingparticipantsinaformoflow-gradecorruption—thekindthat establishes a power balance in a local community,makes lives easier (orharder, for those unwilling to participate), and keeps the economic wheels ofdailylifegreased.Corruptionwasamatterofsurvival.Onbothsides.

Seeinghoweasily thishappened—not just tousbut toothers aroundus—made me wonder whether corruption is just a moral issue. I know that theKoreansImetweregoodpeople.Butifcorruptionismostlyamoralissue,whydidthesegoodpeopleparticipateinitsoeasily?

And they’re far from an anomaly. Today, more than two-thirds of thecountries measured by Transparency International, the international NGOcommittedtocombatingcorruption,scorelowerthan50,outofapossible100,ontheannualCorruptionPerceptionsIndex.Ascoreof0isverycorrupt,100isvery clean. The average score, across the world, is 43. According to theorganization, six billion of the total 7.6 billion people in the world live incountrieswith“corrupt”governments.That’salotofus.It’shardtoestimatethechilling effect corruption—or the threat of corruption—has on impoverishedcountries, especially when the mere perception of corruption impedesinvestments that canhelp those countries createwealth andprosperity, butweknowthattheimpactisenormous.

Inmostoftoday’sprosperouscountries,properenforcementoflawsagainstcorruptionfollowedinvestments in innovations thateithercreatednewmarketsor grew and connected to existing ones. Ifwe get the sequence right,we canbegin to stokeprogress in even themost corrupt countries in theworld today.Historyhasprovedthatout,timeandagain.

FightingcorruptionoftenfeelslikeplayingagameofWhac-A-Mole,wherea player uses a hammer to hit toymoles that appear at random fromdifferentholesontheplayingsurface.Youhitoneandanothermolepopsupinanotherhole. You expend so much energy hitting and hitting and hitting that youeventuallythrowupyourhandsindespair.

Thishasmadeuswonder ifwe are focused toomuchon the symptoms ofcorruption,insteadofseekingtotrulyunderstanditscauses.Togettothebottomof this,wemustask twoimportantquestions:First,whyisovertcorruptionsomuchmorepervasiveinpoorercountriesthaninrichones?Andsecond,howdidmanyof today’sprosperous countries became lessovertly corrupt.Aswewillsee,answeringthesequestionswillprovideaframeworkthatcanhelpreducetheprevalenceofcorruptioninmanyoftheworld’spoorestcountries.

UnderstandingCorruption

Corruption is not a recentphenomenon.Manyof today’sprosperous countrieswereoncevery corrupt; in fact, somewere as corrupt asmanypoor countriestoday. But corruption is not a permanent phenomenon, either. Or at least, itdoesn’t have to be. Although we know there are still individual cases ofcorruptionineventhemostadmiredcountriesintheworld(andAmericaisnoexception),itisnolongerapervasivepartofthesecultures.Sowhatcausedthechange?

You might quickly list off what seem to be the obvious answers: goodleadership and governance from the top, a change in the moral values of asociety,or the right institutionsbeingput inplace.Butwedon’tbelieve thosefundamentally change the prevalence of tolerance for corruption in a society.This is important to recognize because so many anticorruption programs aredirected almost exclusively at governance and operate on a foundation ofinstillingasenseofrightandwrong.Ifthiswerethekeytofightingcorruption,whyhavetheseveryworthyefforts,overall,hadrelativelylittlesustainedimpactonwinningthewaroncorruption?

AccordingtothemostrecentCorruptionPerceptionsIndexreportpublishedbyTransparencyInternational,“themajorityofcountriesaremakinglittleornoprogressinendingcorruption.”2Soevenwithintenseinternationalfocus—andaflood of resources to combat the problem, including initiatives to inculcate afundamentalsenseofintegrityinchildren—progresshasbeenveryslow.

Webelievethatpeoplebornintopoorsocietiesarenotsomehowmissingthefundamentalmoral fiber of those of us fortunate enough to be born intomoreprosperous circumstances. Nor are they simply ignorant that there is a betterway.Corruptionisthebetterway,aworkaround,autilityinaplacewheretherearefewbetteroptions.CorruptionisbeinghiredforaJobtoBeDone,or,morespecifically, tohelppeoplemakeprogress inaparticularcircumstance.This is

animportantinsight.Onceweunderstandwhypeopleturntocorruption,wecanbegintoseedifferentapproachestosolvingtheproblem.

WhyDoPeopleHireCorruption?

Sotobegintheprocessofbuildingtrustandtransparency,wehavetounderstandwhypeoplehirecorruption to solve theirproblems in the firstplace.Wehaveuncoveredthreepowerfulreasons.

First,thevastmajorityofindividualsinsocietywanttomakeprogress.Fromthepoorperson lookingforemployment to thewealthyperson looking togainmore status, most of us want to improve our financial, social, and emotionalwell-being.It iswhywegotoschool,goonvacation,andalsogotoplacesofworship.Itisalsowhywesavemoney,buyhomes,startbusinesses,andrunforoffice. Each of those things, in oneway or another, helps us feel likewe aremakingprogressinlife.Whensocietyoffersusfewlegitimateoptionstomakeprogress,corruptionbecomesmoreattractive.

Second, every individual, just like every company, has a cost structure. Inbusiness,acompany’scoststructurerefers to thecombinationof thefixedandvariable costs it incurs in order to run its business. It defines how much thecompanymustspendtodesign,make,sell,andsupportaproduct.Forexample,whenacompanyspends$100tocreateanddeliveraproducttoacustomer, inordertomakeaprofit,itmustselltheproductformorethan$100.

Similarly, individuals also have a cost structure—how much money theyspend to maintain a particular lifestyle. This includes things such as rent ormortgage payments, school fees, hospital bills, food, and so on, and, just likecompanies, individuals must also have revenues (income from their work orinvestments) that surpass their costs. Understanding this simple revenue-costrelationship can help predict circumstanceswhere the likelihood of corruptionwill be high and the efficacy of anticorruption interventions. In essence, ifanticorruption programs don’t fundamentally affect the revenue-cost equation,theyareunlikelytobesustainable.

For illustration, consider this simple example. If a police officer in Indiaearns20,000rupeesamonth(approximately$295)buthasacoststructurethatdemands he spend $400 amonth, he is going to be susceptible to corruption,regardlessofwhatthelawsdictate.3Asaresult,onecanpredictablyexpecttheaverage police officer to demand bribes, especially in a society where lawenforcement andprosecutionof corruption crime is not prevalent. It’s not that

he’s inherently a bad person—in fact, personally I believe that people areinherentlygood—butthecircumstancesofhislifedictatethathemakedifficultchoicestosurvive.

Thethirdreasonpeoplehirecorruptionisthatmostindividuals—regardlessofincomelevel—willseektosubverttheprevailinglawenforcementstrategiesinordertomakeprogressorbenefitthemselves,accordingtoHarvardacademicsEdwardGlaeserandAndreiShleifer,whostudied the rise in regulations in theUnitedStatesattheturnofthetwentiethcentury.Humanbeingsarehardwiredto make the best decision for themselves in the circumstances.When we areconfrontedwithalawthatlimitsourabilitytodosomethingwewanttodo,mostofusinstinctivelymakeamentalcalculation.DoIneedtoobeythislaw,orcanIgetawaywithdisobeyingit?AndwhichwaywillIbebetteroff?

Thereasoningbehindthisinsightisquitestraightforward:toliveaccordingto the lawsestablishedby the state requires effort, and so theaverage rationalpersonwill juxtaposethebenefitsofobeyingthelawwiththeconsequencesofdisobedience.Ifthescaletipstowarddisobedience,thenitisactuallyirrationalfor the individual to obey the law, nomatter how “good for society” itmightseem.Consider the fact that somanyofus,allover theworld, flout thespeedlimitwhentherearenopoliceofficersinsight.Twentyyearsago,havinga“fuzzbuster”(aportablepoliceradardetector)wasalmostastatussymbolinAmerica.Thesedays,thecommunity-basedGPSsmartphoneapplicationWazeallowsustowarneachotherwhenapolicecarislurkingbehindthebushesupahead.Wehavedevelopedasocialnetwork–enabledproductthatisdependentonmanyofusagreeingweshouldhelponeanotheravoidgettingcaughtinspeedtraps.Wewant to make progress—get to where we are going quickly—and willinglyignorethelawthatinformsusofthelegalspeedlimitbecausewebelievewe’reultimatelybetteroffmakingthatchoice.Whilethecircumstancesmaydiffer,thecalculationprocessrarelyeverdoes.

Butsocietiesevolve.Thepath,however,fromasocietysteepedincorruptionto onewhere trust and transparency thrive typically follows a predefined andoften predictable pattern, with three phases: “overt and unpredictablecorruption,” followed by “covert and predictable corruption,” ultimatelytransitioningtowhatwewillcalla“transparent”society.

Justbecauseaparticularcountryiscategorizedasbeinginphaseonedoesn’tmean it doesn’t have some components of phase two. Instead of thinking ofthese three phases as distinct absolutes, think of them as three points on aspectrum.Ourassumptionisthatweallwanttoendupasclosetophasethreeaspossible,asocietywheretrustandtransparencyarevalued.Historytellsusthatthepath fromcorruption to transparency inmanyof theworld’smostadmired

countries has followed a relatively predictable path through these phases.Understanding how these phases evolve is essential in our quest to create thetransparencyrequiredforhealthyeconomies.

Phase1:OvertandUnpredictable

ThefirstphaseiswhatwecallOvertandUnpredictableCorruption,andthisiswhere many poor countries find themselves. In these countries, contracts aredifficult to enforce, government institutions are hard to trust, and corruptionscandals are commonplace. Travel to any of these countries and pick up anewspaper, and you will likely see a headline on the front page about grossmismanagementoffundsbybusinessandpoliticalelites.Manyofthecountriesin this phase get a low score in Transparency International’s CorruptionPerceptionsIndex.

It is very difficult for capital to be deployed in this kind of environment.Investors understandably shy away from this kind of unpredictability andopacity.Forexample,imaginedoingbusinessinVenezuela,whereatthetimeofthiswritingthegovernmentcannolongerfundthesocialprogramsthatprovideforthebasicneedsformanyofitspeople.4

AlthoughthesituationinVenezuelamightseemhopeless,itisimportanttonote that many prosperous and advanced nations have come from similarcircumstances. In the late 1940s, for instance, Taiwan was quite corrupt andunpredictable. Mayors and local public officials handed out favors to theircronies and lined their own pockets in the process, and many forms ofcorruption,suchasbribery,embezzlement,nepotism,andevenorganizedcrime,went unchecked.5 Taiwan, however, has since become a very successful andproductive economy, and ranks 29th out of 180 in theCorruption PerceptionsIndex.

In this first phase of a society’s evolution, especiallywhen the country ispoor, a corruption-fighting strategy focused primarily on instituting new lawsdoesnot, in reality, do enough to curb corruption. In fact, it is likely tomakethingsworseasapremiumisplacedonfindingwaystoworkaroundlawsthatget in people’sway ofmaking progress. In addition,many poor countries areunable to properly enforce the law. It just so happens that law enforcement iscostly—financially, socially, and politically. This is not to say that corruptiongoeswithoutnotice.Protestsagainstcorruptionaremassiveandfrequentalloverthe world. This fervor has led to a proliferation of anticorruption candidates

throwing their hats in the ring for key political positions. Sometimes theyactually win. Russia’s Vladimir Putin and Venezuela’s Hugo Chávez (nowdeceased),forinstance,cametopowerpromisingtoeradicatecorruption.Let’sjustsaythatthosecampaignsdidn’tpanoutasvotersmighthavehoped.

Even in the rare case of a genuinely good leader with a powerful will totransform a country—take for example NelsonMandela’s influence on SouthAfricaintheyearsheledthecountry—corruptiondoesnotmagicallydisappearwithgood intentions from the top.WhenMandelawas elected as president ofpost-apartheidSouthAfricain1994,hewas,withoutquestion,oneofthemostuniversally admired leaders in world. Twenty-seven years of politicalimprisonmenthadnotdampenedhiswilltomakeSouthAfricaabetterplace.Ifanything, they had made it stronger. We still think of Mandela today as theembodimentofgreatleadership.“Althoughheprofessedtobeanordinarymanwhobecamealeaderonlybecauseofextraordinarycircumstances,”thedeanofHarvardBusinessSchoolNitinNohriasaidatthetimeofMandela’sdeath,“heexemplified the characteristics of leadership we value most highly: integrity,morality,compassion,andhumility.”

Butevenduringthemosthopefulyearsofhistenure,SouthAfricawas,andhas since remained, mired in corruption. In fact, in the years since Mandelastepped down, corruption has only gotten worse. Jacob Zuma, who becamepresidentafterMandela’sinitialsuccessorwaspushedfromoffice,wasdubbedSouthAfrica’s “Teflon president” for his ability to brush off an extraordinarynumberofcorruptionallegationsandscandalsinhiseightyearsinoffice.

HowdidSouthAfrica, sohungry for changeduringMandela’s leadership,slide so far and so quickly away from the hope that he represented?Bymostaccounts,SouthAfricapossessesmostof the institutionalfeaturesnecessary tocombatcorruption:amuch-admiredconstitution,anindependentjudiciary,andarobust media. In most indices of corruption, including those produced byTransparency International,SouthAfrica is stillonly rankedsomewhere in themiddle—arankingthathasactuallydeterioratedyearafteryear.

South Africa’s struggle is not unique. Five years after Liberia’s EllenJohnson Sirleaf becameAfrica’s first democratically elected female president,Sirleafwasawardedtheoneofthehighestinternationalhonors,theNobelPeacePrize, for her leadership in securing peace in Liberia. She had spent yearsfocusing on building—or rebuilding—the nation’s democratic institutions andstrengtheningthepositionofwomen.Butevenwithsuchinternationalacclaim,Sirleaf’sleadershipwasnotabletofullytransformLiberia,whereTransparencyInternational reported that 69 percent of people admitted to paying a bribe in2016 for access to basic services like health care and education. Sirleaf

eventuallyleftofficewiththecountrystillfacingwhatshehaddubbed“publicenemynumberone”whenshetookofficemorethanadecadeago.“Wehavenotfully met the anticorruption pledge that we made in 2006,” Sirleaf toldlawmakersinherfinalstateofthenationaddress.“Itisnotbecauseofthelackof political will to do so, but because of the intractability of dependency anddishonestycultivatedfromyearsofdeprivationandpoorgovernance.”

Corruption is not primarily about the lack of good leadership. Althoughthat’scertainlypartofit,thecausalfactorsarefarmorefundamental.Corruptionis about “hiring” the most expedient solution for what seems to be, in themoment,thegreatestgoodoftheoptionsavailabletous.

Phase2:CovertandPredictable

The second phase in the corruption spectrum is Covert and PredictableCorruption.Inthisphase,corruptionismoreorlessanopensecret—thinkofthefilm Casablanca, in which police captain Louis Renault professes to be“shocked—shocked!” to find that there is gambling in Rick’s thriving, illicitnightclub, an establishment that routinely greasesRenault’s palms. People areaware that there is corruption, but it’s baked into the system. Becausedevelopment ishappening inparallel,corruption is seenasanecessarycostofdoingbusiness.

The transition from unpredictable to predictable corruption can be veryexpensive—economicallyandpolitically—andprimarilyrequiresthecreationofnewmarkets,notlaws.Mostpeoplewhoengageincorruptionknowtheyshouldnotdowhattheyaredoing.Newlawsonlyhelpsolveaproblemwhenthereisconfusionaboutwhattodoandwhengovernmentshavethecapabilitytoenforcethelaws.

ConsiderChina.Bysomeestimates,corruptioncouldbecostingtheChinesegovernment as much as $86 billion annually.6 That’s more than the GDP ofsixty-onecountries.Since2000,between$1trillionand$4trillionisestimatedto have left the country, and some of those funds have been linked togovernmentofficials,includingPresidentXiJinping’sbrother-in-law.Accordingto one report, the net worth of the 153 Communist Chinese Parliamentarianstopped $650 billion in 2017, up about a third from the previous year.7 That’slargerthantheGDPsofFinlandandNorwaycombined.

Note that China and many other poor countries have tried to eradicatecorruptionprimarilybyusinglaws,butwithlimitedsuccess.Paradoxically,the

more laws these countries enact to fight corruption, the more corruption hasseemed to spread. China, for instance, has “more than 1,200 laws, rules, anddirectivesagainstcorruption.”Butwhatgoodisalawifthelaw-providingbodyhasneitherthemuscle,themoney,northewilltoenforcethelaw?

Atthesametime,itishardtoarguewithChina’srecentdevelopmentandtheinflux of foreign direct investment (FDI) over the past four decades. In 1970,China’sGDPpercapitawasapproximately$112;todayitisabout$8,200.Backthen, life expectancywas fifty-nine years; today it is about seventy-six years.Thecountryhasgrownat anannualaverage rateofmore than10percent andhasaccountedforapproximately40percentoftheworld’sglobalgrowthduringthisperiod.8,9

It’s notable, however, that even as China experiences this growth, thecountry still ranks 77th out of 180 countries on Transparency International’sCorruption ranking, below Senegal (66th), and on par with Trinidad andTobago.10Corruptionhasnotpreventeddevelopmentfromtakingroot.Perhapsmost telling of all is China’s meteoric increase of FDI over the past fourdecades.In1980,FDIintoChinawasaround$400million.In2016,FDItotaledmore than$170billion,a42,400percent increase. In fact, from2006 to2016,more than $2.3 trillion of FDI flowed into China.11 Did the foreign investorswho poured trillions of dollars into China not know that corruption waswidespread in the country? Why didn’t they wait for China to eradicatecorruption before investing? It is primarily because the type of corruption inChina differs from that of other countries in the first phase. It’s covert, butpredictable.And thus, canbe included in the calculationof the “costofdoingbusiness”inChina.

Even thoughdevelopment ishappening inChina (aswementionedearlier,thecountryhasliftedclosetoonebillionpeopleoutofpovertyoverthepastfewdecades),wewouldallagreethatitisnotyetatransparentsociety,andthatthereis still progress to bemade. For prosperity to become sustainable in the longterm,anationmusttransitiontothethirdphase.

Phase3:Transparency

In 2017, total lobbying in the United States totaled more than $3.3 billion.12Lobbyistsareemployedtoinfluencegovernmentsinordertoenactlawsthatarefavorabletotheircauses,industries,orparticularinterests.Butevenwithbillionsofdollars influencingAmerica’sgovernmentofficials, thecountrystill ranksa

respectable16thoutof180countriesinTransparencyInternational’sCorruptionPerceptions Index. But even with billions of dollars influencing America’sgovernmentofficials, the country still ranks a respectable sixteenthout of 180countriesinTransparencyInternational’sCorruptionPerceptionsIndex.13

Corruption is largelyfrownedupon inAmerica,and is routinelyrootedoutand prosecuted to the fullest extent of the law. The 1977 Foreign CorruptPractices Act (FCPA) serves as a deterrent to would-be corrupting Americanfirmsthatoperateoutsidethecountry,or internationalfirmsthatoperate in theUnitedStates.Walmart,Siemens,Avon,Alstom(aFrenchindustrialgroup),andmany other companies have run afoul of FCPA, and have paid hundreds ofmillionsofdollarsinfinesasaconsequence.

Sohowarethesetwothingsconsistent—weopenlyspendbillionsofdollarsin influencingourgovernments,butwealsoaggressivelypursueandprosecutethoseengagedincorruption?Besidethefact that lobbyingis legal, lobbyingisalsofairlytransparent.CuriousAmericanscangetdatafromtheSenateOfficeofPublicRecordsandfindoutwhoislobbyingforwhomandforwhatcause.

In addition to the transparency, the American economy is also relativelypredictable. ThoughAmerica is not immune from corruption—and reasonablepeople may disagree on how corrupt America really is—what’s different andhopefulisthatcorruptioninAmericaisoftenexposed,prosecuted,andpunished.You don’t have to look very hard to find headlines of corrupt politicians inAmerica. Three of the most recent Speakers of the House of Representativesfrom our home state of Massachusetts have all become convicted felons oncorruption charges. Former Illinois governor Rod Blagojevich was tried,convicted,andsentencedtofourteenyearsinprisonforcorruptionchargeswhenhetriedto“sell”formerpresidentBarackObama’svacatedSenateseat.

ButAmericadidnotalwaysprosecute,much lessconvictandsentence, itsBlagojevichs.SohowdidAmericaevolvefromacountrywherecorruptionwasrifetooneinwhichtransparencyhasbecomethenorm?

BossTweed’sAmerica

JustasitisdifficulttoimagineapoorUnitedStates,it’salsodifficulttoimagineanovertlycorruptAmericawheresuchincidentswouldnotbeinvestigated.ButtherewasatimewhencorruptioninAmericarivaledcorruptioninsomeofthepoorestcountriestoday.

Perhapsmore thananyone,nineteenth-centuryAmericanpoliticianWilliam

Magear“Boss”Tweedexemplifiedwhatitmeanttobeovertlycorrupt.Bornin1823,Tweedenteredpoliticsatanearlyageandwaselectedcityaldermanbythe timehewas twenty-eightyearsold.After spendingseveralyears inoffice,Tweedopenedalawofficeeventhoughhewasnotalawyer.Throughtheoffice,hereceivedpaymentsfromlargecorporationsforhis“legalservices,”butthesepayments were mostly extortions. With these funds, Tweed purchased manyacresofManhattanrealestateandgrewhisinfluenceinNewYorkCitypolitics.Thiswasjustthebeginning.

“TheTweedringat itsheightwasanengineeringmarvel,strongandsolid,strategicallydeployedtocontrolkeypowerpoints:thecourts,thelegislature,thetreasury and the ballot box,” biographerKennethAckermanwrote. “Its fraudshadagrandeurof scaleandaneleganceof structure:money-laundering,profitsharing and organization.”14 During his time as the boss of Tammany Hall,Tweed(whowasalsoamemberoftheUnitedStatesHouseofRepresentatives)stoleasumestimatedtobebetween$1billionand$4billionintoday’sdollars.15

In 1889, a cartoon titled The Bosses of the Senate in the satirical weeklyPuckdepictedperfectly theovertnessofAmerica’scorruptionat the time.ThecartoonshowsmembersoftheUSSenateworkingfeverishlyasrepresentativesof specific business interests, such as Steel Beam Trust, Copper Trust, SugarTrust,andsoon,watchfromthebalconyabove.Thereareseveralentrancesintothe Senate chamber. One reads: “This is a Senate of theMonopolists, by theMonopolists!”Thedoor representing the“Peoples’Entrance” is“CLOSED.”16Corruption was so severe and widespread that President Woodrow Wilson(1913–1921)hadtoaddressitduringhispresidency.

In1913,Wilsonwrote inoneofhisbooks,“Therehavebeencourts in theUnited Stateswhichwere controlled by the private interests. There have beencorrupt judges; therehavebeen judgeswhoacted asothermen’s servants andnotasservantsofthepublic.Ah,therearesomeshamefulchaptersinthestory.The judicial process is the ultimate safeguard of the things thatwemust holdstableinthiscountry.Butsupposethatthatsafeguardiscorrupted;supposethatit does not guardmy interests and yours, but guardsmerely the interests of averysmallgroupofindividuals.Thenwhereisyoursafeguard?”17

Corruption was also pervasive in major infrastructure projects, like therailroadsandroads,intheUnitedStates.Althoughtherailroadsinthe1800sandtheroadsinthe1900sweregoodforAmerica, theyalsobroughtwiththemanunprecedented level of corruption. When the US government got into thebusinessofrailroadsandextendedsubsidiestocontractors,thosesubsidieswereoften given based on the number ofmiles of railroad tracks built, not on the

qualityoreffectivenessofthetracks.Contractorsbuiltlongandwindyrailroads,oftenusingsubparmaterial,astheymostlycompetedfor“federalfavorsinsteadofrailroadcustomers.”18

Considerwhathappenedwithroadconstructionaftertheautomobileboomintheearlypartof the twentiethcentury.ThomasMacDonald, thenadministratoroftheUnitedStatesFederalHighwayAdministration,“visitedroadconstructionjobswherehefoundwasteandshoddyworkinabundance,”EarlSwiftnotesinhisbookTheBigRoads.“Localitiesoftengotaboutadime’sworthofroadforeverydollartheyspent...contractorshadcarvedthestateamongthemselvessothat each would be assured all the bridge work in a particular territory, anarrangement that cost tax payers twice in contracts that were wildlyoverpriced.”19

Had Transparency International’s annual rankings existed back then,Americawouldnothavebeenhighon the listof“leastcorrupt”countries.ButAmerica,overtime,founditssafeguardsandtodayisnumber16onthelist.Wasthat due primarily to better laws? Better politicians being elected? Betterinstitutionsbeingcreated?Certainlyallofthosethingshelpedcreateandsupportthe culture of transparency we now have, but they didn’t cause America tosuddenlystopbeingcorrupt.

AsmoreandmoreAmericanscreatedmoreandmorewealthforthemselvesand found better ways to make a living, their voices of dissatisfaction withcorruptionbecamelouder.“Politically,therageofvictimscountedforverylittlein1840,notmuchin1860;by1890, itwasaroaringforce”20 ishowStanfordLawprofessorLawrenceFriedmanputit.Clearly,corruptionwasnoteradicatedby1890,butbythenweseetheprocessbywhichitwasevolvinginAmerica.Thehopeforsomethingbetterhadbegun.

Andso,whatwe learnaboutAmerica’sdevelopment is that ithappened inspite of the widespread corruption and unpredictability in the country.21Anticorruption in America was not triggered primarily by legislation or anincreased intensity in lawenforcement. Itcameaboutbecause thefundamentalequationofhowaverageandrichAmericanscouldmakemoney,makeprogress,andmakealivingforthemselvesandtheirfamiliesbegantochange.“Americancapitalism of the 1920s was less corrupt and less abusive of workers andconsumersthanitwasin1900,”22GlaeserandShleiferconcludedintheirpaper.We find that today’s capitalism in America, while not perfect, is certainlysuperiortoAmericancapitalisminthe1920s.

Development often precedes successful anticorruption programs, not theotherwayaround.While,overtime,somepeoplebecomemorecorruptbecause

that’s what they’ve practiced all their lives, personally I don’t believe mostpeoplewakeupinthemorningjusttobecorrupt.

When there are few alternatives to help people make progress, corruptionoftenstandsoutasthemostviableoption.Butwhenabetterwaypresentsitself,the process that leads to transparency begins. We can see this happening incountriesallovertheworld.

OfMonarchsandMen

Consider how corruption evolved in Europe, where perhaps themost obviousformsofcorruption—absolutemonarchiesthatseizedland,appropriatedassets,and killed citizens at will—were common. Monarchs have been likened torobbers who are “permanently on the prowl, always probing . . . alwayssearchingfor...somethingtosteal.”23CorruptionpermeatedEuropeansocietyasbandsofarmedmen,withthesecretblessingofsomelevelofnobility,wouldterrorizewhole districtswith blackmail or other draconianmeans of extortingmoneyorresources.Noage,gender,orplacewasexempted.24Evencommonerscould, with enough money, corrupt judges and juries in ways unthinkabletoday.25

Although Europe’s transition from overt corruption to transparency wasslowerandperhapsmorepainful thanAmerica’s, itwasultimatelytriggeredinpartbyasimilarengine: innovations thatcreatednewmarketsformanyof thecontinent’snonconsumers,whichofferedviableoptions for theaveragepersontomakea living.Thenewmarketsalsoforcedthehandof thegovernments tobecomemorecreativeinhowtheytaxedandgovernedtheircitizens.

As societies became less agrarian, wealth such as gold, silver, and otherpreciousmetalsbecamemoremobile,andgovernmentsneeded tocreatebetterwaystotaxtheircitizens.“Monarchsinnovatednewwaysoftappingtheprivatewealth of their citizens. Among the most significant was the creation ofparliaments—fora inwhich they could trade concessions in public policies forthepaymentofpublic revenues,”concludesHarvardprofessorRobertBates inProsperity & Violence: The Political Economy of Development. Governmentschoseseductionoverbullyingbecause,allofasudden,citizenscouldmovetheirvalue more easily.26 A new type of economy had emerged—from one thatplunderedwealthcameonethatsoughtitscreation.

Additionally, asmonarchs continued to fightmorewars and conquermoreterritories, they needed to borrow larger and larger sums ofmoney.There are

numerousaccounts,forinstance,oftheEnglishkingintheseventeenthcenturyalwaysbeingshortofcash.Thenandtoday,therearefewchallengesworsethana government being short of cashwhen it is at war. And unlike today, whensovereigndebtistypicallyviewedassaferthanprivatedebt(althoughthisdoesdependonthecountryinquestion),backthenitwastheriskiesttypeofdebtonthemarket.Sovereigndebtwaslargerthanprivatedebtandtooklongertorepay,andthemonarchscouldrenegeonthedebtwithfewconsequences.Soinvestorswho typically loaned monarchs money, and whose monies were now moremobile as they were no longer tied to land, caused monarchs to create lesscorruptandmoretransparentinstitutions.27

Theseinstitutions,at theonset,werelessthanideal.Buttheycreatedafairamount of predictability for the investors in Europe. The courts, for instance,focusedmoreondeliveringjudgmentsexpeditiouslythantheydidondeliveringjusticeaccurately.Assuch,investorscouldpredictablyestimatehowlongcourtcases would take, and how that might affect their business dealings. This isimportantbecause researchsuggests that theunpredictability inasystem,evenonerifewithcorruption,mightactuallybemoreharmfulthancorruptionitself.28

As Europeanmarkets grew, the court systems grew as well, in relevance.This affected the culture of the average European, and caused them to placeimmense value on these new transparent institutions. The new institutionsworked, but it’s crucial to understand why they worked: many of theseinstitutions, which promoted transparency, were tied to new markets thatsustainedthemandmadethemnecessary.

Clearly, circumstances today are different. Not every poor country isengagedinawarandruledbyagovernmentthatisdesperatelyinneedofcash,likemanyEuropeangovernments fivehundredyearsago.But thefundamentalequationremainsthesame.Thereneedstobeagoodenoughreasonforpeopleinsocietytowanttoobeythelawsoftheland.ThinkofhowdifficultithasbeenforthegovernmentofArgentinatogetsmallcontractorstodeclaretheirincomein order to pay taxes. But IguanaFix, offering them something beyond moralresponsibility—theabilitytomakeprogressinthestrugglesoftheirownlives—wasabletochangethat.

TransparencyTakesRoot

EvenincountriesthatlookverydifferentfromtheUnitedStatesandcountriesinEurope,weseeasimilarpatterninthepathtotransparency.Ifanyonehadtold

General ParkChung-hee, SouthKorea’s dictatorial leader from 1963 to 1979,that his daughter, Park Geun-hye, would someday become president of thecountry,hesurelywouldn’thavebeensurprised.Butifthatpersonhadgoneonto tell the general that his daughter would be impeached by South Korea’sParliamentandbechargedwithcorruption,hemighthavebeenstunned.

ButthatisexactlywhathashappenedinSouthKorea.Inlate2016,PresidentParkGeun-hye,GeneralPark’sdaughter,was removed fromoffice for allegedbribery,abuseofpower,andothercrimesrelatedtocorruption.InMarch2017,theConstitutionalCourtofKoreaunanimouslyupheldtheparliament’sdecision,and inApril 2018, the formerpresidentwas sentenced to twenty-fouryears inprison.29

Toappreciatejusthowsignificantthatis,considerthefactthatSouthKoreawasruledbyGeneralParkuntilhisassassinationin1979.Underhisdictatorship,the scale of economic development achieved by the Korean government wasenviable,but thescaleofcorruptionwasequally indisputable.Thegovernmenthandedout favors to several largecorporations, and those corporations in turngavekickbackstogovernmentofficials.Thisproppedupthesystem,andaslongastheeconomywasgrowing,thecorruptionseemedrelativelyminuscule.Butitwasnotminusculeatall.

“Measures of institutional quality based on bureaucracy, rule of law,expropriation risk and contract repudiation by governments in successful EastAsiancountries in themid-1980swereonly slightlybetter than inmanypoor-performingcountries”ishoweconomistMushtaqKhandescribescorruptionandinstitutional development in the region. “Fast-growing Indonesia scored thesameasBurmaorGhana,andSouthKorea,Malaysia,andThailandthesameasCote d’Ivoire. The corruption index created by Transparency Internationalshowed that the rapidlygrowingEastAsiancountrieshadcorruptionscores inthe1980sthatwerelittledifferentfromthoseofotherdevelopingcountries.”30YetSouthKoreatodayiswellonitswaytoamoretransparentsociety.

As societies invest more in innovation, which creates prosperity for theircitizens,theircorruption-fightingsystemswillslowlyimproveandtheprospectof impeaching a corrupt head of state will become not only possible, butprobable.Manyoftoday’scorruptcountrieshavethepotentialtobecomemoretransparent,too,butinordertogetthere,wewillhavetogetthesequenceright.

What,Then,MustWeDo?

Sowhatcanwedotoreducecorruption?Withourunderstandingthatpeoplearetryingtomakeprogressintheirliveswhenthey“hire”corruption,wemaketwosuggestions. First: What if we stopped focusing all our effort on fightingcorruption?Without simultaneouslyprovidingasubstitute forwhatpeoplecanhire, corruption will be incredibly difficult to minimize. Like that game ofWhac-A-Mole,assoonasoneefforttotampitdownsucceeds,anotherformofcorruptionwillspringup.

The circumstance in which a particular state finds itself should determinewhichinstitutionorlawenforcementmechanismitemploys,suggestHarvard’sGlaeser and Shleifer. Their model proposes that “when the administrativecapacityofthegovernmentisseverelylimited,andbothitsjudgesandregulatorsare vulnerable to intimidation and corruption, it might be better to accept theexistingmarket failuresandexternalities than todealwith themthrougheithertheadministrativeorthejudicialprocess.Forifacountrydoesattempttocorrectmarket failures, justice will be subverted, and resources will be wasted onsubversionwithoutsuccessfullycontrollingmarketfailures.”31Inotherwords,ifa country does not have the capacity to enforce the lawson the books, itwillmatter very little how many new laws, institutions, or public mandates arecreatedtocombatcorruptionorimposetransparency.

Insteadofearnestpoor-countrygovernmentscontinuingtoaggressivelyfightcorruptionwiththeverylimitedresourcestheyhave,whatwouldhappeniftheyinsteadfocusedonenablingthecreationofnewmarketsthathelpcitizenssolvetheir everyday problems? Once enough markets are created, people have aninterest in thosemarketssucceeding.Governmentswillbegin togeneratemorerevenue to improve their courts, law enforcement, and legislative systems. Inaddition,marketsbegin toprovide jobs thatgivepeopleaviablealternative toaccumulating wealth through corrupt means. Asking people to fire corruptionwithoutgiving themanythingelse tohire isnotvery realistic,and,as thedatashow,oftendoesn’twork.

Integrating and Internalizing Your Organization’sOperations

Second,wemustfocusonwhatwecancontrol,byintegratingandinternalizingour operations in order to reduce opportunities for corruption to occur.Organizationsunderstandtheimportanceofverticalorhorizontalintegrationinordertocontrolcostsandbuildpredictabilityintotheiroperations.Thisisoneof

the reasons many large companies in emerging markets vertically andhorizontally integrate operations that might seem unnecessary in moreprosperouscountries.Aswedescribedearlier,forexample,Tolaram—makersofIndomienoodles—suppliesitsownelectricityandbuiltadistributionandretailnetworktoguaranteestableandpredictablesupply.

Themorecomponentsofanorganization’sbusinessmodelthatitbringsin-house, the more opportunity the organization has to reduce corruption. In asense, it’s like an organization has a fresh slate uponwhich it can create newrulesthatdefinetherewardandpunishmentsystemwithintheorganization.Thisis exactly what Roshan, the leading telecommunications provider inAfghanistan,didinordertoreducecorruption.

Withascoreof15/100,Afghanistanranks177thoutof180inTransparencyInternational’sCorruptionPerceptionsIndex.ArecentlyreleasedTransparencyInternationalreportsuggeststhatthecountryisunlikelytomeetitscommitmentstocurbingcorruption, inspiteofefforts throughout thecountry todo just that.ButRoshanunderstoodthattoovercomethecultureofcorruptionthathasbeencultivatedinthecountryforalongtime,ithadtodosomethingdifferent.

Many people might forget what it was like to make phone calls inAfghanistan twodecades ago, but, thankfully,PhilipAuerswald reminds us inhisbookTheComingProsperity.HequotesKarimKhoja, founderofRoshan,whoremarkedthat,“unlessyouwereveryrich,ifyouwantedtomakeaphonecall you had to walk seven hundred kilometers [435 miles] to the nearestcountry.Therewasone cellular phone companywhichwas charging$500 forthehandsetand$12perminuteforinternationalcalls,or$3forlocalcalls.Youhad to bribe their salespeople even to see you.”32 Today, Roshan servesapproximately six million people and has earned a reputation for operatingethically, with a 1,200-person workforce that consists almost exclusively ofAghanis.But achieving thishasnotbeeneasy. In2009,Roshanwas spendingupward of $1,500 per local Afghani employee, training them on both thetechnicalitiesofthebusinessandonethics.

Roshan didn’t simply stop at ethical training, however, in the hopes thatpeoplewouldalwaysappeal totheirbetternatures.Thecompanyunderstoodithad to integrate further. And so, Roshan set up a government relationsdepartmentthathandlescorruptionallegationsandreports.Wheneveremployeeswere asked to pay bribes, theywere instructed to report it to this department,whichwould, inturn,report theseincidencestoAfghanistan’sministers,donororganizations,andmembersofthemedia.Today,thecompanyisperceivedasabeaconofhopeandacommunityassetinAfghanistan.

Afghanistan still ranks poorly onmany corruptionmetrics, but the case of

Roshan shows that it is possible to avert corruption even in themost difficultbusiness environments. If transparency can begin to take root in present-dayAfghanistan,wearehopefulthatitcanworkinothercountriesaswell.

FromPiratetoPayingSubscriber

Corruptionformostpeople,especiallyinpoorcountries,issimplyameanstoanend.Iftheyhadanalternative,mostpeoplewouldnotchoosetohirecorruptionto make progress. And short of enforcing morality—often an expensive anddifficult strategywithmixed results—we cannot think of a better strategy forcurbingcorruptionthanthesubsequentcreationofnewmarkets.

ConsiderwhathappenedinthemusicindustryinAmericaattheturnofthiscentury—where, in relatively rapid succession, a culture of piracy and illegalmusicsharinggaveway toone inwhichcustomersopted topayforstreamingmusicinstead.

Ifyou’reoldenoughtorememberthegoldenageofthe“mixtape,”youwillremember that after the innovation of a dual-cassette recorder, copyingmusicwas easy. So easy that once you bought a tape, it was easy for you tomakecopiesforyourselfandyourfriends.Andmanyofusdid.Mixtapesforparties.Mixtapes tosharewithgirlfriendsorboyfriends.Mixtapes for road trips.Withourhomemademixtapes,wecouldcreatejusttherightmusicalmontage,toplaywhenever we wanted it. Music industry executives spent years lobbyingCongressforstrictercopyrightprotections,andmillionsofdollarsinawarenesscampaignsdesignedtodeterpeoplefrom“stealing”musicthisway.Butnoneofthatmade a dent in the practice ofmaking copies. EssayistGeoffreyO’Briencalledthepersonalmixtape“themostwidelypracticedAmericanartform.”Putanotherway,itwastheartofstealingfromtheartistsweloved.Allofasudden,America had become a nation of thieves who stole music. And few peopleoutsidethemusicindustryseemedtocare.

In fact, thingsonlygotworse for themusic industrywith the inventionofNapster,apioneeringpeer-to-peerfile-sharingtechnologythatmadethepracticeof home taping seem quaint by comparison. Suddenly, people all around theworld could share theirmusic—all of it, anytime,with anyone.And they did,indiscriminately.Thesituationgotsobigandunwieldythatpracticallyeveryonein the music industry took Napster to court. And the music industry won.Napster had to shut down its operations, eventually declaring bankruptcy.Although themusic industrymighthavewon thebattle, it lost thewar to stop

music-lovingAmericans from illegallysharingmusic. Illegal sharing justwentfurtherunderground.

InanextraordinaryconfessionalbooktitledHowMusicGotFree,journalistStephen Witt chronicles his own exhilarating foray into the world of musicpiracy—andhiseventualchangeofheart.Hedidnotstopstealingmusicbecausehe had amoral revelation.Rather, after years of reveling in the furtive onlinemusicpiracyindustry,Wittfinallydecidedtothrowinthetowelin2014becauseitwas simply notworth the trouble. “Piracywas becoming too expensive andtime-consuming—afteracertainpoint,itwascheapertosubscribetoSpotifyandNetflix,” Witt writes. “Individual ownership of ‘private’ digital property wasdisappearing;inthenewparadigm,digitalgoodswerecorporateproperty,withuserspaying for limitedaccess.UsingSpotify for the first time, I immediatelyunderstood that the corporations had won—its scope and convenience madetorrentingmusicseemantique.Forthefirsttime,alegalbusinesswasofferingaproductthatwassuperiortowhatwasavailableunderground.”

Themusicindustrymighthavebeenabletoknockdownmusicpirateshereand there, but until it truly understood why people were “hiring” thosealternativesolutions,itwasnevergoingtoprevail.Itwasplayingitsowngameof Whac-A-Mole. The same is true throughout society. We might win casesagainst corrupt politicians and corrupt practices, but untilwe truly understandwhypeoplehirecorruption,wewillcontinuetospendourhard-earnedresourcesfighting this problem.We aren’t suggesting that theworld turn a blind eye tocorruption,waiting formarket-creating innovations toeventuallypush it aside.We understand that this process will take time. But we must aggressivelycomplement our existing effortswithmarket-creating innovations ifwe are tohaveafightingchanceagainstcorruption.

*

Were theagents inSouthKoreademanding that Ipay“safety insurance” fortyyearsagocorrupt?Byourdefinition,theywere.Whataboutthepoliceofficersin impoverished countries who take bribes? Absolutely. Are these peopleengagingincorruptionbecausetheyaresomehowmorallybankruptindividuals?Idon’tthinkso.Foreachofthesepeople,corruptionisasolutiontoastruggle,and often the most cost-effective way for them to make progress in theirsocieties—andtosupporttheirfamilies.Andaswesee,timeandagain,simplyenactingnewlaws—orevenharsherpenalties—isn’tgoingtomakethemchangetheirbehavior.Itjustdrivesthecorruptionunderground.

We are not saying that corruption can be completely eradicated from any

society, butwebelieve it canbe significantlymitigated.And thismatters to asociety’s potential for growth because limiting corruption makes room forpredictability,which ultimately improves trust and transparency.And just likeprosperity,achievingtransparencyisaprocess.

Whenweexaminewidelyheldbeliefsthatestablishingsolidinstitutionsandabolishingcorruptionarepreconditionsofaneconomy’sdevelopment,wefindagainandagainthatinnovation,especiallymarket-creatinginnovations,canbeacriticalcatalystforchange.Market-creatinginnovationshavetheabilitytopullinwhat’sneeded,regardlessoftheexistenceofsoundinstitutionsorthestateofcorruption.Thosewillfollow,aswill,webelieve,themostvisiblepieceofthedevelopmentpuzzle:infrastructure.

NOTES1. Edward L. Glaeser and Andrei Shleifer, “The Rise of the Regulatory State,” Journal of EconomicLiterature41,no.2(June2003):401–425.

2. “Corruption Perceptions Index 2017,” Transparency International, February 21, 2018,https://www.transparency.org/news/feature/corruption_perceptions_index_2017.

3. “Themonthly remuneration received by each of its officers and employees including the system ofcompensationasprovidedinitsregulations,”MaharashtraStateAntiCorruptionBureau,accessedApril6,2018,http://acbmaharashtra.gov.in/.

4. The drop in oil prices, which accounts for asmuch as 95 percent of theVenezuelan government’srevenues,hasnothelped.Ithascausedrevenuestodwindlefromabout$80billionin2013toaround$22billionin2016.Notonlycanthegovernmentnolongerfundsomebasicneeds,butthegovernmenthasalsogotten more creative in “fund-raising.” For instance, some in the government have targeted food aiddistributionprograms,askingforbribesbeforecontainersoffoodcanbeclearedfromthecountry’sports.

TheAssociatedPress,“USLawmakersCall forActiononVenezuelaFoodCorruption,”NBCNews,January 23, 2017, http://www.nbcnews.com/news/latino/us-lawmakers-call-action-venezuela-food-corruption-n710906.

5. Christian Goebel, “Taiwan’s Fight Against Corruption,” Journal of Democracy 27, no. 1 (January2016):128,https://www.researchgate.net/publication/291821592_Taiwan’s_Fight_Against_Corruption.

6. Minxin Pei, “Corruption Threatens China’s Future,” Carnegie Endowment for International PeacePolicyBrief55,October2017,http://carnegieendowment.org/publications/index.cfm?fa=view&id=19628.

7. Sul-LeeWee,“China’sParliamentIsaGrowingBillionaires’Club,”NewYorkTimes,March1,2018,https://nyti.ms/2t7KA4z.

8. HowardFrench,China’sSecondContinent:HowaMillionMigrantsAreBuildingaNewEmpire inAfrica(NewYork:AlfredA.Knopf,2014).

9. JeffDesjardins,“Thesecountriesareleadingthewayongrowth,”WorldEconomicForum,October30,2017,https://www.weforum.org/agenda/2017/10/these-countries-are-leading-the-way-on-growth.

10. “CorruptionPerceptionsIndex2017,”TransparencyInternational,February21,2018.

11. “Foreigndirectinvestment,netinflows(BoP,currentUS$),”TheWorldBank,accessedApril6,2018,https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=CN.

12. “Lobbying: Overview,” OpenSecrets.org, Center for Responsive Politics, accessed March 5, 2018,https://www.opensecrets.org/lobby/.

13. The Congressional Research Institute, an independently financed think tank focused on improvinggovernanceintheUnitedStatessoitbetterrepresentsAmericans,hasdoneextensiveresearchontheeffectsof transparency ingovernments,particularly theUSCongress.Oneof theircore theses is that increasingtransparencycanactually“degradethequalityofademocracy.”Theirresearchshowsthat,asthelegislativeprocessbecomesmoretransparenttothecitizens,includinglobbyists,thoselobbyistscanbegintoinfluencelegislators to vote inways that don’t represent the needs andwants of theAmerican people.What thismeansisthat,evenatransparentsocietyisnotonedevoidofcorruption.Andassuch,wemustcontinuallylook for ways to help people find a substitute to this economic cancer. Read more here:http://congressionsalresearch.org/index.html.

14. Pete Hamill, “‘Boss Tweed’: The Fellowship of the Ring,” New York Times, March 27, 2005,

https://nyti.ms/2jLJRNi.

15. FaithJaycox’sbookTheProgressiveEraprovidesanaccountofsomeofTammanyHall’s(NewYorkCity’sDemocraticPartymachinery)corruptpractices.Theorganizationwasinvolvedin“policecorruption,including widespread shakedowns, voter intimidation and election fraud, collaboration with rent-rakinglandlordsandstrikebreakingemployers,andmaltreatmentofnewimmigrants.”Whenacasewasbroughtagainst it by some reformers in NewYork City, the governor refused to fund an investigation into theorganization.The investigationwas fundedby theChamberofCommerceandother “GoodGovernmentClubs,”astheywereknownatthetime.TheseclubssprangupallovertheUnitedStatesinresponsetothegovernment’sgrowingcorruption.TheseGoodGovernmentClubswerefundedbyconcernedcitizenswhowantedbetterrepresentationfromtheirgovernments.

FaithJaycox,TheProgressiveEra(NewYork:FactsonFile,2005),80.

16. JackBeatty,AgeofBetrayal(NewYork:VintageBooks,2008),xvi.

17. PresidentWoodrowWilsonwas a prolificwriter, even before he became president.Hewrote oftenaboutthestateofgovernmentintheUnitedStatesandoncorruption.InAugust1879,theinfluentialjournalInternationalReviewpublishedoneofWilson’sessays,whichhewrotewhileanundergraduatestudentatPrinceton. In it, the future president wrote, “Both State and National legislatures are looked upon withnervoussuspicion,andwehailanadjournmentofCongressasatemporaryimmunityfromdanger.”Wilsonlater goes on towrite in a speech titled “Government andBusiness”: “What is it that iswrongwith thebusinessofthiscountry?Inthefirstplace,certainmonopolies,orvirtualmonopolies,havebeenestablishedinwayswhichhavebeenunrighteousandhavebeenmaintainedinwaysthatwereunrighteous;andhavebeenusedandintendedformonopolisticpurposes.”

WoodrowWilson, The New Freedom: A Call for the Emancipation of the Generous Energies of aPeople(NewYork:Doubleday,Page&Company,1913),240.

18. Larry Schweikart,The Entrepreneurial Adventure: AHistory of Business in theUnited States (FortWorth:HarcourtCollegePublishers,2000),153–154.

19. Earl Swift, The Big Roads: The Untold Story of the Engineers, Visionaries, and Trailblazers WhoCreatedtheAmericanSuperhighways(Boston:HoughtonMifflinHarcourt,2011).

20. Lawrence Friedman, A History of American Law, 3rd revised ed. (New York: Simon & Schuster,2005).

21. During the timewhen Isaac Singer released his sewingmachine, innovatorsweremore likely to besued for their innovations than to sell their products. Lawsuitswere so commonplace that Singer and agroup of other innovators created the first-ever “Patent Pool.” The notion that, somehow, America’sbusinessenvironmentwaspredictableandlawandorderwasrespectedisnotquitetrue.

Inaddition,duringthetimeoftherailroadconstruction,therewaswidespreadspeculationanddealingswithmembers ofCongress.Manymembers ofCongress took advantage of this opportunity to line theirpocketsbygrantingfavorstothehighestbidders.

22. EdwardL.GlaeserandAndreiShleifer,“TheRiseoftheRegulatoryState,”419.

23. RalphV.TurnerandRichardHeiser,TheReignofRichardLionheart:Rulerof theAngevinEmpire,1189–1199(London:Routledge,2000),12.

24. Sir John Fortescue and Charles Plummer,TheGovernance of England: The Difference between anAbsoluteandaLimitedMonarchy(Oxford:ClarendonPress,1885):24.

25. DeirdreMcCloskey,BourgeoisDignity:WhyEconomicsCan’tExplain theModernWorld (Chicago:UniversityofChicagoPress,2010),317.

26. Harvard University professor Robert Bates provides a brilliant summary about the evolution ofinstitutionaldevelopmentinEuropeinhisshortbookProsperity&Violence.Hepeelsthecoversandgoes

behind the scenes to show us how Europe’s courts and parliaments were developed. In both cases, theconnectionbetweengrowingandthrivingmarketsandtheabilityfortheStatetogeneratemorerevenuebydevelopingthesenewinstitutionsisapparent.

RobertBates,Prosperity&Violence(NewYork:W.W.Norton&Co.,Inc.,2010),41,52.

27. Ibid.

28. In theirpaper,“PredictableCorruptionandFirmInvestment,”economistKrislertSamphantharakandpolitical scientistEdmundMaleskywrite thatpredictabilityofbribes is at least as important for a firm’sinvestmentdecisionsastheamountofbribesfirmspay,providedtheamountisnotprohibitivelyexpensive.

Krislert Samphantharak and Edmund J. Malesky, “Predictable Corruption and Firm Investment:Evidence from a Natural Experiment and Survey of Cambodian Entrepreneurs,” Quarterly Journal ofPoliticalScience3(March31,2008):227–267.

J. Edgar Campos also comes to the same conclusion that, in terms of how corruption impactsinvestments,predictabilitymatters.Heexplainsthisinhispaper“TheImpactofCorruptiononInvestment:PredictabilityMatters.”

29. ChoeSang-Hun,“ParkGeun-hye,SouthKorea’sOustedPresident,Gets24YearsinPrison,”NewYorkTimes,April6,2018,https://nyti.ms/2Heh68v.

30. MushtaqH.Khan,“StateFailureinDevelopingCountriesandInstitutionalReformStrategies,”AnnualWorld Bank Conference on Development Economics—Europe 2003,http://eprints.soas.ac.uk/3683/1/State_Failure.pdf.

Matthew McCartney, Economic Growth and Development: A Comparative Introduction (London:PalgraveMacmillan,2015),217.

31. EdwardL.GlaeserandAndreiShleifer,“TheRiseoftheRegulatoryState,”420.

32. PhilipAuerswald,TheComingProsperity:HowEntrepreneursAreTransformingtheGlobalEconomy(Oxford:OxfordUniversityPress,2012),58.

Karim Khoja, “Connecting a Nation: Roshan Brings Communications Services to Afghanistan,”Innovations 4, no. 1 (Winter 2009): 33-50,https://www.mitpressjournals.org/doi/pdf/10.1162/itgg.2009.4.1.33.

Chapter10

IfYouBuildIt,TheyMayNotCome

Between theoceanand themountain [inCapeTown], there’s theunfinishedhighway. It isanodd-looking landmark in a beautiful city: sections of elevated road left suspended in mid-air whenconstruction stopped in the 1970s. Four decades later, the hulking slabs of concrete still end inprecipitousdrops.

—THEECONOMIST1

TheIdeainBrief

Childrensittingondirtfloorsinone-roomschoolswithoutdesks.Patientsliningthecorridorsofhospitalsandclinics,desperate forhelp.Womenwalking longdistances on unpaved roads to fetch water. Nonexistent sewage treatmentfacilities. Unpassable roads. Dysfunctional rail. Inefficient ports. Poorinfrastructure is one of the most visible signs of poverty and is one of theprimaryreasonspoorcountriescannotescape theircycleofpoverty,accordingtoaUnitedNationsConferenceonTradeandDevelopment(UNCTAD)report.2If poor countries could just improve their infrastructures, the thinking goes,investmentwillflowin,andprosperitywillfollow.

Although it’s true that investors and entrepreneurs, development workers,and multinational corporations alike are frustrated by the lack of reliableinfrastructure in many low-income countries across the globe, assuming thatprosperity will follow after investments in infrastructure misses one criticalquestion:Whatsustainssuccessfulinfrastructuredevelopment?Isitaseasyasagovernment or well-meaning development agency earmarking millions orbillions of dollars for construction? In this chapter, we will explore therelationship between market-creating innovations and infrastructure. We findthat without a serious commitment to fostering innovations that create newmarketsorsupportexistingones,manyinfrastructureprojectsarevulnerabletofailure.

*

WhenMoIbrahimfirstconceivedofsettingupamobilephonecompanyacrossthecontinentofAfrica,heandhiscolleagueshadtofindcreativewaysofcopingwith the poor physical infrastructure that they faced, country by country.ChallengesthatevenalifetimeofexperienceintheUK’stelecomindustryhadnot prepared him for. “Building a mobile phone company in Europe requiresdoing deals with existing telecom companies, filling out forms, and makingcalls,” Ibrahim recalls of the process, which seemed quaint in comparison towhat he was about to face. “In Africa we had to literally build the network,towerbytower.”

Initially, Ibrahim and his team focused on a handful of countries that hadinexpensiveor free network licenses available, includingUganda,Malawi, theDemocratic Republic of Congo, Congo-Brazzaville,Gabon, and Sierra Leone.The pent-up demand was almost overwhelming; they couldn’t get set up fastenough.WhensettingupoperationsinGabon,forexample,customersactuallyknockeddownthedoorofoneoftheCeltelofficestryingtogetin.That’showbadly peoplewanted tomake phone calls.But that demand just served to putmorepressureonIbrahim’sneedtoactuallysetuptheinfrastructurerequiredtogetthebusinessupandrunning,aherculeantask.DoingbusinessinaplaceliketheDemocraticRepublicofCongowasinitiallyanightmare,becauseithadnogoodroads—andsometimesnotevenanybadroads.Ibrahim’steamhadtousehelicopterstomoveitsbasestationsandtakeheavyequipmentupahillorintothemiddleofnowhere.Theyhadtofigureouthowtogetpowertothosespots.

Celtel’steamshadtosupplytheirownelectricityandwater.Theyhadtofueltheirgeneratorsandreplenishthemfrequently.Andtherewasonechallengethathis extensive experience in the telecom industry had not prepared him for:making sure they didn’tmake enemies of any of the localwarring groups, inwhoseterritoryCeltelneededtosetuptowers.Ibrahim’scriticswarnedhimthathewouldneverbeabletoworkinterritoriesdominatedbylocalwarlords.Butthat, it turnedout,wasanunfoundedfear.Notonlydid thesegroupswelcomeCeltel towers in their territory, they actually protected them. They quicklyrecognized that those towers facilitated better communication during times ofconflict.Ithelpedthemsolveastruggle.

And so, tower by tower, Ibrahim and his team were able to build theinfrastructure he needed to get his company off the ground. It was, at first,imperfectandspotty.Butasthecompany’scustomerbasegrew,sodiditsabilityto create—or partner with local governments to create—the sophisticatedinfrastructure needed to fully support the network. Today, Africa’s mobile

telecommunication infrastructure supports approximately one billionsubscribers. Not only was Ibrahim’s company wildly successful, but hisinvestments in infrastructures also ignited further investments and catalyzed aflurry of entrepreneurs to consider Africa’s telecommunications industry. Anonexistentindustrywithnoinfrastructuretwentyyearsago,theindustrytodayattractsbillionsofdollarsininvestmentsandnowaddsmorethan$200billionineconomicvaluetothecontinent.

Although many would see the lack of fundamental infrastructure instrugglingeconomiesasaninsurmountableobstacle—oranessentialfixbeforecompaniescanbegintoplantthemselvesandgrowinemergingmarkets—othersrecognizethatinfrastructureispulledintoamarket,indribsanddrabs,oftenin“good enough” solutions where it’s really needed. Just ask the many Africantelecommunicationssubscribershowmuchcellservicehasimprovedinthepasttwenty years. Itmight not be perfect today, but it is vastly better than it wastwenty, ten, and even five years ago. Interestingly, we observed a similarphenomenon happen in America 150 years ago. Successful infrastructureprojects grow up with companies and improve as economies develop. Goodinfrastructure will come when there are markets that can absorb the cost ofbuildingandmaintainingit.

ThePushforInfrastructureThatNeverQuiteDelivers

The notion that infrastructuremust be pushed onto societies, by poor-countrygovernments before anymeaningful development can happen, has not been atime-honoredpath toprosperity. In fact, the idea that large-scale infrastructureinvestments are a precondition for economic development is a relatively newtheory,which began to take root in the 1950s.Even theword “infrastructure”wasnotcommonlyuseduntilseveralinfluentialpaperswerewrittentopromoteitasaprecursor toeconomicdevelopment.3After that, itbecamesynonymouswithapromise for “progress,”butoften linked to thechangingvicissitudesofpoliticalwinds.

IfyouevervisitCapeTown,SouthAfrica,you’llbestruckbythesightofanelevated highway running right over the center of the city because it literallydropsoff,midair,withoutsomuchasaguardrailtopreventacarfromgoingofftheedge.Thisroadtonowherehasbeensittingthere,unfinished,formorethanfortyyears.Itwasplannedoriginally,inpart,asameansofhelpingsomeoftheCapeTownregion’spoorerresidentstravelmorequicklytohigher-payingjobs

outoftheirlocalneighborhoods.Except,itturnsout,thereweren’treallyalotofhigher-paying jobs just waiting for people to find a way to get to. So whenfunding ran out and priorities changed—and all those higher-paying jobsavailable to the most impoverished and uneducated residents failed tomaterialize—the bridge became a glaring symbol of good intentions gonewrong.It’sbeenusedasabackdropforedgycommercialandmodelingshots,orthe occasional movie or television show, but for little else, in the past fourdecades.

Pushing infrastructure intoa low-andmiddle-incomeeconomybefore thereare enoughmarkets to use the infrastructure can result in big, beautiful—andultimatelyfailed—infrastructureprojectscostingbillionsandbillionsofdollars,visibleandpainfulremindersofwhatonceseemedpossible.

Bycontrast,aswedescribedwhenwewroteaboutIsaacSinger,there’sstillaSingerrailwaystationinScotland—builtoriginallyin1907asawayforSingersewing machines to get from the factory in Scotland into the market moreefficiently.ThefirstmajorrailroadintheUnitedStates,theBaltimoreandOhioCompany,wasbuiltbyaconsortiumofinvestorsandentrepreneursinBaltimoreand Ohio for the primary purpose of improving access to markets. Americanengineer,businessman,andpoliticianT.ColemanduPontof the influentialduPontfamilywasresponsibleforbuildingtheDuPontHighway,aone-hundred-milehighwayinDelaware,whichhelaterdonatedtothestate.Today,weknowitasUSRoute113andUSRoute13.DuringtheautomobilemaniaintheUnitedStates,Goodyeartirecompany’spresident,FrankSeiberling,pledged$300,000forthebuildingofroadsinthecountry.Hedidnotconsulthisboard,latersayingitwas“amovementuponwhich[Goodyear]willexpecttorealizedividends.”4Peoplewhowantedtoselltireswereveryhappytobuildroads.

Theconstructionofmanysuccessful infrastructureprojects—thenandnow—often starts out because entrepreneurs are trying to solve a problem moreefficiently. It was the proliferation of motorcycles and motorized vehicles inJapanthatledtothepavingofroads,oratleastthatmadeitsustainable.In1949,therewere fewer than two thousand kilometers of paved highways and barely370,000 registered motorized vehicles in the country. Ten years later, thenumberofregisteredmotorvehiclessurpassedfivemillion,whilethelengthofpaved highways hadmore than quadrupled. But transportation is not the onlysectorwhereweseethisphenomenon.Itispresentinothers,suchaselectricity,education, health care, communications, and so on. Even today, companiesaroundtheworldareoftenleadinginfrastructureeffortsthatareessentialtoscaletheir businesses. As we described earlier, Tolaram, the billion-dollar noodlecompany, provides its own electricity and water treatment and is actively

developing what will become one of the largest ports in Africa. POSCO, theKorean steel company, one of the largest in the world, created POSTECH, aschool to train technical managers and technicians. When Ford decided todemocratizethecar,hehadtobuildandrunafewrailroadsaswell.

Asexpensiveasmanyoftheseinfrastructureprojectsmightseem,whenwefigure out how to properly communicate the opportunity, capital will follow.Wheninfrastructureprojectsareconnectedtomarket-creatinginnovations,theybecomemoreviableandareabletoattractthenecessarycapitalforconstructionandmaintenance.Whenthesameinfrastructureprojectsareviewedinisolation,theyhardlyeverseemprofitable,andasaresult,itbecomesdifficultforthemtoattractcapital.

MycolleagueandfellowHarvardBusinessSchoolprofessorJosephBowerdetailed a similar phenomenon in his bookManaging theResourceAllocationProcess: A Study of Corporate Planning and Investment. In the book Bowerexplainshowmanygood ideas languishedwithin corporationsbecausemiddlemanagerswere unable to communicate the value of the projects in relation tohow theorganizationmademoney.As such, thehigher-level executivesnevereven got a chance to considermany potentially bankable projects because themiddle managers deemed them unprofitable and never brought them to theirattention.Infrastructureprojects,especiallyinpoorcountries,aresimilar.Manyinvestorsmay never seriously consider funding a new road, technical college,port,orhospitalbecausethoseprojectsareoftenseenpurelythroughthelensofbeing necessary and unprofitable investments. If seen through the lens of themarket they are helping either create or grow, many of these infrastructureprojectswouldbecomemoreinterestingforbothgovernmentsandcompanies.

Itmightbetemptingtothinkthisisa“poor-country”or“emerging-market”phenomenon. It isn’t. It is an “innovation typically precedes infrastructure”phenomenon—rich and poor countries alike. In late 2017, for example,FacebookandMicrosoftbuiltasignificantdigitalinfrastructurecalledMAREA.Itisafour-thousand-miletransatlanticsubseacablebetweenVirginia,USA,andBilbao,Spain.AccordingtoMicrosoft,thisisthehighest-capacitycableevertocross the Atlantic Ocean. And just like railways helped us move goods andservices in the 1800s, the Internet infrastructure is helping us move digitalinformation today.MAREA,however,wasn’t fundedbyVirginiaorBilbao. ItwasfundedbyMicrosoftandFacebook.

Rightnowpoorcountriesaretryingtoreplicatemanyoftheinfrastructuresthat have grown up andmatured for over hundreds of years in rich countries.And,worse,thesecountriesareoftentryingtoreplicatedifferentinfrastructureswithout connecting them to theneedsoforganizations, and,more specifically,

market-creating innovations.Unfortunately, andaswecan see fromone failedinfrastructureprojecttoanotheracrossmanycountries,thatisnotasustainablestrategy.

Afghanistan,where theUS government has spentmore than $1 billion oneducation infrastructure in the country with little to show for it, offers anexample.In2011,accordingtotheeducationministry,therewere1,100schoolsin operation.By2015,most of the schoolswere empty buildingswith neitherstudentsnorteachers.5InTanzania,a$200millionprojecttobuildapaperandpulpfactorydesignedtosupportthecountry’scommitmenttouniversalprimaryeducation(thecountrywouldneedtoprintalotofbooksforstudents)wentbustafter the planners realized it was too large and technically complex forTanzanians,atthetime,tomanage.Itwasanunfortunatewhiteelephantprojectforwhich Tanzanians paid the bill for the following twenty years.6 A similarthing happenedwith health care inKabulwhen theUS government funded astate-of-the-art primary care clinic. At one point, the clinic saw thousands ofpatientsamonth,butitwasclosedin2013becauseitlackedthefundstoremainsustainable and solvent. The situation is similar in Zimbabwe’s ParirenyatwaHospital.OnceathrivinghospitalthatcaredforthousandsofZimbabweans,thehospital isnowanabandonedspacewitha“disquietingsenseofabnormality,”byoneaccount.7

Why do these projects start out with such hope and promise but almostalwaysfailtodeliver?

CategorizingInfrastructure

Infrastructure is often defined as the basic physical and organizationalstructuresandfacilitiesneededfortheoperationofasocietyorenterprise.8Thisdefinition leads us to make the case that infrastructure development must bepursuedatallcostsinorderfordevelopmenttohappen.9Bythisdefinition,weseeallinfrastructurethroughthesamelens—asessentialfortheoperationsofasocietyor enterprise.Butwhenyouunderstand the roleof infrastructuremoreaccurately,youcanseethatwheninfrastructureispushedintoalocaleconomybeforeit’sready,itrarelysucceeds.

Inorder to trulyunderstandwhymany infrastructureprojectsdon’tdeliveron theirpromises,wemust firstdefineandcategorize infrastructuresproperly.Categorizationsmatter.It’safundamentalpartofhowourbrainsmakesenseof

information.Whenwelearnsomethingnew,weputitintoacategoryof“like”or “not like” something else in our brains. It’s how we understand relativemeaning. In academia, properly categorizing problems, solutions, and ideas iskeytoimprovingourknowledgeofhowtheworldworks.Ifwedon’tcategorizethings properly, then we can never truly make sense of the problems we aretrying to solve.Wecannever quite properlydiagnose faults in our analysis—meaningwe’llneverbeabletosolvetheunderlyingproblem.Infrastructureisnodifferent.

It’simportant,then,thatweunderstandthatinfrastructureisbrokenintotwocategories:hardandsoft.Hardinfrastructuresarethingssuchasroads,bridges,andtheenergyandcommunicationssystemsofaregion.Softinfrastructuresarethingslikethefinancial,health-care,andeducationsystems.

With this categorization inmind,we seeadifferent,perhapsmorehelpful,definition of infrastructure as themost efficientmechanism throughwhich asociety stores or distributes value. For example, roads are the most efficientmedium we have developed to distribute or transport cars, trucks, andmotorcycles;schoolsarethemostefficientmediumtodistributeknowledge(sofar); hospitals and clinics are themost efficientmediumwe have to distributehealth care (compared to a time when most doctors made house calls); theInternetisthemostefficientmediumtodistributeinformation;portsarethemostefficient medium we have developed to temporarily store transported goods.Thisdefinitionthoroughlysimplifiestheconceptofinfrastructure.

Infrastructure Category Value StoreorDistribute

Schools Soft Knowledge Distribute

Financialsystem Soft Credit Both

Ports Hard Goods Store

Electricity Hard Power Both

Sewersystems Hard Sewage Distribute

RoadsandbridgesHard

Cars,trucks,motorcycles,bicycles,etc.

Both

Waterworks Hard Water Both

Figure10:Someexamplesofinfrastructuresandthevaluetheyeitherstoreortransport,orboth

Understandingthefunctionalpurposeofinfrastructureat thisgranularlevelhelpsusdiscovertwoimportantattributesofinfrastructure:

1. Ultimately,thevalueofaninfrastructureisinextricablylinkedtothevalueitstoresordistributes.

2. The value being stored or distributed must justify—and ultimatelycontribute to—the cost of construction and maintenance of theinfrastructure.

Letusexplainwhatwemean.

WhenSchoolsAreNottheSameasEducation

How do you determine the value of a nation’s education, health-care, ortransportationinfrastructure?Aretheseinfrastructuresnotworthasmuch,oraslittle, as the value they provide their citizens? There is a tendency to buildinfrastructures without taking the time to understand the delicate connectionbetweentheinfrastructureandthevalueitdistributesorstores.

Infrastructures exist to serve a purpose.By themselves, they do not createvalue—they distribute or store it.10 For example, unfortunately many poorcountries are building schools that are not distributing real value to students.Andso,whilewemightcelebrate the fact that their education infrastructure is“improving,”therealvalue—thatis,thequalityofeducationbeingdistributedtostudents—is low.“Morekidsare inschoolnowthaneverbefore. Internationalattention to improving enrollment and targets such as the [UN’s] secondMillenniumDevelopmentGoalshavehadmuchtodowith that improvement,”observesHarvardKennedySchool’sLantPritchett,whohaswrittenextensivelyonthe topic.“Butwhile therehavebeenmanyschoolinggoals, therehasbeennointernationaleducationgoal,andschooling—tomakeonethingclear—isnotthesameaseducation.”11Inessence,schoolisnotsynonymouswitheducation.

WhatPritchettdescribesplaysoutinthevalueofeducationmanystudentsinpoor countries get. For instance, even though the rate of primary schoolenrollment inmost low-income countries is now almost at the level of that inhigh-income countries, the quality of education couldn’t be more different.12Internationalassessmentsofliteracyandnumeracyshowthattheaveragestudentinalow-incomecountryperformsworsethan95percentofthestudentsinhigh-incomecountries.Inaddition,studentswhoareatthetopquarteroftheirclassesin low-income countries would end up at the bottom quarter in high-incomecountries.13

The situation does not seem to be drastically different for those who gothrough the entire schooling system inmany poor countries. The valuemanyseemtobegettingeven from thehigher-education infrastructurealsoseems tobequitelow.InGhana,forinstance,manyeducatedgraduateswhocannotfindjobshavecreatedanorganizationcalledtheUnemployedGraduatesAssociation.(Theassociationrebrandeditself in late2017tothemoreoptimisticallynamedAssociation of Graduates in Skills Development.) Tunisia has a similarorganization aswell, theUnion forUnemployedGraduates. InNigeria, SouthAfrica, and Kenya, unemployment among graduates continues to soar, andstudents are now considering self-employment as their most viable option tomakeendsmeet.14

Although these nationsmight boast rising primary, secondary, and tertiaryeducationenrollmentrates,thevaluetheseschoolsaredistributingtostudentsislow.Thesamethinggoesforotherformsofinfrastructures—fromhealthcaretotransportation, and the many other infrastructures we develop. Theseinfrastructures are onlyworth the value they can distribute to citizens. If theycannot efficiently, profitably, and sustainably distribute value to citizens, theyarenotlikelytolast.

WhoBearstheCosts?

Ribbon-cutting ceremonies that highlight new and flashy infrastructures areubiquitousinmanycountries,richandpoor.Theyareachanceforpoliticianstohighlight (or take credit for) the work they are doing to serve the people.However,many infrastructure projects that are pushed onto poor communitiesdo not store or distribute enough value to justify the construction andmaintenanceof the infrastructure.Those ribbon-cuttingceremoniesarequicklyforgotten as once-promising infrastructure efforts languish without generatingenoughrevenuetobemaintained.

Ifthevalueofwhatisbeingstoredordistributedinaparticularinfrastructureisunabletofund(oftenbywayoftaxes—directlyorindirectly—orbythefeescharged by the infrastructure suppliers) the infrastructure’s development andmaintenance, then the infrastructure project will most likely fail. If thatcontinues to happen, unfortunately, poor countries will continue to borrowmoneytofundlarge-scaleinfrastructureprojectsandmaynevergetoutoftheirdebt cycle. InMarch 2018, the InternationalMonetary Fund (IMF) released areport that 40 percent of low-income countries are now in a debt crisis or are

highlysusceptibletoone.Consider the example of the recently commissioned Mombasa–Nairobi

StandardGaugeRailway,which opened inMay 2017.A recent article inTheEconomist notes that the $3.2 billion railway “may never makemoney.” Thenewraillinewassupposedtotransportroughly40percentofthecargofromtheMombasaport, but in its firstmonth transported just2percent.Unfortunately,the economics of the investment don’t seem to be adding up. A 2013WorldBank study estimated that the “new railwaywould be feasible only if itwereabletomoveatleast20mtonnesofcargoayear,justabouteverythingthatgoesthroughthe[Mombasa]port.Atbest,thenewlinewilltransporthalfofthat.”15Already,thereissomeevidencethattheraillinewillnotbesustainable,andifnot maintained properly, it may not last very long. But Kenya’s debt to theChinese who financed and built the railway will last, and, with interest, willincrease. It seems the issue isn’t theabsenceof rail (infrastructure)per se,buttheabsenceofvalue(innovations)tomoveacrosstherail.

Therearemanymoreexamplesofhospitals,schools,andotherinfrastructureprojects that are not moving or storing enough value to remain economicallyviable. In Brazil, there are almost too many failed infrastructure projects tocount.Forexample,a$32millioncablecarprojectmeanttotransportresidentstothehilltopfavelainRiodeJaneirohasnotfunctionedsince2012.Therewerenotenoughriders to justify themaintenanceof thecablecarsystem.Thereareseveralothers inandaround thecountry, including the$3.4billionnetworkofconcretecanalsinthenortheasternpartofthecountry,thedozensofnewwindfarms, and several stadia and rail projects. It almost is as if infrastructureprojectsjustcan’tsurvivetheBrazilianclimate.16

With our understanding ofwhat infrastructure is and how it relates to thevalue it stores or distributes, how can we more sustainably invest in viableinfrastructureprojects?

InfrastructureDevelopment

Infrastructuredevelopmentnotonlyisexpensive—economically,politically,andsocially—butalsooftenunderdeliversonitspromiseofeconomicimpactinbothrichandpoorcountries.Forinstance,DanisheconomistBentFlyvbjerg,whohasdone extensive research on megaprojects (projects that cost over a billiondollars) and risk, notes that nine out of ten megaprojects are late, are overbudget,andunderdeliverontheireconomicprojections.Andmostoftheissues

and studies that Flyvbjerg cites aren’t in the poorest countries in the world,which lack the institutional capacity, technical prowess, and managerialoversighttomanagethesebigprojects;theyareinthewealthiest.17

Thismakespushing infrastructures all themoredifficult inpoor countries.Bydefinition, poor countries donot have the funds to invest in infrastructure,nor are poor-country governments able to attract the investments they need tobuildandmaintaintheirnonexistentinfrastructures.Inlightofthehighcostsofinfrastructure and the severe lack of investments pouring into poor countries,what hope is there for the development of their infrastructures?There is littlehope when infrastructures are thought of in the conventional manner—essentiallyasanecessarypreconditionfordevelopment,whichmustbefundedalmost exclusively by the government or well-meaning agencies or NGOs.However, when the development of infrastructures is pulled into society byinnovationsthatcreatenewmarkets,theinvestmentsbecomemoreviable.Allofasudden,thehighcostofinfrastructuredevelopmentbecomesmoremanageableandthecostsareofteninternalizedbythenewmarketscreated(taxes,chargedfees to use the newly built infrastructure, or companies making long-terminvestmentsandpullingthemintotheirbusinessmodel).

InIndiaweseehowAravindEyeCareSystem,nowtheworld’slargestandmost productive eye hospital, pulls in the infrastructure it needs in order toprovidehealthcareformillionsofpeopleinIndia.Thehospitalhastreatedmorethan thirty-twomillionpatientsandperformedover fourmillioneye surgeries.ButAravinddoes not recruit trainednurses; instead it internalizes the trainingcosts for nurses and other medical professionals. The hospital recruits smartpeople, trains them, and then offers them jobs at the prestigious organization.“Theydon’tcomefromnursingschool;weprovidethetrainingforthem,”R.D.Thulasiraj,oneoftheorganization’sleaders,notedaboutthetrainingofnurses.“Itislikegettingaprestigiousdegreeandtrainingallinone.”18

Aravind is able to internalize the cost of this education infrastructure itprovides largely because it has created a vast newmarket for eye surgeries inIndiaandmustensurequalityofcaredeliveredtoitspatients.Andbecausetherearefewschoolsthatcantrainhealth-careworkersuptothelevelnecessaryforAravind, thecompanyhas to internalize thecostofeducation into itsbusinessmodel. Most of Aravind’s patients are very low income in India, but theorganization has developed such a unique and sustainable businessmodel thatnumerouscasestudieshavebeenwrittenaboutit.Aravind’sbusinessmodelnotonly involves the extensive training of its medical personnel so they areoptimizedforworkatthehospital,butalsoincludesmanufactureofintraocular

lenses (IOLs) and several other activities. IOLs are an integral part of the eyesurgeries the hospital performs. Before building their manufacturing plant,Aravind imported IOLs from theUnitedStatesat acostof roughly$30.AfterAravindfinishedtheirplant,IOLscostaboutaquarteroftheUSimports.19

If Dr. Govindappa Venkataswamy, Aravind’s founder, had waited for theIndian government to build India’smedical education infrastructure before hebuilt the hospital, then the world’s largest and most productive eye hospitalwouldnotexisttoday.

ButIsn’tIttheGovernment’sJob?

Itmaybeanuncomfortablethoughtthatwe’resomehowlettinggovernmentsoffthe hook for developing, funding, and managing infrastructure. Isn’t that acriticalpartofwhatthegovernmentissupposedtodoforasociety?

Indeed, infrastructure development has certainly evolved to become thegovernment’s responsibility, and we are not absolving governments of theirduties.But once again, the sequencingmatters.History is full of examples ofcreative entrepreneurs and innovators finding a faster path to creating theinfrastructure their businesses need long before the government iswilling—orable—tostepin.

In America, as we discussed earlier, it was individual entrepreneurs andprivate companieswho builtmost of the early roads, rails, and canals.At thetime, the government could not afford it, somany of these companies issuedstocks and bonds in order to fund the construction of these infrastructures. InNewEngland, for example, private companies investedmore than $6million,which helped construct thousands of miles of highway. New York andPennsylvania followed suit, handing out charters to hundreds of privatecorporations that invested tens of millions of dollars for the construction ofthousandsofmilesofroads.20

Over time, the government becamemore involved not only in developingand managing infrastructures, but also in setting standards. For example, asdifferentcompaniesbuiltandmanagedrailroadsintheUnitedStates,theyusedwhatever track gauge—spacing between rails on a railway track—was mostconvenient for them, from standard gauge to minimum, narrow, and broadgauge. Naturally, this limited the efficiency of a growing rail network in thecountry,aseithertrainswouldneedtobefittedtomaneuverdifferentgaugesorcustomers and cargo would need to transfer trains depending on the gauge

network in their journey. In 1863, the federal government passed thePacificRailway Act of 1863, which mandated every new federal railroad to be builtusing“standardgauge.”Whiletheactdidn’timpactprivaterailroadsdirectly,itcertainlydidindirectly.AftertheCivilWar,tradebetweentheNorthandSouthbegantogrow,andthedifferentgaugesinthecountry(especiallyintheSouth)significantlyhamperedcommerce.Sinceamajorityofgaugesinthecountryatthetimewerestandardgauge,Southernrailroadsdecidedtoconverttostandardgaugein1886.

Today,consideringthesize,scale,andimportanceofmostinfrastructures—especially from a national security standpoint—governments are tasked withmanagingandfundingthem.However,differentcountriesshouldhavedifferentinfrastructurestrategiesdependingontheneedsoftheircitizens,industries,andthemarketstheyhopetocreate.

Creating and maintaining infrastructures is often too expensive for poor-countrygovernmentstofundandmanagebythemselves,especiallywhenthereis little to no foundation of market-creating innovations. If, according to theAmericanSocietyofCivilEngineers, theUnitedStates—therichestcountry intheworld—gets a grade of “D+” for the state of its infrastructure, and needsmorethan$4.5trilliontogetitsinfrastructuretoagradeof“B,”thenhowcanthe governments of Honduras, Togo, or Liberia even begin to considerdevelopingtheirinfrastructures?21

Most early entrepreneurs who invested millions of dollars to buildinfrastructuresdidsonotbecauseitwasprofitablebyitself,butbecausebuildingroads, rails, canals, and better communications infrastructures helped improvetheir other business interests.22 This is the same thing we see with manyorganizationsworking inpoorcountries today—companies thatunderstand theneedtocreatemarketsandtheprocessofbuildingasuccessfulbusinessinlow-and middle-income countries invest in their own infrastructures because it’sessential for their business. Companies in themanufacturing sector fund theirowneducationprogramsbecauseit’sessentialfortheirbusiness.Theydon’trelyontheknowledgethegraduatesgetfromlocaluniversities.Thisisnotatypical.

“If you build it, he will come.” It’s one of the most famous Hollywoodmovie lines of the past few decades. In the 1989 movie Field of Dreams,struggling Iowan farmer Ray Kinsella, played by actor Kevin Costner, isinstructed by amysterious voice to build a baseball field in themiddle of hiscorncrop.That,itturnsout,willsolveallhisproblems.Butforgovernmentsinpoor countries, we believe the reverse advicemay be evenmore powerful. Iftheycome,thenyoubuildit.

IfTheyCome,WeWillBuildIt...

When economic development stakeholders, including entrepreneurs,development practitioners, and policy makers, work to develop markets thatrequireinfrastructure,theinfrastructureshaveamuchbetterchanceofnotonlysurviving,butalsothriving.Justasinitialinnovationsareoftenofpoorquality,thosethathaveidentifiedapromisingmarketopportunitytypicallygetbetterandbetter.The same is true for infrastructure: infrastructure that is pulled in for apressingmarket-creating innovation is often just “good enough” to survive. Itmaystartoffjustgoodenough,butit’llalmostalwaysimproveaslongasthere’sagoodreason(typicallyavibrantmarket)forittogetbetter.Whengovernmentsstep in to play a supporting role, they can improve rapidly—helping thoseinfrastructuresserveamuchwiderpopulation.

Itmightbetemptingtocomparetheinfrastructureinvestmentthatcompaniesinpoor countriesmustmake toget to a “goodenough” solutionwith thoseofcompaniesinrichcountries,andconcludethattheinvestmentisjusttoomuch.But thecontextmatters. Inmany lower-incomecountries, if companiescannotrely on their suppliers, they are better off vertically integrating—owning ormanaging parts of their business they ordinarilywould outsource to suppliers,such as distribution, electricity, education, and so on. The process of verticalintegration when suppliers are unreliable ultimately helps companies reducecost. It is almost always a necessary step in the market-creation phase of acompany.Theup-frontcostswillbehigh,butovertime,thebenefitsareclear.Often,anecessaryinfrastructureinvestmentthatstartedoutasacostcenterforcompaniesendsupbecomingaprofit center.Manyof thecompanieswehavementioned are clear examples of this as they begin to “sell” the infrastructuretheydeveloptoothercompaniesthatneedit.

There’s no question that it’s difficult to build and then maintaininfrastructures. Itwouldbeeasier to relyongovernments to take the leadandremovethatworryandresponsibilityfromprivateenterprise.Buthistorytellsusthatthatdoesn’toftenhappen.

Whenyoucreateanewmarket,theprofitsfromthemarkethelppayfortheinfrastructurespulled into theeconomy.This ishowmanymajor infrastructureprojects in the United States were developed. By themselves, many of theinfrastructures—theroads,therails,thecanals,andsoon—werenotprofitable.But once the infrastructures were pulled into an American economy that wascreatingalotofvaluethatneededtobestoredortransported,theinfrastructuresthen became viable. The infrastructure-innovation equation has not changed.

Pullingitintotheeconomyislikelytobefarmorepowerfulinthelongrun.

TheValueMatters

Ultimately,wemustdothehardworkoffirstcreatingthevaluethatweintendtostoreordistributeonaparticularinfrastructure.Ifwedon’t,wefallvictimtothedoctrine of “infrastructure first” and can find ourselves in a very difficultsituation—one where, if successful, we may have just built a house withoutanyoneabletoaffordtoliveinit.

Building that house, however, is enticing, andweunderstand the allure alltoowell.Efosa’sorganization,PovertyStopsHere, raised tensof thousandsofdollarsandbuilt fivewellsbeforeheunderstood theequationwasn’tworking.Thecompletedwells,orshallwesaythewaterinfrastructure,createdasenseofaccomplishment.Howcould that not be a good thing?But thewellswerenotconnected to an organization thatwas able to create lasting value from them.Andassuch,allbutoneofthemeventuallybrokeandwereleftunrepaired.

Economiesaroundtheworldhavemoreincommonthanwemightinitiallythink.We’rejustatdifferentstagesofdevelopment.WhenIreadaboutTolaram,forinstance,thecompanyremindsmeofFordMotorCompanyduringitsearlydays.WhenItraveltoIndiaandIlearnaboutcompanieslikeZoho,whichfundstrainingprograms for its ITstaff, I thinkaboutPOSCOandhow thecompanycreated POSTECH. Sustainable infrastructure development is possible, and itcanhappeninamorepredictablemanner.Butfirstwehavetogettheequationright.

NOTES1. “Plans for a weirdly unfinished highway in Cape Town,” The Economist, April 12, 2017,https://www.economist.com/news/middle-east-and-africa/21720649-road-nowhere-may-finally-reach-end-plans-weirdly-unfinished-highway.

2. ChipondaChimbelu,“Poor infrastructure iskeyobstacle todevelopment inAfrica,”DeutscheWelle,July26,2011,http://p.dw.com/p/122ya.

3. YaleUniversityprofessorWilliamRankinexplainsin“Infrastructureandtheinternationalgovernanceof economic development” that in the 1950s, “debates about development aid shifted attention from aneconomicdefinitionofinfrastructuretowardsoneframedmoreintermsofgeneralprerequisites.”Hegoesontofurtherwritethat“earlydevelopmenttheoryisoftenportrayedasinfrastructure-centric;ifthereisasingletheorythatstandsfortheeconomicthoughtondevelopmentinthe1950s,itisthe‘bigpush’,whereahugeinfusionoflumpyinfrastructurecapitalisseenasnecessaryforovercomingtheviciouscircleoflowproductivity,lowsavingsrateandlowinvestmentthoughttoexistinunderdevelopedcountries...OnlyinthecontextofinternationaldebateabouteconomicdevelopmentaftertheSecondWorldWardidtheterminfrastructurebecomealabelforthetechnical-politicalsystemsrequiredforgrowthandmodernity...Butnowhere in theseearlierusesof infrastructurecanone find the idea that large-scaleengineeringsystems,especiallythoseoftransportationandcommunication,togetherconstituteasupportivebaseforotherkindsof economic activity. It is only in the 1950s discussion about international financing for economicdevelopment that infrastructure becomes recognizable as a concept relating engineering to largersocioeconomicconcerns.”

This has significant implications for economic development, especially in poor countries. Ifinfrastructures are now considered prerequisites for development, then technically there can be nodevelopment without first developing one’s infrastructures. And because the prevailing model is “thegovernmentmustprovidetheinfrastructure,”poorcountriesfindthemselvesonaneconomicdevelopmenttreadmill,runningasfastastheycanbutnotgoinganywhere.

4. Earl Swift, The Big Roads: The Untold Story of the Engineers, Visionaries, and Trailblazers WhoCreatedtheAmericanSuperhighways(Boston:HoughtonMifflinHarcourt,2011),33.

5. AndrewDegrandpreandAlexHorton,“Ghostschoolsandgoats:16yearsofU.S. taxpayerwaste inAfghanistan,”ChicagoTribune,August21,2017,http://www.chicagotribune.com/news/nationworld/ct-us-afghanistan-spending-20170821-story.html.

6. ThestoryoftheMufindiPulpandPaperProjectisprofiledinRobertCalderisi’sbookTheTroublewithAfrica:WhyForeignAidIsn’tWorking. In it,Calderisiexplains thatTanzaniadidnothave the technicalexpertise tomanage suchabigproject, and theWorldBank staffersdidnot include trainingor capacitybuildingintotheprojectcost.

RobertCalderisi, TheTroublewithAfrica:WhyForeignAid Isn’tWorking (NewYork:St.Martin’sGriffin,2006).

7. Chris McGreal, “A month ago, the hospitals were overflowing. Now they lie empty,” Guardian,December6,2008,https://www.theguardian.com/world/2008/dec/06/zimbabwe-cholera-hospitals.

8. Oxford Dictionary definition of “infrastructure.” Many definitions of infrastructure are not muchdifferentfromthisone:https://en.oxforddictionaries.com/definition/infrastructure.

9. The idea that infrastructure must come before development is understandable. In a paper by CésarCalderónandLuisServén, titled“InfrastructureandEconomicDevelopment inSub-SaharanAfrica,” theauthors conclude that there is “robust evidence that infrastructure development—as measured by an

increasedvolumeofinfrastructurestocksandanimprovedqualityofinfrastructureservices—hasapositiveimpactonlong-rungrowthandanegativeimpactonincomeinequality.”Theyalsonotethat“sincemostAfrican countries are lagging in terms of infrastructure quantity, quality, and universality of access, thetentative conclusion is that infrastructure development offers a double potential to speed up povertyreductioninSub-SaharanAfrica:itisassociatedwithbothhighergrowthandlowerinequality.”

Reading a paper like that can lead policy makers to make significant investments in increasing theinfrastructurestockinthecountry.Althoughinfrastructuresareusuallyagoodthing,wehopetoshowinthischapterthat,iftheyarenotconnectedtoamarket,theywillbeverydifficulttomaintain.

CésarCalderónandLuisServén,“InfrastructureandEconomicDevelopment inSub-SaharanAfrica,”WorldBankGroup,PolicyResearchWorkingPaper4712,September2008,https://openknowledge.worldbank.org/handle/10986/6988.

10. InreferringtoinfrastructuresinEnglandandhowtheycontributedtotheGreatDivergence,economistDeirdre McCloskey put it this way: infrastructures “changed locations, not amounts. They increasedefficiency,butdidnotincreaseincomesbyafactoroftwoorsixteenoraquality-correctedonehundred.”Deirdre McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (Chicago:UniversityofChicagoPress,2010),343.

11. Pritchett goes on to note that the average adult in a poor country today is getting more years ofeducation than the average adult in a developed country did in 1960. But it is clear that the educationinfrastructures in many of today’s poor countries are not worth as much as those in 1960s developedcountriesandthatthesenewlyconstructededucationinfrastructuresarenotpreparingpeopleforthefuture.LantPritchett,TheRebirth ofEducation: SchoolingAin’tLearning (Washington,DC:Center forGlobalDevelopment,2013).

12. “World Development Report 2018: Learning to Realize Education’s Promise,” The World Bank,accessedMay3,2018,doi:10.1596/978-1-4648-1096-1,5.

13. Ibid.,5–6.

14. Dayo Adesulu, “Graduate unemployment, time-bomb in Nigeria,” Vanguard, June 4, 2015,https://www.vanguardngr.com/2015/06/graduate-unemployment-time-bomb-in-nigeria/.

15. “Did Kenya get a loan to build a railway or vice versa?,” The Economist, March 22, 2018,https://www.economist.com/news/middle-east-and-africa/21739227-chinese-backed-nairobi-mombasa-line-may-never-make-money-did-kenya-get.

16. Simon Romero, “Grand Visions Fizzle in Brazil,” New York Times, April 12, 2014,https://nyti.ms/2HoVtCo.

17. Bent Flyvbjerg’s research on the development and evolution of megaprojects, into which categorymany infrastructure projects fall, is vast. Flyvbjerg lists the following indisputable and unavoidableprinciples,ironlawsastheyarecalled,ofmegaprojects.First,Flyvbjerg’sresearchfindsthatnineoutoftenmegaprojectsincurcostoverruns,andmanyofsuchoverrunssurpass50percentoftheoriginalbudgetedamount.These overruns are not specific to any particular geography and have stayed relatively constantoverthepastseventyyears.Forexample,theDenverInternationalAirportwas200percentoverbudget.Infact,someindustrieshavebeenstudiedsomuchthatthereareexpectedoverruns.Therailindustryisone,where the average rail project is expected to be approximately 45 percent over budget, while roadconstructionprojectsareexpectedtobeabout20percentoverbudget.Second,Flyvbjergnotesthatnineoutof tenmegaprojectsare late.Whenmany large-scaleprojectsareproposed, their costsand schedulesareinputsthatareusedtoestimatetheshort-andlong-termeconomicandsocietalbenefitsoftheprojects.Asaresult,nineoutoftenmegaprojectsoverestimatetheireconomicandsocialbenefits.Aftermodelingmanylarge-scaleprojects,Flyvbjergfoundthataone-yeardelaycanincrease thecostofaprojectbyupto4.6percent. Few projects illustrate this point more perfectly than Boston’s Big Dig Central Artery/Tunnel

Project,whichreroutedacentralhighwayinthecityintoanewlyconstructedtunnel.In1982,thepricetagfortheBigDigwas$2.8billion(approximately$7billiontoday),butaccordingtotheBostonGlobe,whenallissaidanddone,theprojectwillcostabout$24billion.Theprojectwasalsonineyearsbehindschedule.Boston’sBigDig,however,wasnotananomaly.Third,andperhapsmostsurprising,isthatcostoverrunsareaproblemforbothpublicandprivatesectorprojects.FlyvbjergprovidestheChannelTunnel,athirty-one-milerailtunnellinkingtheUKandFrance.Euro-tunnel,theprivateownersofthetunnel,estimatedthatcostoverrunswouldlikelynotsurpass10percent.Constructioncostswere80percentoverbudget,whilefinancingcostswere140percentoverbudget.TheBritisheconomyhaslost$17.8billionfromtheproject,withinvestorsreapingawhopping-14.5percentontheirinvestment.

Bent Flyvbjerg, “What You Should Know about Megaprojects and Why: An Overview,” ProjectManagementJournal45,no.2(April–May2014):6–19.

18. V. Kasturi Rangan, “The Aravind Eye Hospital, Madurai, India: In Service for Sight,” HarvardBusinessSchoolCase593-098,April1993.(RevisedMay2009.)19. Ibid.

20. Larry Schweikart,The Entrepreneurial Adventure: AHistory of Business in theUnited States (FortWorth:HarcourtCollegePublishers,2000),97.

21. JackStewart, “AmericaGets aDPlus for Infrastructure, and aBigBill toFix it,”Wired,March 9,2017,https://www.wired.com/2017/03/america-gets-d-plus-infrastructure-big-bill-fix/.

22. LarrySchweikart,TheEntrepreneurialAdventure:AHistoryofBusinessintheUnitedStates,98.

Section4

WhatNow?

Chapter11

FromProsperityParadoxtoProsperityProcess

Mostofthethingsworthdoingintheworldhadbeendeclaredimpossiblebeforetheyweredone.

—LOUISD.BRANDEIS

TheIdeainBrief

Prosperity for all? It might seem an impossibility. But consider that in mylifetime,SouthKoreawasdeemedaneconomic“basketcase,”acountrysopoorthatmanyeconomistshadwritten itoff.Today,however, ithasemerged frompoverty toprosperity, and it did so“faster than theUnitedStates,Britain, andevenJapan,”reportstheNewYorkTimes.Whilethepathtoprosperitywilllookdifferent for different countries and will ultimately depend on their currenteconomiccircumstances,webelievethattheProsperityParadoxcanbecometheProsperity Process, one that is sustained by a continuous commitment toinnovation.

Wedonotknowtheanswerstoallofthedevelopmentpuzzlesinourworld.Butwehopethatourbookoffersyouasetofnewlensesthroughwhichtoseethe world.We hope that through some of the principles, stories, and theorieswe’ve explored, you can begin to ask yourself and those around you thequestions that can finally help us solve the seemingly intractable problem ofglobalpoverty.

*

My brother-in-law Reed Quinn has spent much of his career as a pediatriccardiothoracicsurgeoninthestateofMaine.Fromwhathetellsme,Ibelievehecould spend every waking minute performing surgery and never satisfy the

demandforhisservices.Congenitalheartproblemsarethemostcommonformof birth defect, occurring in about forty thousand babies in theUS each year.Thousands of infants are born with heart defects so severe that they almostalways require complex, high-risk operations for a chance at surviving. I canonlyimaginethepainafamilygoesthroughafterfindingthisout.Asuccessfulheartsurgery,however,canchangetheentiretrajectoryofachild’slife.

ThechancetoimpactasmanylivesashecaniswhatmotivatesReed,andhehas spent his entire career trying to findways to domore. “We’ve never notoperatedonanybodyinthestatethathasneededit,”hetoldthePortlandPressHerald a few years ago. “I don’t knowwho paysme andwho doesn’t, and Ireallydon’tcare.”That’sReed.Butinadditiontoservingthelocalpopulation,ReedalsoserveschildrenfromimpoverishedcountriesaroundtheworldthroughtheMaineFoundationforPediatricCardiacSurgery,anorganizationhefounded.Duringhismany trips todifferentcountries, includingChinaandKenya,Reedhasperformedscoresofsurgeriesandtrainedseveralphysicians.

UntilItalkedtoReedabouthiswork,Ihadnoideawhatitinvolved,andI’minaweofhisselflessdevotiontoit.Today,manychildrenaroundtheworldowetheirlivestoReedQuinnandotherdoctorsandnurseslikehim.ButIcan’thelpbut think of all the childrenwhowill never get the chance tomeet their own“ReedQuinn.”Theproblemfeelsoverwhelming.

Wemightbetemptedtothrowinthetowelandconcludethatthisproblemistoocomplicatedandtooexpensivetosolveinpoorcountriesaroundtheworld,farfromtheresourcesofawell-fundedhospital.Fortunately,thatisonlypartlytrue.Theremaynotbeenoughdevotedindividualdoctorswhowillspendtheireverywakinghourhelpingchildrenreceivethemedicalcarethatwillsavetheirlives,but thatdoesnotmeanwecannot findabetterway tohelppeople.Thisrequiresustoputondifferentlensestohelpusdevelopasetofprocesses thatradicallyscalewhatdoctorslikehimdo.

Thatiswheretheimportanceofinnovationcomesintofocus.InChapter1,wedefined innovation asa change in the processes bywhichanorganizationtransformslabor,capital,materials,andinformationintoproductsandservicesof greater value.Whenmost organizations are initially formed,muchofwhatgetsdoneisattributabletotheorganization’sresources—particularlyitspeople.Theadditionordepartureofafewkeypeoplecanhaveaprofoundinfluenceonitssuccess.Thesepeople,manyofwhomaregutsyandhighlyskilled—suchasabrilliantentrepreneurorapassionateindividualdoctor—aredifficulttoreplicate.

Butthat’swheremarket-creatinginnovationsplayacriticalrole.Theyhelpus develop the processes necessary to convert the complicated and expensiveservices into simpler andmore affordable ones so thatmanymore people can

accessthem.Attheoutset,anorganizationsurvivesbecauseofitsresources.Butanorganizationthrivesinthelongtermbecauseofitsprocesses.

ConsiderthecaseofNarayanaHealth.

ThePowerofProcesses

NarayanaHealth(NH)isachainofmultispecialtyhospitalsinIndiawithmorethanseventhousandhospitalbeds,sevenworld-classheartcenters,andnineteenprimary health-care facilities. Dr. Devi Prasad Shetty, who once served aspersonalphysiciantoMotherTeresa,foundedandbuiltNHinIndia,oneofthepoorest countries in the world and one that is perpetually plagued withcorruptionandmismanagement.Hisdreamof“curingtheworld’spoorforlessthan a dollar a day” is reminiscent of Henry Ford’s declaration that he “willbuildacarforthegreatmultitude...[which]willbesolowinpricethatnomanmakingagoodsalarywillbeunabletoownone.”AndinthesamewayFord’svisioncametrue,Dr.Shetty’sdreamismuchclosertoarealitytodaythanitwasin July 2000, when he started NH. Much like Ford, Dr. Shetty focused onimproving the process by which NH delivers care. In doing so, he hasdemocratized access to some of the most complicated and expensive surgicalprocedures,including,heart,brain,andspinalsurgeries.

NH’s obsessive focus on and commitment to developing the processesnecessarytocreateanewmarketthatprovidesqualityandaffordablehealthcareformanyinIndiaareatthecoreofwhatdrivesthecompany.Affordablehealthcare,even in richcountries, isbecomingamisnomer. In theUnitedStates, forinstance,we spend roughly $3.3 trillion or $10,348 per person on health careevery year, effectivelymaking health care unaffordable formany.1 InBritain,theNationalHealthServiceissaidtobe“underthreat”orin“crisis”andinneedofanewmodel if it is to survive.2Affordablehealthcare inpoorcountries isanothermatter altogether, asmost cannotprovidebasichealth-care services totheircitizens,much lessadvanced tertiarycare likecardiaccare,neurosurgery,andothercomplexmedicalandsurgicalinterventions.Considerheartsurgeries,forexample,anarea thatNHspecializes in; in theUKandtheUS,openheartsurgerycouldcostasmuchas$70,000and$150,000respectively.AmajorityofIndiansdon’tmakethisamount in their lifetimes.Asaresult,whenNHbeganoperations,ofthe2.4millionpeoplewhoneededheartsurgeryeveryyear,fewerthan 5 percent got their surgeries done. In this struggle, Dr. Shetty saw anopportunitytocreateanewmarketforcardiaccare.Andindeedhehas.

Today, NH performs open-heart surgeries for between $1,000 to $2,000,whileachievingsimilarmortalityandinfectionratestothoseofmanyhospitalsintheUS.3Butnotonlythat,thehospitalnowoffersqualityhealthcareinmorethan thirty specialties, including oncology, neurology, orthopedics, andgastrointestinal services, to tens of thousands of Indians annually.As a result,NHisnowworthapproximately$1billion,directlyemploysmorethanfourteenthousand people, and has trained thousands of health-care workers who nowworkatotherhospitalsinIndiaandabroad.

Onthesurface,whatDr.Shettyhascreatedmightseemimpossible.Butwesee itdifferently.Dr.Shetty’schainofhospitalscanserveasamodel forhowprogress is possible when thinking about seemingly intractable problems inhealthcare,orotherfields.Hesucceedednotonlybecausehehadavisionforabetter way to solve heart problems in India, but also because he created theprocesseswithinhisorganizationthatcouldscalewhathewaspersonallyabletodo.

Over time, an organization’s capabilities shift primarily from its resourcestoward its processes, with the business model determining what it mustprioritize. As people work together successfully to address recurrent tasks,processesbecome refinedanddefined.Andas thebusinessmodel takes shapeand it becomes clear which types of activities need to be accorded highestimportance, priorities coalesce. Consider how Dr. Shetty focused on buildingprocessesinhisorganization.

First and foremost, Dr. Shetty knew NH had to provide excellent qualitycare, so he developed a business model with processes that ensured a highutilization of the organization’s resources—doctors, nurses, buildings,medicalequipment,andsoon—whichareexpensive.IfNHcouldincreaseutilization,hethought, thiswould reduce theunitcostofeach transactionwithapatient.Forexample,thehospitalrantheirbloodtestmachinesmorethanfivehundredtimesa day,while other hospitalsmight run theirs only several times a day.At theoutset, the hospital performed nineteen open-heart surgeries and twenty-fivecatherizationproceduresaday,over700percentmore than theaverage Indianhospital. Within four years of its founding, NH was performing nearly twohundred surgeries per year per surgeon, a volume and pace faster than manyworld-classhealth-careinstitutions.4ThisenabledNHtonotonlyreduceitscost,butalsooffer thebestquality.Assurgeonsperformedmoresurgeries, theygotbetter.

NH also developed such an innovative business model that its efficientprocessesenabledittoservebothrichandpoorIndiansprofitably.Inadditionto

increasingitsresourceutilization,fromitsequipmenttoitsdoctors,NHofferedtiered services to patients. The organization acknowledged that wealthierpatientswouldlikelypayforextraservices,suchassingleroomsforprivacyandotherspecialamenities.NHalsochargedpatients forproceduresdependingonthepatient’sincomelevel,uptoamaximumamount.Thisway,heartsurgeriescost low-incomepatients less than60percentwhat theycostwealthierpatientswho could afford the surgery. And even at this rate, wealthier patients paidroughly$2,000per surgerywhile the same surgery cost about $5,500 at otherIndianhospitals.NHhasneverturnedawayapatient.In2017,theorganizationgeneratedmorethan$280millioninrevenuesandmademorethan$12millioninprofits.5

NHunderstoodthevalueofpullingin-housealotofinfrastructurethatwasnotreadilyavailableinIndia,startingwitheducation.Thehospitalrannineteenpostgraduate programs for health-careworkers, from cardiothoracic surgery tomedical laboratory technology. The training at NH was so good that thehospital’snurseswereknownallacross the region forboth their technicalandclinicalexcellence.Thisdid,however,comewithadownside,asthehospital’snurses were often heavily recruited by other organizations. But Rohini Paul,NH’sdirectorofnursing,didnotseeitthatway.“Althoughwepaythehighestsalaries,welosemanyofournursesbecausetheskillstheylearnherewillearnthembetterpayabroad,”observedPaul,“butthisdoesnotworryus,sincetherearesomanymorenurseswaitingtojoin[us].”6Andshecouldn’tbemoreright.When another organization pulls in a nurse fromNH, there is a vacuum thatmust be filled in order to keep serving nonconsumers. This creates moreopportunitiesforothersinthecountry.

Trainingwas not the only areaNH integrated into its businessmodel. Aswe’ve described throughout this book, when creating a market, organizationsmustincur“marketdevelopment”coststhatmanymaynotseeas“core”totheirbusinessmodel, but are in fact essential for them to scale and thrive.NH, forinstance, developedan insuranceproduct calledYeshasvini.For as little as11cents a month, a member of a low-income household, typically a farmingcooperative,couldgethealthinsurancethatwouldcoverupto$2,200inhealth-careexpenses.Thinkaboutit:apremiumcosting11centsamonthcouldcoveropen-heart surgery. Since its inception, the insurance product has beenpurchasedbymorethan7.5millionpeople.TheprogramhasbeensosuccessfulthatDr.Shettywasabletopullingovernmentsupportfortheprogram.In2016,revenuefrommemberpremiumsreached$14million,whiletheKarnatakastategovernmentcontributed$26.5million.ButitwasNHthatpulledthegovernment

in,nottheotherwayaround.NH did several other things that the typical hospital may not do, such as

provide mobile cardiac diagnostic labs (large buses outfitted with medicalequipment, cardiologists, and technicians) that traveled to poor communities.LiketheexecutivesatTolaramwhoasked,Whatisthepointofyourproductifitisaffordablebutnotavailable?thedoctorsatNHalsounderstoodthattherewaslittle point in creating affordable health care if patients couldn’t get to it.Althoughmanyof these investmentsmightseemanunnecessaryexpensefromtheoutside,theybecomeabsolutelynecessaryonceorganizationsstartfocusingoncreatinganewmarketwherenoneexistedpreviously.

The results fromNH are exemplary.Although he startedwith just cardiaccare, Dr. Shetty gradually moved toward providing other specialties with thesamerigorforcostsavings,highquality,andintenseefficiency.NHreducedthecost of bone marrow transplants from approximately $27,000, the nationalaverage, to just under a third, $8,900.Brain surgerywould be around $1,000,whilespinalsurgerywouldbe$550.Thissparkedamajormedicaltourismboomin India. In 2016 alone, NH treated more than fifteen thousand internationalpatients from seventy-eight different countries.Consider the economic activitythose patients generated in India, from their flights to the country to the foodtheyate.Thisistheprocessbywhichdevelopmentoccurs.

WhenthemembersofthelocalgovernmentinKarnataka,thestateinwhichNH was founded, learned about its work, the government enthusiasticallydecidedtofundtwenty-ninecoronarycareunits.NHensuredthatthesecenterswereoperatingup to the levelnecessary toprovideadequatecare forpatients.Ourbeliefisthatgovernmentsinunder-resourcedcountrieswanttodotherightthings,butareundersignificantconstraintsthatpreventthemfrommakinggood,long-term decisions. Development organizations that support market-creatinginnovators can serve as catalysts, speeding up the rate at which developmenthappens.

NHisn’ttheonlyhealth-careorganizationinIndiaworkingtocreateanewmarket toserve thevastnonconsumption thatexists in thecountry. InChapter10,weintroducedAravindEyeCareSystem,oneoftheworld’slargestandmostproductiveeyehospitals.Aravindwasfoundedin1976withjustelevenbedsandfourmedical officers.Today, thehospital seesmore than fourmillionpatientsand performs over four hundred thousand eye surgeries annually. AlthoughAravind isdifferent in theservices itoffers tomillionsof low-incomeIndians,fundamentally, the organization is similar to NH. Aravind has focused oncreating a newmarket for peoplewho historically had no access to eye care,includingeyesurgeries.Theorganizationispullingthethingsitneeds,including

training, telemedicine to reach rural areas, and even manufacturing of lenses,intoitsbusinessmodel.LikeNH,Aravindhasdevelopedabusinessmodelthatserves both wealthy and low-income clients, with a commitment to providequality eye care services to anyone in India.The eleven-bedhospital thatwasfounded in 1976 is now a postgraduate institute for ophthalmology that trainshundredsofhealth-careworkersanddoctors inIndiaannually.Thisprocessofdeveloping a businessmodel to create a newmarket that provides health-careservicescanbeappliedinothercountriesaswell.

InChapter7,wewroteaboutJavierLozano’sClinicasdelAzúcarandhowthatchainof“SugarClinics” isworking to solveMexico’sdiabetescrisis.Dr.Consulta,achainofhealthclinicsinBrazilthattodayemploysmorethan1,300doctors and treats more than 100,000 patients monthly, is another example.Sinceitsfoundingin2011,theorganizationhasgrownat300percentyearoveryear.Thischainofclinicsissoefficientthatitcanchargeanywherefrom$3to$30 fordiagnostics exams, suchasMRIs, blood tests, andmammograms.TheorganizationhasattractedprivatecapitalfromLGTImpactVenturestofunditsexpansion,andnowoperatesfiftyhealthmanagementclinicsacrossSãoPaulo.But even with its rapid growth, Dr. Consulta still only services less than 5percentofBrazil’spopulation.7 Imaginewhatmighthappen toBrazil’shealth-care systemwhenDr.Consulta reaches fivehundred clinics, or five thousand.Thesesolutionsoftenstartout small,butasweseewithNHandAravindEyeCareSystem,theyhaveenormouspotential toscale.Althoughall thesehealth-care solutions might look different, at their core they are illustrating similarpoints. Not only is there immense economic opportunity when you targetnonconsumption and create a new market, but there is also significantdevelopmentalopportunity.

If we can begin to solve these problems in health care—one of the mostcomplex sectors—imagine what we can do for food, transportation, finance,housing,andahostofother industries.Aswestudyorganizationsandnationsthroughthelensofinnovation,weseeclearlythattheinnovatorswhohavehadthe biggest impact did so by creating the processes that enabled them todemocratizeproductsandservicessothatmanymorepeoplewouldhaveaccesstothem.

Mo Ibrahim created the processes that enabled his company to provideaffordable telecommunications services tomillions of people inAfrica.HenryFord improved the process by which the Ford Model T was built and sold,thereby creating an entirely newmarket for cars in theUnitedStates.RichardLeftley created new processes and partnerships for selling insurance inBangladesh,India,Malawi,andseveralothercountriestoreachpeoplewhoneed

it the most. Liang Zhaoxian saw the nonconsumption of microwave ovens inChinaasanopportunityanddevelopednewprocessesofmaking,marketing,andsellingmicrowavesinthecountry.IsaacSinger,GeorgeEastman,andAmadeoGiannini each developed new processes for providing access to affordablesewing machines, photography, and banking services respectively. Theirinnovationsradicallychangedthoseindustries.

In the samewaywemay look at pediatric cardiac surgeries inMaine andconcludethattheproblemistoobigtosolve,wemayalsolookatglobalpovertyand conclude the same thing. But we can solve it. Our ability to developinnovationsthattransformcomplicatedandexpensiveproductsandservicesintosimpleandaffordableoneshassignificantpotentialtoalsotransformthelivesofbillionsofpeopleinourworld.

InDr.Shetty’soffice,there’saquotefromformerUSSupremeCourtJusticeLouisBrandeisthatsummarizesboththeworkthatNHisdoingandtheworkofmanyoftheinnovatorswehaveprofiledinthisbook:“Mostofthethingsworthdoingintheworldhadbeendeclaredimpossiblebeforetheyweredone.”

ThePrinciplesofMarket-CreatingInnovation

Market-creating innovationscanbegin to solvemanyofourbiggestproblems,and in the process they can ignite the economic engine of many countriescurrently struggling to prosper. By their very nature, these innovations createjobs,pullininfrastructureandinstitutions,andserveasastrongfoundationandcatalyst for future growth. As a result, they have the potential to shift thedynamicsofmanypoorcountriestoday.

Wehavewrittenthisbooktoemphasizethecriticalroleinnovationplaysinhelpinguscreateprosperity inourworld.ThroughourworkonunderstandingtheProsperityParadox,wewerereminded timeandagain that innovation isn’tsimply something that happens on the fringes of society after society goesthroughtheprocessoffixingitself.Instead,innovationisactuallytheprocessbywhichsocietyfixesitself.Theprinciplesweofferherehavethepowertochangethe way we view and respond to poverty, development, and the hope forprosperityallaroundtheworld.

Torecap:

1. EVERYNATIONHAS THE POTENTIAL FOREXTRAORDINARYGROWTHWITHINIT.Wecallthis“nonconsumption,”and,tous,it’sasignalthatopportunity

lies within. Two hundred years ago we lived in a world filled withnonconsumption of all sorts of products and services that we take forgranted today. From cars to financial services, thereweremany productsthat were once limited to only the rich in our society. But today ourcircumstanceshavechanged.Wewereonceimpoverished,andinthesameway our circumstances changed, the circumstances of many of today’simpoverishednationsinourworldcanchangeaswell.

In the appendix,weoffer several potentialmarket-creating innovationopportunities. For example, consider that for billions of people in ourworld, affordable hard and sanitary flooring in their homes is a luxury.What might it look like if an entrepreneur developed a profitable andscalablebusinessmodel thatmade,sold, installed,andservicedaffordableflooring?Millions of people around the world are not consuming healthcare. What might happen if entrepreneurs developed a profitable andscalablemodel thatmadehealthcareaffordableandaccessible?Therearesomany opportunities ready to bemined.But to see the opportunity,wewillhavetoputonnewlenses.

2. MOSTPRODUCTSONTHEMARKETTODAYHAVETHEPOTENTIALTOCREATENEW GROWTH MARKETS WHENWE MAKE THEMMORE AFFORDABLE. Heartsurgeryforbetween$1,000and$2,000?Oraffordableeyesurgery?Whatabout selling health and life insurance to millions of people for whomconventional insurance products were not accessible? While manyentrepreneurswho see opportunity in nonconsumption are often doubted,wehope that these stories illustrate the power, potential, and possibilitiesinherentintheirchoices.

Considertheelectriccarmarkettoday.Manycompanies—fromTeslatoFord, Hyundai, and Nissan—are developing products that compete withexistinggasolinecarsalreadyonthemarket.Theyaresellingtheseproductsinto the consumption economy, where the competition is steep and themarket is saturated. But what if they targeted nonconsumption?What ifthey focused their product development and sales and marketing on themajorityofpeopleinourworld,forwhomtransportationandmobilityareadailystruggle?Itmaynotbeaseasyorasstraightforwardasdevelopingaproduct for the consumption economy, but the opportunity to develop anaffordableproductthattargetsnonconsumptioninthisindustryisvast.

3. A MARKET-CREATING INNOVATION IS MORE THAN JUST A PRODUCT OR ASERVICE. It is a whole system that often pulls in new infrastructures and

regulations, and has the capability of creating new local jobs.One of theclearestillustrationsofthispointishowMoIbrahim’sCeltel(nowpartofBharti Airtel) democratized telecommunications in Africa, ultimatelypavingthewayforthecreationofanentirelynewdigitaleconomy,whichnowsupportsapproximatelyfourmillionjobs.By2020,thenumberofjobssupported by this industry is expected to top 4.5 million. The product,however,isnotsimplyaninexpensivemobilephone—itisawholesystem.It is the cell towers, which need to be installed and maintained byengineers;itisthe“scratchcards”(prepaidcallingminutes),whicharesoldin informal retail shops; it is the advertising, which is done by creativeartists and graphic designers; it is the contracts, which are drawn up bylawyers, and the new projects financed by bankers; it is the regulations,which cannowbe enforced andmodified to fit theneedsofmany in thecountry.Ineffect, it isanentiresystemthat isbuiltonthebacksofmanynewlocaljobs.

4. FOCUS ON PULLING AND NOT ON PUSHING. Pushing institutions,anticorruption measures, and infrastructure may temporarily solveproblems, but they usually don’t predictably lead to long-term change.Development and prosperity canmore easily take root inmany countrieswhen we develop innovations that create markets, which in turn pull innecessaryresourcesasocietyrequires.Onceanewmarketiscreatedthatisprofitable to the stakeholders in the economy (including investors,entrepreneurs, customers, and thegovernment), the stakeholders are oftenincentivizedtohelpmaintaintheresourcesthemarkethaspulledin—suchas infrastructures, education, and even policies. Pull strategies ensure thereadymarketiswaiting.This,webelieve,hasasignificantimpactonlong-termandsustainableprosperity.

5. WITHNONCONSUMPTION,SCALINGBECOMESINEXPENSIVE.Onceopportunityisidentifiedinnonconsumptionandabusinessmodelisconceivedtomakea product or service available to a large population of nonconsumers,achieving scale is relatively inexpensive. The first step, however, isrecognizinganareaofnonconsumption.Ifyouchaseaftertheconsumptioneconomyandhope toget scale thatway,youmightbechasingamirage.Think about the different strategies in providing financial services to theaverage Kenyan. Once Safaricom, the company behind the innovativemobilemoneyproductM-PESA,realizedtherewasavastnonconsumptionopportunity in financial services, itdevelopedM-PESA.ScalingM-PESA

cameeasy—injust less thanadecade,more than twentymillionKenyanspulled it into their lives.Contrast thatwith howmuch itmight have costSafaricom to replicate the conventional banking system, which largelytargetedtheconsumptioneconomy.

*

Market-creating innovations span geographies, industries, and economicboundaries, and can catalyze new and exciting growth opportunities formanyimpoverishednationstoday.Wehavevisitedawidevarietyofindustriesinthisbook—fromhealthcaretoautomobiles,fromfinancialservicestoflooring,andfrom insurance to food—each providing fertile territory for market-creatinginnovations.Innovationreallydoeschangetheworld.

Butforthattohappen,wemustbewillingtochallengeourassumptionsandaskourselvesnewquestions.Thatisthestartofopeningourselvesuptoaworldofpossibilitiesweneverknewexisted.

ReframingtheProblem

MostofusassociatetheWrightbrotherswithinventing,building,andflyingthefirst successful airplane in America. But what you may not know is that theWright brotherswere amongmany competitors in a fierce race inAmerica tocreatea“mannedflyingmachine.”Fromoneperspective,theiroddsofwinningwerenotgreat:theywerenotthemostwell-known,respected,orfunded.Atthetimeothers,most notably astronomer, physicist, and inventorSamuelPierpontLangley,wereconsideredsafebets.

Langleywas a professor ofmathematics and astronomy, and later becamesecretary of the Smithsonian Institution. Today, many aircraft facilities,includingtheNASALangleyResearchCenterandLangleyAirForceBase,arenamed after him. In his efforts to create the first manned flying machine,Langley spent more than $50,000 (approximately $1.4 million today) oftaxpayers’money,andhadtheresourcesoftheUSgovernmentathisdisposal.Hehadaclearideaofhowhewasgoingtowinthisrace:hewasconvincedthatifhecouldfigurehowtogenerateenoughpower,hecouldshootaplaneintotheair,causingittoflylikeanarrowflungfromabow.Aftermuchfanfare,LangleyshowcasedhisthinkingwithtwoeffortstopropelhiscraftacrossthePotomac.Buteachtime,his“aerodrome”planecrashedstraightintothewater.Humiliated

andmockedinCongress,Langleyeventuallyabandonedhisquest.Bycontrast,theWrightbrothersspentroughly$1,000ontheirexperiments.

OrvilleandWilburwerehumblebicycleenthusiasts,neitherofwhomevenhadahighschooldiploma.ButtheydidonethingthatLangleydidn’t:theyfocusedonreframing the problem, which led to them to ask different questions. WhileLangley had concentrated on propulsion for his aerodrome to fly, theWrightbrothers wanted to understand something else first. Their experience withbicycles had taught them about the importance of balance. Was balance—inrelationtobothliftanddrag—criticalinflight,too?

It turned out that this was the right question to ask. No matter howpowerfully an aircraft is thrust into the air, if it isn’t balanced, it won’t fly.Understanding the roleofbalancemadeall thedifference. Justninedays afterLangley’sfinalattemptlandedintheicywatersofthePotomacin1903,WilburandOrvilleWrightmadeanddocumentedthefirstsuccessfulcontrolledmannedflightintheKillDevilHillsofNorthCarolina.TheWrightbrothers’flightlastedjust59secondsoveradistanceof852feet.Butthat“goodenough”flighthelpedus to finally understand many of the critical elements of flight. Langley wascertainly considered a success in his day; he had several prominent buildingsnamedafterhim.But inreframingtheproblem,theWrightbrotherscreatedanindustry,andthatindustry,inturn,changedtheworld.

*

Inmydecadesofteachingandadvising,Ihavefoundthataskinggoodquestionsisoneofthemostimportanttraitsinbrightstudentsandgreatmanagers.Whydowedothingsthisway?Whydowebelievewhatwebelieve?Whatifwethoughtabout things differently? What is our mission and why? Why are we in thisbusiness?Whydowedodevelopmentthisway?Thesearesimplequestions.Butwebelievetheycanleadtopowerfulinsights.Tothosewhohavebeenworkingin development and government, and to those who have been working toencourageentrepreneurshipinmanyoftheworld’spoorcountries,yourworkisimportantnowmorethanever.Wehopethatsomeofthekeyprinciplesthatweofferherearehelpfulasyoucontinuetomaketheworldabetterplace.

We know this is not a perfect book.We see it as the beginning, not theculmination, of ourwork tomore fully understanding the role innovation canplay in creating and sustaining prosperity for somany in our world—andwehopeyouwill joinus in thatquest.Everygood theoryandeverygood idea ismade better when we understand the things it can’t explain and thecircumstancesinwhichitismostandleastrelevant.Weinviteyoutochallenge

and refine our thinking to help us make the theories here stronger, so thattogetherwecangettotheanswersthatmattermost.

Dreamwithusforasecond.Theheartsofhundredsofmillionsofpeopleallacross theworldbreakwheneverwesee imagesofpoorchildrenwhohavenoeasyaccesstofood,water,education,andbasichealthcare.Theseimagesbringout thehumanity in all ofus.Theyconnectus topeoplewedonotknowandwhomwewilllikelynevermeet.Butunlesswecanconvertthestrongemotionsthese images trigger into intelligent action, our efforts will amount to puttingBand-Aids on a wound that never heals. And over time, we will developcompassionfatigue.Theimagesofsick,poorchildrenwillnolongermoveustoaction,onlydespair.Or,worse,apathy.

Butwecansolvethisproblem.Itispossible.Weareconvincednotbecausewe are eternal optimists, but because we have done it before. The more wechannelourcollectivepassionsintosustainableprogress,themorewewillchipawayattheseeminglyintractableproblemofextremepoverty.

Webelieve in thepowerof innovation.And,morespecifically,webelievethatinvestinginmarket-creatinginnovations,evenwhenthecircumstancesseemchallenging,providesoneofthebestchancesforustocreateprosperityinmanyof today’spoorcountries.This is thesolutionto theProsperityParadox,anditcangetustotheendofdevelopmentinourlifetime.Thestakesaretoohighforusnottogetthisright.

NOTES1. “NationalHealthExpenditureData:History,”Centers forMedicareandMedicaidServices, accessedApril 26, 2018, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html.

2. KailashChand,“TheNHSisunderthreat.Onlyanewmodelwillsaveit,”Guardian,January4,2018,https://www.theguardian.com/healthcare-network/2018/jan/04/nhs-under-threat-new-model-of-care.

3. Robert F. Graboyes, “HighQuality and Low Price Coverage at Narayana andHealth City CaymanIslands,” Inside Sources, September 13, 2017, http://www.insidesources.com/high-quality-low-price-converge-narayana-healthcity-cayman-islands/.

4. TarunKhanna,V.KasturiRangan, andMerlinaManocaran, “NarayanaHrudayalayaHeartHospital:CardiacCareforthePoor(A),”HBSNo.505-078(Boston:HarvardBusinessSchoolPublishing,2011):20.

5. “InvestorPresentations:InvestorPresentation—May2017,”NarayanaHealth,accessedApril26,2018,https://www.narayanahealth.org/sites/default/files/download/investor-presentations/Investor-Presentation-May-2017.pdf.

6. TarunKhanna,V.KasturiRangan, andMerlinaManocaran, “NarayanaHrudayalayaHeartHospital:CardiacCareforthePoor(A),”10.

7. SashaBanks-Louie, “HowaSmallClinic IsHaving aBig Impact onHealthcare inBrazil,”Forbes,September 26, 2017, https://www.forbes.com/sites/oracle/2017/09/26/how-a-small-clinic-is-having-a-big-impact-on-healthcare-in-brazil/#358d9e1f3ab5.

Acknowledgments

ClaytonChristensen:BeyondProsperity

SouthKoreawasaverypoorcountrywhenIleftittoreturntotheUnitedStatesin1973.Themortalityrateforchildrenundertheageoffivewasveryhigh,andpeople simply didn’t live into a ripe old age. I remember friends andacquaintances struggling to provide even the most meager living for theirfamilies.IwasprofoundlychangedbymyyearsinSouthKorea;IlefthalfofmyheartinSouthKorea,determinedtofindawaytohelpmyfriendsriseoutofthedesperatepovertytowhichtheyhadbecomeaccustomed.

Butasunrelentinglygrimas thatpictureof thecountry is,mymost lastingimpressionwassomethingverydifferent. Itwasoneofhappiness. I rememberrunningintooneofourfriends,wecalledhimBrotherYoo,highinthehillsofUlsan,pullingasmallcartbehindhim.Hetoldusthathewasintheprocessofmovingapartments,andweofferedtorollupoursleevesandhelphim.Withasmile,hegesturedtothecartbehindhim,saying,“Thisisallwehave.”Inthatcart were all of his family’s possessions, so few that he could easilymanagemovinghiswifeandbabyonhisown.SomanyofthepeopleImetseemedtohavethis inexplicablejoythatdidnotrelyonhowmuchtheyhad.Theyhadafewmaterialpossessions,buttheirliveswererichwithfriendsandfamily.

Thesedays,whenIvisitSouthKorea,therearealmostnovisiblesignsofthepervasive poverty that I originally associated with the country. I’m happy toreport that South Korea virtually eradicated child mortality (now just 2.9 per1,000births;America’sis5.6)andlifeexpectancyhasincreasedtomorethan82years.Equallystunningisthepureeconomicgrowth—between1973and2017,the country’s GDP per capita grew by almost 6700% from around $406 to$27,539in2016.That’sacompoundedannualgrowthof10.3%over43years—arateofgrowth,decadeafterdecade,thatwouldthrillanycompany,muchlesscountry.Becauseofall these improvements,SouthKoreawasable togo frombeinga“developing”countrytoonenotonlyhostingtheworldattheOlympics

—twice—butalsoonenowfundingaidprojectsinmanylow-incomecountries.Thecountry isnowhometonumerousrenownedglobalbrands thatdesign

andmanufacturesophisticatedproducts,fromcars tosmartphonestobigships.SouthKoreaevensuccessfullyexportsitsculture(askyourteenaboutK-poporflip through the pages of a fashion magazine to see the influence of Koreanfashion)tocountriesallovertheglobe.

South Korea has solved its prosperity problem. But I fear it might haveacquiredsomenewonesintheprocess.

The suicide rate in South Korea is shockingly high: an average of 29.1peopleper100,000in2012,about2.5timeshigherthantheOECDaverage.Thecountry also has the highest rate of hospitalization for mental illness amongOECDcountries,withmore than twomillionpeople reportedly suffering fromdepression annually (and evenmore heartbreaking is the fact that only fifteenthousandchoose to seek regular treatment fordepression,due to social stigmaandfamilypressures).SouthKoreaisroutinelyrankedashavingoneofthebesteducationalsystemsintheworld—andthecountryhasinvestedheavilyinit—butpressureonstudentstoperformhasledtoanationaldebateaboutthehumantollofthosehighexpectations.

Wewanttobeclearthatwewishprosperityfortheworld,butprosperity,byitself, does not solve all of a society’s problems. And it doesn’t solve ourpersonalones,either.AsRobertKennedyoncesaid:GDPdoesn’tregister“thebeautyofourpoetryorthestrengthofourmarriages,ortheintelligenceofourpublic debate . . .” GDP measures everything “except that which makes lifeworthwhile.”

Ihope that inourstruggle tomake theworldabetterplace,wenever losetrackofwhatmattersmost.Forme, thathasbeenbuildingmy lifearound thedesire tohelppeople, agoal thathas servedas the foundationofmy roleasateacher,asacolleague,andasafriend.Andmostimportant,IcontinuetoseektoknowGodmoredeeply.

By sharing our thinking with you here, Efosa, Karen, and I hope we arehelpingyou,too.

Working side by side with Karen Dillon and Efosa Ojomo has been adelightfulexperience.Trulydelightful.Wewrotethisbookasateam,thoughweeachacquiredkeyroles.Efosa’sabilitytomasterandsynthesizewhatacademiaand practitioners have already brought to this puzzle—both deep and wideresearch—and then understand where our thinking here fits has been thefoundationofthisbook.TheroleofEfosahasbeentounderstandtheheartsandthe minds of Africa, Asia, and the Americas, both past and presentsimultaneously, andbring thatknowledge to life, first inhisown researchand

thenon thesepages.Hisunderstandingofpartsof theworld that Ihaveneverknownexceptinasuperficialwayisquiteremarkable.IcanstillpictureexactlywhereEfosasatinmyclassafewyearsago—thesecondtolastrowontheleft,near theback.Nobodyhas everoccupied that chairwith the samedelight andunderstanding that hebrought tomy class. I believedhewas amongmymostpromisingstudentsthen,andhisworkonthisbookhasprovenhowrightIwas.Asapartnerandcollaborator,hehasexceededallmyexpectations.

ThisisthethirdtimeIhavehadthepleasureofcollaboratingwithKarenonabook,and I’vecome toappreciatehergiftsmoreeach time.On thisproject,Karen defined ourmeetings by askingme questions, carefully listened tomyresponses,andpokedandproddedatouranswers.Shethenmanagedtotranslatecomplex thoughts into something that is both clear and powerful at the sametime.Karenwritesbyunderstandingmymindandmyheartsimultaneouslyandhasdoneabeautifuljobcapturingbothhere.Asawriter,sheisunsurpassed.Shetrulyhasbeenaninvaluablethoughtpartner,collaborator,andfriend.Ifeelsorryforanyonewhodoesn’thavethechancetoworkwithKaren.

Ialsowanttothankthemanypeoplewhohavehelpeduswiththisbook.I’llstartwithmy friends inSouthKorea,back in the1970s,particularlyPresidentEdward and Sister Carol Brown, who helped ignite my initial interest in thequestionsaroundprosperity.

As we’ve discussed and shared these ideas in class, my students havebecomemygreatestteachers.I’vebeengratifiedtoseehowtheyhaveusedtheseideasintheirownwork(thefoundersofIguanaFixandClinicasdelAzúcar,forexample, both first learned these ideas while students here in Cambridge andused them to help shape their market-creating innovations), and theirexperiences,inturn,havehelpedshapeandrefineourthinking.

My colleagues at Harvard Business School who teach the BSSE course,WillyShih,SteveKaufman,ChetHuber,DerekvanBever,RoryMcDonald,RajChowdhury, V. G. Narayanan, and Ray Gilmartin, have been an invaluablesource of support and feedback. Dean Nohria, who leads us all, has been aconstantsupporterofmyresearchandadearfriend.ProfessorRobertoUnger,oftheHarvardLawSchool,withwhom I have frequently shared thoughts abouthow we use disruption to raise human potential, has been the source ofinspiration andprovocative thinking.HowardYu,my former doctoral student,demonstrated the power of “deep dives,” which has influenced this work.Among my original mentors, whose leadership and support I have deeplyvalued, areKimClark,who taughtmehow todo research,KentBowen,whotaught me how to teach, and SteveWheelright, who was a steady guide as Ifoundmypathinacademia.

ThestaffofHarvardBusinessSchoolForumforGrowthandInnovation,ledby Derek van Bever, has been an invaluable source of support and thoughtleadership, includingallowingus toworkcloselywith theForum’sNateKim,who has provided us with endless hours of research assistance and criticalthinking as we’ve gathered information from all around theworld, and PoojaVenkatraman,whose parallelwork onmarket-creating innovations and capitalmarkets played a role in helping shape our thinking here. Clare Stanton hashelpedorganizeandcoordinatemuchoftheForum’seffortstopresentourworkoncampus,whichhashelpedusimmensely.

I also want to thank my colleagues and dear friends at the ChristensenInstituteandInnosight,particularlymyChristensenInstitutecofounderMichaelHorn and Innosight senior partner ScottAnthony, both ofwhom put hours ofthought intoprovidinguswith invaluable feedback for thiswork. I’mgratefulfor your support and your friendship, and this book is better because of you.BothTCSandLi&FunghavealsobeenvaluedsupportersofourlargerresearcheffortsattheChristensenInstitute,forwhichIamtrulythankful.

Ihavebeenfortunate,indeed,tohavethesupportofastellarteamhereattheHarvard Business School, including my tireless chief of staff, CliffMaxwell,whohasbeenmypartnerinsomuchimportantworkoverthepastyear.Cliff’ssharp mind, deft editing touch, and sincere desire to do work that makes theworld a better place has been an enormous gift to us on this project. Hispredecessor, JonPalmer,who isnowpursuinghisowndoctorateatHBS,wasoneofthestrongestoriginalsupportersofthiswork,andwe’regratefulforthehoursandhoursofthoughtandenergyhehasputintohelpingusbringthisbooktolife.MyassistantBrittanyMcCreadyhassomehowmagicallykeptalloftheballsintheair,andI’mgratefulforhersupportonthisandalltheotherprojectsthatshehasquietlyenabledtorunsmoothly.BeforeBrittany, therewasEmilySnyder,whocontinuedtobeacheerleaderforthisworkevenaftersheleftHBStopursueherownMBAatColumbiaBusinessSchool.AndnowI’mgratefultohavethewonderfulErinWetzelbymyside.

IhavebeenfortunatetoworkwithaterrificteamatHarperCollinsovertheyears, includingmy longtime editor and collaborator,HollisHeimbouch,whohastrulymadeeverythingI’veeverpublishedbetter.Mylongtimeagent,DannyStern, and his top-notch team at Stern Strategy, includingNedWard, KristenSoehngenKarp,andAniaTrzepizur,haveprovideduswithconstantsupportandableguidance.

The Christensen family have been among my most important partners inthoughtandsupport—onthisbookandallofmyworkinpastdecades.IwanttothankMatthew and Liz, Ann,Michael, Spencer and Channing, and Katie for

theirtirelessinterestinhelpingmerefinemythinkinganddoworkthatwillhelpmake the world a better place. My wife, Christine, and I are proud of theirsuccess in their own lives and careers—in part because they have used thetheoriesaboutmanagementthatwerehonedindiscussionsathome.Beyondthis,however,ChristineandIaremostproudthateverydaytheyrememberwhyGodsentustothisearth.

And finally, tomywife,Christine,whohas trulybeenmymost importantpartnerineverythingthathasevermatteredinmylife.ShehasreadandeditedeverybookI’veeverwritten,butonthisoneI thinkshe’sgonetheextramile.Bothherheadandherhearthavebeentrulyengagedinthiswork,andhertouchis reflected on every page.And she’s done all thatwhile helpingme throughsome challenging health problems in recent years. I considermyself fortunateindeedtohaveChristinebymyside,andmywork—andmylife—hasbeenallthebetterforit.

EfosaOjomo:BeyondtheAmericanDream

TwentyyearsagoI failed theentranceexamintouniversity inNigeria.Twice.ButasGodwouldhaveit,IwasfortunatetogainadmissionintoacollegeintheUnitedStates.Andso,inAugust2000,IcametoAmericaforcollege,andtogetmyownsliceoftheAmericanDream.IneverintendedtoreturntoNigeria,andforthelongesttime,Ididn’tevenvisit.Igraduated,gotajob,andboughtmyselfahouseandanSUV.IwaswellonmywaytorealizingthisAmericanDreamIhadheardsomuchabout.Then,in2008,inthepagesofNYUprofessorWilliamEasterly’sTheWhiteMan’sBurden,ImetAmaretch.

OnacoldFebruarynightinWisconsin,IreadaboutAmaretch—aten-year-oldEthiopiangirl—whosestoryinstantlychangedthetrajectoryofmylife.Afterlearning about how she had to wake up every morning at three a.m., fetchfirewood,andsell inthemarket,IaskedsomefriendstohelpmestartPovertyStopsHere.Whatwelackedinskillandexpertise,wemadeupforindedicationandpassion.Afterraisingacouplehundredthousanddollars,however,IrealizedtheproblemwasmuchmorecomplexthanIhadoriginallythought.Andso,in2013,IheadedtoHarvardBusinessSchool to learnhowbusinesscouldplayaroleineradicatingpoverty.ItwasthereImetProfessorClaytonChristensen.

CLAY:Thereare fewpeople IhavemetwhoareasbrilliantandaskindasProfessor Christensen. He has the ability to change not just how you see theworld,butalsohowyouseeyourselfandyourpotential.IfirstmetClaywhenI

took his course Building and Sustaining a Successful Enterprise and wasinstantlyfascinatedbyhiswillingnesstohelpeveryoneheencounteredbecomeabetterversionof themselves.Hisdedication to teaching isonlysurpassedbyhisgenuineaffectionforhisstudents.Aftertakinghisclass,makingthedecisiontoworkforhimwaseasy.Forme,thisbookis theculminationofathree-yearprocess of thinking, writing, and refining our ideas. For him, it represents athree-decade journey to make this world a better place. Clay believed in meenoughtotakemeonthisspecialjourneyandforthatIameternallygrateful.Hestretchedmy thinking when I thought we had found an answer to a pressingquestion.Heshowedmepatienceasweworkedonfine-tuning themessageoftheProsperityParadox.Andeverydaywemet,hewassimplykind.Thankingaperson like this is not easy. Outside of my family, Clay has had the mostprofoundimpactonmylife.Heismyprofessorandmymentor,but,mostofall,heismyfriend.AndtoChristine,thankyousomuchforthecountlesshoursyouspentreadingandgivingusinvaluablefeedback.

KAREN: Writing a book is akin to running marathon in that it can take awhile.Throughthisprocess,inbetweenmomentsofexcitementanddiscovery,there were moments of self-doubt and anxiety. Karen’s partnership wasabsolutelyessentialingettingthisbookandtheideasinittothefinishline.Herability toaskquestions, simplifyconcepts, andemphasizepartsofa story thatwould resonatewith readers is truly second to none.Shewas always ready togiveofhertimeandofherselfforthebenefitofthebook.Shehasbeenatruepartner through thisprocess,butmore important, shehasbecome“fam.” I amverygratefulforher.

NATEKIM spent countlesshoursprovidingexcellent researchandedits thathave made this book stronger. He has a keen ability to simplify complexconcepts tomakethemaccessibleforallaudiences.Nate’shelponthisprojectwastrulyinstrumentalinhelpinguswritethebestbookpossible.

ANNCHRISTENSEN,mymanager,hasaquestionshehasaskedmeeveryweeksinceIstartedworkingattheChristensenInstitute:“HowcanIbemosthelpfultoyou?”Annhasnotonlymadewritingthisbookpleasurable,butshehasalsomadeworkingajoy.Forthemanywaysyousacrificeforus,thanks,Ann.

CLIFF MAXWELL, who serves as Professor Christensen’s chief of staff, hasread this book almost as many times as we have and has provided us withinvaluablefeedback.Upuntilthefinalhour,Cliffwasstillhelpingusrefineourthinking.Weaffectionatelyrefertohimasourfourthauthor.

BRITTANYMcCREADY,Clay’sfacultyassistant,hasbeenpivotalinhelpinguskeep all the balls in motion as we wrote this book. She was encouragingthroughouttheprocessandalwayskeptourspiritshigh.

JON PALMER had the brilliant idea of “recruiting”Karen to join us on thisproject,andhealsograciouslyreadearlymanuscripts.Jon’seditorialprowessistrulysecondtonone.Thanksforhelpingusimprovethisbook.

Although EMILY SNYDER left to pursue herMBA at Columbia, the cultureandstructureshecreatedtosupportClay’sworklivesonandwasinstrumentalinensuringwedidourbestpossiblework.

SCOTT ANTHONY and MICHAEL HORN provided feedback that practicallychangedthedirectionofthisbook.Theyreadveryearlydraftsoftheentirebook(including our many footnotes ☺) and were kind enough to spend timeexplainingtheirfeedbacktous.Weareinyourdebt.

MY CHRISTENSEN INSTITUTE COLLEAGUES—Ruth Hartt, David Sundahl,Horace Dediu, Spencer Nam, Ryan Marlin, Alana Dunagan, Aroop Gupta,SubhajitDas,JennyWhite,RebeccaFogg,JuliaFreelandFisher,JohnGeorge,Tom Arnett, Chandrasekar Iyer, Richard Price, John Riley, Meris Stansbury,ParthasarathiVaratharajan—workingwithyouallistrulyoneofthejoysofmylife. Your dedication to making the world a better place encourages me toimproveeveryday.

I’d like toespecially thankHAYDENHILLandCHRISTINANUNEZ for readingearlymanuscriptsandprovidinguswithexcellentfeedback.

POOJA SINGHI and TERRENSMURADZIKWA, two of themost brilliant collegestudentsI’veeverinterfacedwith,providedinsightfulfeedbackanddidexcellentresearchwhichhelpedimprovetheideasinthebook.

MY POVERTY STOPS HERE FAMILY—Jeremy andAmandaAkins, Ranjit andSneha Mathai, Donald and Grace Ogisi, Terry and Mary Claire Esbeck, JeffMeisel, Ese Efemini, Femi Owoyemi—ten years ago you took a chance oncreatingPSH.Yourbeliefthatwecouldcreateabetterworldformanywhohavebeendealtadifficulthandcontinuestofuelmetothisday.

MYCHURCH FAMILY—PastorChris andBeckyDolson, Jason andVeronicaZhang, Lee-ShingChang, BrightAmudzi, andmyCity on aHill CommunityGroup—yousupportedmethroughsomeofthetoughestdaysI’vehadinrecenttime.Youprayedforme,youhopedforme,andyouhelpedmebecomeabetterversion ofmyself.You remindedmeof the role of the bodyofChrist.Thankyou.ToPriscilaSamuel,whohaschangedmy life inmoreways than shecanimagine,thankyouforalwaysbeingkind.

MYHBS FORUMFORGROWTHAND INNOVATIONFRIENDS—DerekvanBever,Pooja Venkatraman, Clare Stanton, Bryan Mezue, Tom Bartman, KatieZandbergen, and Tracy Horn—thank you for your support, your intellectualrigor, and forhelpingget thewordout. I alsowant to thankTaddyHall,whointroducedustoseveralentrepreneursweprofileinthebook.

HOLLISHEIMBOUCH,ourpublisheratHarperCollins,thankyou.Younotonlybelievedinuswhenourideasweren’tyetfullyformed,butalsohelpedusmakethembetter.

AMYBERNSTEINatHarvardBusinessReview,thankyouforbelievinginme.Youhavebeeninstrumentalinmygrowthasawriter.

ToourfriendsattheCENTERFORINTERNATIONALPRIVATEENTERPRISE(CIPE)and their colleagues—Toni Weis, Kim Bettcher, Brian Levy, and KatrinKuhlman—thank you for reading drafts, providing feedback, and helping usimprove our ideas. A very special thanks to Philip Auerswald, who read ourwholemanuscriptandprovidedinvaluablefeedbackandreferences.

Tomy family—DAD,MOM, ESOSA, FEYI, EDEFE, EDEMA,GIGI, andUYI—thankyou.EverythingIam,Iowetotheenduringloveandceaselessencouragementyouhaveshownme.Thankyoutomyparentsforalwaysbelievinginme.EsosaandFeyi(mybrotherandhiswife),youareasgenerousasyouarebrilliant,and,throughcountlessconversations,youhavehelpedmethinkmorecriticallyaboutmany ideas in this book. Your beautiful kids—Gigi and Uyi—are a constantsourceofinspirationforusall.Mytwosisters—oneofwhomhasaPhDandtheotherwhoiscurrentlyworkingonone—knowalltoowellwhatittakestowrite.Through thisprocess, the twoofyouhavehelpedmeaskbetterquestionsandhaveremindedmeto thinkof thebookasan invitation toaconversation.Youhavealwayssupportedme,evenwhenithascomeatacosttoyou.Thankyou.

Mostofall,IamthankfultoGod,theOnefromwhomallmyblessingsflow.Twenty years ago, I came to theUnited States in search of theAmerican

Dream.Icametofindpersonalprosperity.Butallthathaschangednow.Life,Ihave learned, cannot simplybeaboutoneself.Lifenecessarilyhas tobeabouthelping asmany people aswe can in the short time thatwe all have here onearth.ItismydeepesthopethatyoufindthewordsinTheProsperityParadoxhelpfulinyourcausetomaketheworldabetterplace.Thankyou.

KarenDillon:BeyondCaring

Two years ago, my daughter Rebecca was given an assignment to invite aspeakerwitha“uniqueandinnovativeperspective”ontheworldtoaddressherhigh school class. When she asked me if I knew of anyone who fit thatdescription,IimmediatelythoughtofEfosaOjomo.IwasawarethatEfosawasdoing interesting research on innovation and prosperity at the ChristensenInstitute, though only enough to recommend that Rebecca reach out to him.

Havingdonemy“momduty,”Ithensteppedoutofthesituation.Thedaythathecametoherclass,however,Iwassuckedrightbackin.Theconversationatourfamilydinner table thatnightwasanimatedbywhatEfosahaddiscussedwiththe students. Did I know how rough things were in America just a fewgenerations ago? Did I know about Efosa’s wells? Did I know about theinnovationhappeninginthemostunlikelyplacesaroundtheworld?Mysixteen-year-olddaughterhadbeencaptivatedbyhisideas,andnow,sohadI.

In early 2018 the journal Nature published the findings of two separateresearch studies into the progress beingmade on poor child nutrition and loweducation levels across fifty-one countries in Africa. The studies assessed, inextraordinarydetail,howcloseeachcountryinAfricaislikelytogettotheUN’stargetofendingchildhoodmalnutrition.ThefindingsinNatureweregrim:notonlyhadnoAfricancountrymettheinitial2015MillenniumDevelopmentGoalof eradicatinghunger, but nonewas expected tomeet it by2030. SimonHay,one of the authors of the papers published inNature, suggested that the UNglobalgoalwasmerelyan“aspirational”target.Andtheparticularaspirationtoeradicatechildhoodmalnutrition,hesaid,“isvery,veryfaraway.”

That conclusion is heartbreaking tome.More than thirty years ago, IwasoneofmillionsofteenagersgluedtothetelevisionforthelivebroadcastoftheLiveAid concert, featuring an unprecedented assembly of theworld’s biggestrockstarswhoraisedmillionsofdollarstohelpfeedstarvingpeopleinAfrica.Wememorizedallthelyricsto“FeedtheWorld,”wephonedinourpledges,andwe convinced ourselves that if we cared enough, we could help change theworld.

MytwodaughtersarenowroughlythesameageIwasduringthattimeandit’s painfully clear that the needle hasn’t moved. But I refuse to watch mydaughters’generationslowlysinkintothesamedespair—or,worse,indifference—thathaswashedoverpreviousgenerations.Caringisn’tenough.Weneednewtools,newweapons.Withthisbook,Clay,Efosa,andIhavejoinedthefight.Bysharing our best ideas, by poking and prodding conventional wisdom, and byencouraginganewlensonoldproblems,wehopewe’vespurredyoutodothesame.

It has been one of the privileges of my life to collaborate with ClaytonChristensen.Thisisnowourthirdbooktogether,andIneverfail toappreciatethe gift I’ve been given in working closely with one of the most respectedacademicsintheworld.Butfarmoreimportantthanthat,Ihavehadthechanceto collaboratewith the truly goodman behind thatmuch-deserved reputation.Ourworktogetherandthedeepfriendshipwehavedevelopedovertheseyearshavebeenpricelesstome.You’vetrulychangedmylife.

EfosaOjomo:Ithasbeenanunmitigatedjoytobeyourpartneronthisbook.You have inspired me in so many ways throughout the course of ourcollaboration.Notonlyareyoubrilliant,butyouaretrulykind,anexceedinglyrarecombinationinthisdayandage.Forme,oneofthebestthingstocomeoutof this project is thewonderful friendshipwehave forged in the days,weeks,andmonthsofworkingsocloselyonsomethingthatwebothcareddeeplyabout.You’vebeenmorethanapartner;you’vebecomefamily.Iknowthatthewellsyou so desperatelywanted to give back toNigeria did not last, but I hope insomewaythisbookbecomesyourfirstenduring“well”—oneofideasthatmayhelpmanymorepeople.Icannotwait toseethegreatthingsyouhavetooffertheworldintheyearsahead.

ToClay’schiefofstaff,CliffMaxwell,wecouldn’thaveaskedforamoresupportivepartnerinthisprocess.Youcaredasmuchaswedidaboutthisbook;youofferedusyourbestthinking,youchallengedus,andyoureditshelpedraisethiswork to another level.We are all indebted to you. Christine Christensen,whoiskindnessandclasspersonified,wasoneofourstrongestsupportersofthisproject, and I’m so grateful for your work here. And to the extraordinarilyresourcefulBrittanyMcCready,ahearty thank-youfor justalwayssteppingupwhen we needed you, whether being ready with hair spray on a photoshoot,keepingall theballs intheair,or justmakinguslaugh.Youwereasoulsisterthroughoutthisproject.NateKim,Iknewyourresearchforthisbookwouldbeinvaluable,butthewonderfulsurprisewaswhataterrificeditorandwriteryouare, too. Ifwe couldgo through this bookwith ahighlighter andmark all thesections in which you played a critical role, this book would be covered inyellow.Thankyoufortrulygivingthisbookyourall.

ToJonPalmer,whogentlycoaxedmetohavealookatEfosa’sworkintheearlydaysand thendevotedhoursofyourown time toproviding feedbackonthis book, I owe you an enormous debt of gratitude. You have been a truepartnerandfriend.ScottAnthonyandMichaelHorn,twoofthesharpestmindsIknow,gaveus invaluable insightsonearlydraftsof thiswork,andthebookismuchstronger for it.Wehad thebenefitofmanyother first-classmindsalongtheway,includingAnnChristensen,PoojaVenkatraman,HaydenHill,ChristinaNunez, Karen Player, Khuyen Bui, and Stephanie Gruner. Mallory Dwinal-Palischwasadeeplyvaluedearly reader, enthusiasticallyworking through theentiremanuscriptinbetweenthehoursshehelpsmaketheworldabetterplaceatOxford Day Academy. Charlene Bazarian, you have been one of my secretweaponsthesepastfewyears,inspiringmedailywithyourindefatigablespirit.ThismaynotbeourtriptotheRitzyet,butconsideritmyheartfeltthank-you.Tomyfriends,nearandfar,whohavecheeredmeonas Idoveheadlong into

thisbook,Ithankyouforyourunconditionalsupport.Danny Stern,Ania Trezpizur,NedWard,Kristen SoehngenKarp, and the

entire teamatSternStrategyhaveoffered steadyguidanceandencouragementthroughout this process and I am so grateful you’re on our team. We areextremely fortunate to have had the guidance of the giftedHollisHeimbouch,our longtime editor atHarperCollins,who took a leapof faithwith us on thisbook.Hollisistheperfectbalanceofpushingandpullingasaneditor,ensuringthatwewillwanttogiveherourbestwork.HercolleagueRebeccaRaskinwasalsoaninvaluableallyasweworkedourwaythroughthefinaldaysofcreatingabook.

ToRobLachenauerandallmycolleaguesatBanyanGlobalFamilyBusinessAdvisors:youhavebeenthesourceofmuchhappinessasyou’vewelcomedmeinto thefold,challengedmeto learnandgrow,andremindedmethatworkingcloselywithworld-classcolleaguesisagift.It’sanhonortobeaBanyanite.

To my parents, Bill and Marilyn Dillon, who instilled in me a sense ofcompassionforothers,Icontinuetooweyouanenormousdebtofgratitudeforyourunstinting,lifelongsupport.Mybelovedmother,Marilyn,haseditedeverybook I’ve everwritten, and I’ve come to count on her eagle eye tomakemywork better.My brother, Bill Dillon, andmy sister, Robin Ardito, have beenamongmymostardentsupporters,clearingthewayformetofocusonthisbookwhiletheysteppeduptotheplateforourfamilyresponsibilities.Iloveyouallmorethanwordsherecancapture.

Tomydaughters,RebeccaandEmma,whoIknowwillfindtheirownwaysto make the world a better place in the years ahead, I am grateful for yoursupport and interest as I’ve enthusiastically discussed each new nugget ofresearchfor thisbook.Beingyourmotherhasbeenthegreatest joyofmylife.You’ve continually inspiredme to dowork thatmatters, and I hopewith thisbookI’vedoneyouproud.Andtomyhusband,Richard,whohasbeen,dayinand day out, an avid scout of insights and examples for this book, my mosttrustedthoughtpartner,andmybestfriend:wemaynotsolvealltheproblemsoftheworldonour longwalks,butwesuregive it agood try. I can thinkofnobetterpartnerwithwhomtowalkthroughlife.

Appendix

TheWorldThroughNewLenses

Entrepreneurshipisthemostsurewayofdevelopment.

—PAULKAGAME,PRESIDENTOFRWANDA

The innovatorsweprofilehere in this appendix—inbusiness, indevelopment,andingovernment—areseeingtheworldthroughanewsetoflenses.Aworldin which struggle represents opportunity, development is focused on makingitself unnecessary, and government rallies around entrepreneurs. The point ofthis appendix is not to provide a tip sheet on the hottestmarket opportunities(thoughsomeofthesemightbejustthat),butrathertomakeclearthatwhenyoubegin to see the world through the lenses of nonconsumption and market-creatinginnovations,youcanbegintoassessriskandrewarddifferently.

It’stoosoontosayifanyoftheorganizationsandprogramsweprofilewillbesuccessful in the longrun,but takenasagroup, theyoffermuchreasonforoptimismthatwewillfindourwaytoamoreprosperousworld.

ThePowerofOutsiders

Everyindustrywoulddowelltohaveoutsiders—orthosethatarenotyetexperts—in it.Outsidersareable toasksimplequestions thatmanyexperts,often forgood reason,may not think to ask.These outsiders are not yet immersed in apoolofexpertiseandassumptionsthatsometimesleadstocognitivecaptureorcognitive tunneling, a phenomenon of inattentional blindness where observersaretoofocusedonparticulartasksandnotontheenvironment.

Consider,forinstance,thecaseofMalcolmMcLean.Manyofushaveneverheardofhim,butweowealotofourabilitytomoreefficientlytradegloballytothis former-truck-driver-turned-millionairewhoonlyhadahigh schooldegree.

McLean was a North Carolinian truck driver who found himself waiting forhoursata loadingdock thedaybeforeThanksgiving in1937when inspirationstruck.AsMcLeanwas thinkingabouthowfasthecould leave theport togethome in time for Thanksgiving dinner, a time-honored tradition in theUnitedStates, he realized that the dominant shippingmethod at the time, break-bulkcargo,wasveryinefficientandquitedangerous.1McLeanthought,surelytherehadtobeabetterway.

Heaskedaforeman,“Whydon’tyoujusttakemywholetruckandputitontheship?”Theforeman,abitunsureofwhatthatwouldevenentail,laughedatMcLean.Atthetime,everyshipperknewthatthefastestwaytomoveproductsfrom one place to another was to build bigger and faster ships. ButMcLeanthoughtthekeytoamoreefficienttransportsystemwasnottobuildfasterships,buttobuildfasterdocks.SinceMcLeanwasnotanexpertinshipping,hewasn’ttaken seriously.But itwas precisely becauseMcLeanwas an outsider that hecouldseewhattheotherscouldnot.

Todayitseemsobvious,butitwasn’tuntiltwentyyearslater,afterMcLeanbought his own shipping company and built a special boat and equipment forloading and unloading containers, that several others began to buy into hisvision. McLean’s innovation—containerization—reduced shipping costs fromapproximately $6 a ton to just 16 cents, and he reduced the loading andunloadingtimeofashipfromoneweektoeighthours.Safetyonshippingdockswasalsoabigconcern,butMcLean’stechnologyofshippingwholecontainerswithoutunloadingdrasticallyreducedinjuriesonshippingdocks.2

WhenMcLean died, he not only had revolutionized global trade, but alsowasworthroughly$330million.NotbadforahighschoolgraduatefromNorthCarolina.

Containerization,aprocessthatseemssoobviousinhindsight,waslaughedat because itwasnot how thingsweredone.McLean and containerization arenotalonewhenitcomestogoingagainstconventionalwisdom,especiallywhenit has suchgreatpotential in fundamentally changing thewaywedo things insociety.

Consider the case of the lucky discovery of the Helicobacter pylori (H.pylori) bacterium in the stomachs of patientswith gastritis and ulcers byDrs.Barry Marshall and RobinWarren. Marshall andWarren later won the 2005NobelPrizeinPhysiologyorMedicineforthisdiscovery,butnotbeforerunningaveryinterestingscientificexperiment.

Marshall,amicrobiologist,andWarren,apathologist,hadbeenunsuccessfulingrowingtheH.pyloribacteriainthelabtoshowthatH.pyloriexistedinthe

stomach.Theygot samples fromonehundredpatients,but itwasn’tuntil theytestedtheirthirty-fifthsamplethattheirtestsprovedsuccessful.AsDr.Marshalllaterrecalled,“Thateventcameaboutbecauseofaluckyaccident,inwhichthecultureswere left in the incubator over the longEasterweekend and thus theplates were not examined until the fourth or fifth day after biopsy . . . thetechnologistrealizedinhindsightthat,priortothisday,theresearchbiopsieshadbeendiscardedafter48hourswhennormalgastrointestinalorthroatspecimenswould have been expected to be overgrown with commensal flora and thuswould have been useless for any further diagnostic purpose. This rule did notapplytoH.pyloricultures.”3

AfterDrs.MarshallandWarrenhadsuccessfullygrown thecultures in thelab, the scientific community still did not believe thatH. pylori was largelylinkedtogastritisorulcers.Dr.MarshalllaterrecountedinaninterviewwithDr.PaulAdams, “I had been arguingwith the skeptics for two years and had noanimalmodel that could proveH. pylori was a pathogen. If Iwas right, thenanyonewhowas susceptible to the bugwoulddevelopgastritis andmaybe anulceryears later.”SoDr.Marshall,who testednegative forH.pylori, drank abrewwhichcontained“twocultureplatesoftheorganism.”Afterhedrankit,hebegan experiencing symptoms such as bloating, decreased appetite, andvomiting. An endoscopy showed he had severe active gastritis withpolymorphonuclearinfiltrateandepithelialdamage.AsDr.Marshallnotesintheinterview,“Gastritiswasexplained.”4

In retrospect, it might seem reasonable to conclude that members of thescientificcommunitywerebeingirrational.But,onthecontrary,theywerebeingveryrational.Dr.Marshallwasabouttoturneverythingtheybelievedaboutthesurvival of bacteria in the stomach upside down. Brilliant scientists haddevelopedtheserulesoverdecades,andthenotionthatoneoftheirfundamentalassumptions was wrong, or perhaps not as right as they thought, could bedevastating.Butanoutsiderhadtheabilitytoseewithneweyes.

Letusnowtakeasurveyofopportunitiesaroundtheworld,puttingonourlensofmarketcreationandnonconsumption.Thepotentialintheseexamplesweshare here for solvingmany global problems, creating significant wealth, andultimatelydevelopingmoreprosperouscommunitiesisinspiring.

Appliances—PortableWashingMachinesinIndiaTheglobalwashingmachineindustryisabouta$25to$30billionmarket,withIndiaresponsibleforlessthan10percentofthatmarket,eventhoughthecountryishometo1.3billionpeople—almost20percentofglobalpopulation.5Only9

percentofhouseholdsinIndiahaveawashingmachine.6ComparethatwiththeUnitedKingdom,where97percentofhouseholdshave theproduct. In fact, interms of washing machine ownership, India today lags behind the UnitedKingdom in the 1970s, when 65 percent of homes in the island nation had amachine.Wemight lookat thatandconclude that India isapoorcountry thatcannot afford existing washing machines. But we might also see the vastnonconsumptionopportunityinstead.

Although experts estimate that by 2025 the global market for washingmachineswill reach$42billion,wethink itcanbemore.7Thoseestimatesarederivedbylookingat theexistingwashingmachineproductas it is,estimatingthe growth in the “consumption economy,” which we described earlier, andprojecting sales. Unfortunately, there are many limitations with the existingmachine.

For example, existing washing machines are complicated, power-hungry,and too expensive for most of the world’s population, and they are mostlyavailableforhomeswithpipedwatersupply.Inaddition,purchasingawashingmachineandattachingittoone’shomealmostalwaysnecessitatesacalltotheplumber, a cost thatmanyhouseholds in India cannotbear.Existingmachinesalsorequireelectricity,andmillionsofhouseholdsinIndia,andotheremergingmarkets,don’thaveaccesstoelectricity.So,bydesign,mostwashingmachinesonthemarketexcludeamajorityofIndia’sandtheworld’spopulation.Butwhatif an innovator designed,manufactured, and sold a washingmachine targetedspecificallyatthenonconsumptionmarketinIndiaandinmanycountrieslikeit?

Aproductthattargetsthismarketwillhavetobesmaller,lessbulky,easierto installandoperate,andawhole lotmoreaffordable thanexistingmachines.Theproductwillneedtofit inasmallhomewithfewtonoconveniences,andshould be able to operate without access to electricity. Also, the product willneed to bemore easily distributed to communities thatmay not be on typicaldistribution routes for major appliance sellers. The more an innovator thinksaboutthecircumstancesinwhichaveragenonconsumersfindthemselvesandthefeatures this machine must have to help them get the job of convenientlywashing their clothes done, it becomes clear that we are not talking about awashingmachineinitsexistingform.Wearetalkingaboutanentirelydifferentproduct.

Whatwearewritingmightseemfar-fetched,butonecompanyweknowofhasalreadydevelopedaportablewashingmachinethatattachestoabucket.Youneedonlyaddsomewateranddetergent,andputyourclothesinthebucket.Themachine does the rest. It currently retails for around $40.8 Imaginemarketing

thisproducttoallthesmallbusinessesthatprovidelaundryservicestopeopleintheirneighborhoods.Manyofthesepeoplehand-washtheircustomers’clothes.Withthisproduct, theycanwashmore,chargeless,andgrowtheirbusinesses.The company that makes this product can either provide financing or partnerwithabanktoprovidefinancingtotheseentrepreneurs,amovenotsodissimilarfromwhatmanyappliancemanufacturersdoinprosperouscountries.It iseasytoseehowthiscanbegintohelppeoplenotonlygrowtheirbusinesses,butalsobuildtheircredit.

Ifacompanybuiltabusinessmodelthatdevelopedandsoldthisproducttojust 10 percent of the households in India, it would generate revenues ofapproximately $1 billion. This is the kind of potential that awaits innovatorswillingtocreatenewmarketsinemergingmarkets.

AffordableDrugsinNigeriaAWorld EconomicOutlook study showed that there are currently fewer thantwenty-five pharmacies in Nigeria per million people. This means that in acountry with approximately 180 million people, there are fewer than fivethousand licensed pharmacies. To put that into perspective, there are moreWalgreen’s stores (over eight thousand) in the United States than there arepharmaciesinNigeria,whileNigeria’slargestpharmacychainbrandhasfewerthan one hundred outlets. There are approximately 67,000 pharmacies in theUnitedStates(population325million).Thisstaggeringstatisticalonerepresentsa significantmarket-creation opportunity. If theUnitedStates seems an unfaircomparison to highlight Nigeria’s underdeveloped pharmacy sector, thenconsider that Ghana, another poor West African country, has four times thenumber of pharmacies per capita as Nigeria. Another concern many existingpharmacies and patients face is the prevalence of counterfeit drugs in theNigerianmarket,asit’softendifficultforpharmaciestoguaranteethequalityoftheirsupplychains.

On the face of it, these challenges seem insurmountable. So you mightconcludethatNigeriamustfirstfixtheregulationsinthisindustrybeforeithasany chance of providing affordable and genuine medication to the tens ofmillions of people who fall sick every year. However, it is precisely bydeveloping a solution that is able to provide affordable, quality drugs thatNigeria will begin to overcome these challenges, including enhancingregulations and improving the supply chain. A low-cost pharmacy businessmodeliswhatisneededtopullinthenecessaryinfrastructurethatwillalsoserveasNigeria’sinfrastructure.

One of my former students, Bryan Mezue, is developing a solution(Lifestores Pharmacy) for this vast problem. After graduating, Bryan spent ayearwithmeattheForumforGrowthandInnovation,whereweexploredhowthetheoriesofinnovationandmanagementcanimpacteconomicdevelopment.Wecoauthoredanarticlethatdiscussesthis,“ThePowerofMarketCreation”inForeignAffairs,anarticlethatbegantoidentifysomeofthethemeswediscussinthisbook.

Lifestores is building out a chain of low-frill, affordable pharmacies indenselypopulated,low-incomeurbanareasinNigeria.Inadditiontolaunchingbrand-newstores,theLifestoresteamisrollingoutasharedownershipplatformthat allows mom-and-pop stores to professionalize under a master brand.Lifestores has signed direct agreements with drugmanufacturers and first-tierdistributors to secure product quality and works closely with local providerssuchasWAVEAcademy(avocationaltrainingsocialenterprisealsocofoundedby Bryan at Harvard Business School) for customer service training. Imaginewhat would happen if Lifestores developed into the Walgreen’s of Nigeria.Imagine the jobs that could be created, or, better yet, the lives that could bechanged.Thisiswhatispossiblewhenweinvestinmarket-creatinginnovations.

Comfort—SleepinCambodiaI often tell people that one of the best ways to identify nonconsumptionopportunities is to visit a country, find theMormonmissionaries, and simplyexperiencelifewiththem.Theyareusually insomeof thepoorestpartsof thecountriesandinmostcircumstances,liveliketheaveragepersoninthatsociety.Asa result,manyof their strugglescanpoint tomarket-creatingopportunities.ConsiderthisopportunityinCambodia,whichwasbroughttoourattentionbyaMormon.

InpartsofCambodia,mattressesarerarelyused,especiallybythose in themid-to low-income earning bracket. With a GDP per capita of $1,270, mostCambodiansfallintoeitherthemiddle-incomeorlow-incomecategory.Infact,accordingtotheWorldBank,almost30percentofthe15.7millionCambodians“remain near-poor, vulnerable to falling back to poverty when exposed toeconomic and other external shocks.”9 Most people he came across slept onbamboomatsoronthehardfloor.Whilesomepeopleusedfoammattresspads,thosewere bulky andvery difficult to store, especially in a small single-roomhome.

On the surface, it might seem like an inexpensive mattress would do thetrick.ButconsideringthefactthatmanyinCambodia,andinothereconomically

poorcountries,liveinsmallsingle-roomhomes,itisclearthatisn’tlikelygoingto work. What if an innovator developed a low-cost, easy-to-assemble-disassemble-and-storemattress?Targeting this opportunity could create a newmarketofmattresspurchaserswhomightexperiencebetterrestatnight.Itturnsoutthattheremightjustbevastnonconsumptionofa“goodnight’ssleep”intheworld.

SanitationandEnergy—EnergyfromWasteinGhanaSanitationisahugeprobleminmanypoorcountriesandformanypoor-countrygovernments.Whenmostgovernmentscan’tfindthefinancialresourcestopayteachers, doctors, and other public servants, how are they supposed to fundsanitation?As such,wastemanagement is often a significant problem in poorcountries,and,withrecenturbanizationtrends,itdoesn’tlooklikeit’llgetbetter.Notonlyisitadeadlyhealthhazardforthelocalpopulation,butitisalsoverycostlytotheeconomy.That’swhereSafiSanacomesintothepicture.

Safi Sana has built a waste-to-energy factory in Ghana that has beendeliveringahuge impact for the localpeopleandgovernment.Thecompany’sbusinessmodelissimple.SafiSanacollectsfecalandorganicwastefromtoiletsand food markets in urban slums, and then converts it to organic fertilizer,irrigationwater,andbiogasintheirfactory.Thebiogasisthenusedtoproduceelectricity,whiletheorganicfertilizerandwaterareusedtogrowseedlings.SafiSanaisthusabletoofferaviablesolutiontoGhana’sfecalwasteproblem,whilealsoprovidingmuch-neededfertilizerforfarmersandasourceofcleanenergyforthepeople.

Inaddition,toensurescalabilityandlong-termsustainability,SafiSanarunsa locally owned model—90 percent of its factory staff are members of thecommunitywhogothroughanintensivetrainingprogrambeforebeinghired.IthasalreadyprovidedjobsandtrainingtomorethanathousandGhanaianswhootherwisehadlimitedeconomicprospects.

Automotive—MexicanElectricCars...forMexicansOf the $374 billion worth of exports Mexico shipped in 2016, roughly $88billion (23.4 percent) was cars, trucks, or other vehicle components.10 Amajorityofthosecarsareforeignbrands,suchasFordorBMW,andtheyrunongasoline. So, when Zacua, a Mexican company, began designing andmanufacturing electric cars, many Mexicans felt a sense of national pride.Finally,oneoftheirown.Onejournalistputitthisway:“AsMexicans,wewant

Zacua to continue to grow and become a relevant brand in terms of electriccars.”Zacuaplanstosellitsbasemodelforjustunder$25,000.Thatmodelwillnot have an airbag and is not compliant with international standards. Thecompanyplanstosellonlythreehundredbytheendof2019.11

But what if Zacua, instead of entering an already crowded and verycompetitive electric car market, decided to leverage Mexico’s expertise inautomotive manufacturing and went after nonconsumption instead? If thecompanydidthat,itwouldnotbecompetingwiththelikesofNissan,Renault,BMW,andFord,companiesthataremostlikelygoingtowinagainstZacua,butwouldfinditselfcompetingagainstnonconsumption.

It is clear that,whileMexicans canmake cars, trucks, and other vehicularproducts,theaverageMexicancannotaffordmostofthecarsonthemarket.ForeverythousandpersonsinMexico,thereareabout280cars.12ComparethatwiththeUnitedStates’approximately800,Australia’s740,andCanada’s662.13,14As such, a market that serves Mexican nonconsumption, and then thenonconsumptioninLatinAmerica,isjustwaitingtobecreated.Whoevertargetsthis market is bound to reap significant returns. What might this resemble?PerhapsMexico,andmorespecificallyZacua,cantakeapageoutoftheChineseelectriccarplaybook.

Over thepast severalyears, Ihavebeen fortunate to travel toChinaa fewtimes,andIamamazedeverytimeatthesmallelectriccarsallovertheplace.In2017alone,themarketforelectriccarsinChinagrewbymorethan50percent,and there seems to be no sign of slowdown. Roughly one in three Chineseconsumers say they are leaning toward purchasing an electric car, and thecountryisnowresponsiblefor40percentoftheinvestmentintheindustry.15

What if, instead of Zacua trying to compete with the incumbents, thecompanydevelopedsmall,inexpensive,andjust-good-enoughelectriccars,likeitsChinesecounterparts?Considerthattheaveragevehicleoccupancyinmanycountriesisfewerthantwopeople,soatwo-seatercouldwork,forstarters.16Inaddition,weshouldlookattheaveragemilesdrivenperpassengerwhenmanyof today’s richcountrieswerepoorer, as thatnumberhasbeengoingup sincecountrieshavebecomewealthier.IntheUnitedStates,forinstance,theaveragemilesdrivenperyearperpassengerhasincreasedby39percentsince1950.Theimplicationhereisthatcarsinemergingmarketsmaynothavetotravelasmuchas cars in rich countries. In essence, insteadof startingwithwhat a car is,wefocus onwhat the purpose of a car is,who uses it inwhat circumstance, andwhat the nonconsumers can afford. This exercise can help innovators thinkdifferentlyaboutcarsandmobility. Infact,Zacuamayendupsellingmilesas

opposed tosellingcars.Afterall, theprimary functionalpurposeofacar is toenablepeopletotravelfromoneplacetoanother.

Rethinking the automobile could drastically reduce the cost of the car andopen it up to the averageMexican consumer. Consider whatmight happen ifMexicoisabletoincreaseitsautoownershipratefromabout280carsper1,000peopleto350carsper1,000people.Thatrepresentsanincreaseof25percent.Imagineallthejobsinproduction,distribution,sales,marketing,andservicing.Itispossible.Butitwouldrequireadifferentkindofthinking.

Food—NigerianTomatoPasteNigerianslovetomatoes.Fromtheinternationallypopulardishjollofrice,tothecountry’smany soups thatuse tomatoesas abase,Nigerianshavebecome thelargest importers of tomato paste in the world. The West African countryimports 100 percent of the tomato paste it consumes, amounting toapproximately$1billionof tomatopaste imports annually.At the timeof thiswriting, no single can of tomato paste is produced in the country, which ispopulatedby180millionpeople.What’sparticularlystrikingabouttheNigeriantomatomarkettodayisthatNigerianfarmersgrowovertwomillionmetrictonsoftomatoesannually,butmorethanhalftheirharvestrotsbeforegettingtothecustomer.Thisgoesbacktoourpointaboutthefactthataproductmustbebothaffordable and available in order to adequately target nonconsumption andcreateanewmarket.

Also, the average Nigerian spends more than half their income on food,making access to tomatoes somewhat of a luxury, with more than half theNigerian market for tomatoes underserved.17 Considering Nigeria’s low percapita income, infrastructurechallenges, and the fact that thecountry’smiddleclass isn’t growing as fast as experts thought, conventional wisdom suggeststhere iseithernoopportunityhere,orwhateveropportunityexists is too risky.Butwhenweuseadifferent lens toassess the landscape,we seevastmarket-creatingopportunitythatcanbeaddressed.

One Nigerian company, Tomato Jos, has begun capitalizing on thisopportunity. Mira Mehta, CEO of Tomato Jos and Harvard Business Schoolgraduate,understandsthesignificantpotentialofthismarket.Firstofall,Nigerianeednotimporttomatopaste.Thatbyitselfrepresentsa$1billionopportunity.Second, improving the affordability and availability of tomatoes will increasetheactualsizeofthemarketasmorepeople,especiallynonconsumers,willgetaccesstofreshtomatoesandtomatopaste.Atthemoment, thisproductiongapbetweenwhatthecountrycanconsumeandwhatisproducedisvaluedatmore

than $1.3 billion. Third, Nigeria is a microcosm for other African and low-incomecountries.IfMehta’sTomatoJosisabletocapitalizeonthisopportunity,shewill transform the livesofmanypeople inNigeriaandwill alsomakeherinvestors very happy. In 2018, the company closed a $2 million investmentround.

Leisure/Entertainment—DisneyWorldinDetroitDisneyinDetroit?It’shardtoimaginealesslikelylocation.Detroithasmostlymadeheadlinesinrecentdecadesforitsurbandecay,itsdepressingbattleswithcrimeanddrugs, and itsdubious future.Thecity filed forbankruptcy in2013afteraccumulatinganestimated$18billionindebt.

This is in striking contrast toDetroit just a fewdecades ago. In the 1950sDetroit was the bedrock of innovation in the United States. Home toapproximately 1.8 million people, the city was bustling with motors andMotown.Today,Detroit is a fraction of that size,with just 700,000 residents.Although the city isworking hard to stage a comeback, it is still repletewithabandonedbuildings,vacantlots,brokenstreetlights,andbrokendreams.Since2008,morethanhalfthecity’sparkshaveclosed.18ButwherepeoplemightseeadestituteDetroit,weseeaDetroitthatpresentsnewopportunitiesinleisureandentertainment.

Many people might think that notion is daft. Shouldn’t Detroit focus ongettingitsbasicsinplacefirst?ButthatissimilartohowonemayhaveassessedNollywood, theNigerianmovie industry,when it began. Today,measured byvolume of movies produced annually Nollywood is the second-largest movieindustry in theworld, second only toBollywood. The industry isworthmorethan $3 billion and employs upward of one million people, according to theNigerianBureauofStatistics.19DisneycoulddothesameinDetroit.

But the company would have to think differently. Replicating the DisneyWorld in Orlando would likely be too expensive to build and maintain. Anaverage family of four is advised to budget roughly $3,500 for hotel, parkpasses, and food for a one-week trip to the Florida park, not including planetickets.Asingle-daypassforanadultcancostasmuchas$124.20Andthoseofuswhohavebeen thereknow it’s impossible to limityourself to justoneday.Yousurrender to theDisneyexperience.TheaverageDetroiter,however, isn’tlikelytobeabletoaffordthat.Thisiswherenewmarketcreatorsexcel,seeingopportunitydifferently.

Wedonotprofess tobeexperts inentertainment,butwedohaveourownfamilymemoriesandexperiencestocallupon.Wecanbegintoimagineanew

typeofentertainmentthatwouldservethesameJobthatDisneyinFloridadoesforsomanyof itspatrons.Anescape from theeverydaystressesof life intoamagicalworldwhereeveryoneishappyanddreamsdocometrue.Disneyistheplacewegowhenwewanttospendqualitytimewithourfamilies.Thatdesireisinallofus,whetherwearewealthyorpoor.ItisaJobtoBeDone.

ThepointisnotthatDisneyhastoreplicatetheDisneyWorldofOrlandoinDetroit.But itcanreplicate theDisneymagicso thatDetroiters,andpeople inmanysmall townsforwhomaDisneyvacation isoutofreach,canexperiencethemagic that is Disney. Because for many Detroit residents, Detroit Disneywouldbecompetingwithnothing.

Housing—FlooringinRwandaandSub-SaharanAfricaMorethanhalfofAfrica’s1.2billionpeopleliveinruralareas.Althoughthatinandof itself is not a problembecause of the benefits of living away from theoftenhighlypopulatedandpollutedcities, theproblem is the livingconditionsexperiencedbymanypeople.Onalmosteverydevelopmentmetric,fromaccessto electricity to access to clinics, Africans living in rural areas are strugglingcomparedtotheirurbancounterparts.Onesuchmetricthat isoftenoverlookedbut presents significant opportunity is the lack of affordable hard and sanitaryflooring in rural homes. In Rwanda, where approximately 80 percent of theroughly two million homes have dirt floors, the situation is particularlytroublesome.21 This means that when it rains, puddles of water can easilybecome breeding grounds for mosquitoes in people’s homes. In addition, dirtfloors are simplyuncomfortable to sleepon andoften leaveone’s clothes andbelongingsdirty,whichcanfurtheradverselyimpactpeople’shealth.

Thealternativesolution,concretizingone’sfloors,istooexpensiveformanyin Rwanda and sub-Saharan Africa, where the annual per capita income isapproximately $705 and $1,461 respectively.22 In Rwanda, for instance,converting dirt floors to concrete for the average home costs more than twomonths’wages.Howcan therebeopportunity in a countrywhere the averageannual per capita income is less than the price of a new iPhone? But whereconventionalwisdom sees poverty and risk,we see struggle, nonconsumption,andtheopportunitytocreateasizablenewmarket.Onecompany,EarthEnable,is already targeting this opportunity, and if it is successful in executing aninnovative business model in Rwanda and then in other African countries, itcould become a multibillion-dollar company with tens of thousands ofemployees.

For roughly $4 a square meter, EarthEnable is able to provide affordable

flooringmade from gravel, laterite, sand, clay, andwater—all locally sourcedmaterials.TheaverageRwandanhome is just twenty squaremeters (sixty-fivesquarefeet).Ifthecompanyisabletoprovideflooringforjust20percentoftheRwandanpopulation,itwillgeneratemorethan$25millioninrevenue.23Nowimaginewhat that number becomes as the company scales toUganda,Kenya,Burundi, Botswana, Zimbabwe, Nigeria, and Cameroon. EarthEnable will notonlygeneratesuperiorrevenue,butalsoneedtohiretensofthousandsofpeopletomake,market,distribute, sell, andservice itsproducts. Inaddition,considerthe health implications of its products. Indirectly, this company might helpreduce incidences of tetanus, malaria, and other illnesses propagated by dirtyenvironments.

Electricity—PowerinBangladeshBangladesh is economically poor. With a GDP per capita of $1,359,approximately 20 percent of the country’s 163million people live in extremepoverty,on less than$2aday.Approximately75percentof ruralhouseholds,wheremostofthoseinpovertylive,donothaveaccesstoelectricity.Thismeansthat at sundown, either they have to purchase very expensive and pollutingkeroseneforlighting,ortheydonothing.Inotherwords,oncethesunsets,sodothey.Theymustclosetheirsmallbusinesses,theirchildrenmuststopstudyingorplaying, and theymust take safetymeasures inorder toprevent theft.Life forthese tens ofmillions ofBangladeshi citizens ismademore precarious by thelackofelectricity.This,webelieve,representsanopportunityforabigmarkettotakeroot.

Over the past few decades, we have seen the price of renewable energyplummet.What’sparticularly interesting is thatentrepreneurscan leverage thistechnology to develop specific solutions for nonconsumers. In other words,people don’t necessarily want electricity, they want what electricity affordsthem. They want to be able to turn on a light, to watch a show on theirtelevisions, computers, or phones, and to keep their food cold and fresh. Ifentrepreneurs develop cost-effective solutions that help these nonconsumersovercometheirstruggles,theyaremorelikelytosucceed.

Consider how Infrastructure Development Company Limited (IDCOL) iscreatingamarketbycapitalizingonthisopportunityinBangladesh.24Overthepastdecade,IDCOLhassuccessfullyinstalledmorethan3.5millionsolarhomesystems(SHS)inruralBangladesh.Thesolarsystemsarenotcomplicatedandcomeinthreeflavors.Oneofthesystemspowersjustalampandamobilephonecharger.Anotherpowersalamp,atelevision,andamobilephonecharger.The

thirdonepowersafanaswellaseverythingthesecondonepowers.AccordingtoIDCOL,getting theSHStomillionsofhomeshascreatedoverseventy-fivethousandjobsandhasimpactedmorethansixteenmillionpeople.By2018,theprogramwasontracktoinstallsixmillionSHSacrosstheentirecountry.InsteadoflookingatBangladeshicitizensastoopoortoenjoythebenefitsofelectricity,the innovators at IDCOL developed a solution that targeted theirnonconsumption.Theresultsspeakforthemselves.Thechangedlivesspeakforthemselves.

Just like Bangladesh, many countries in sub-Saharan Africa also strugglewith access to steady electricity. Those who have it often pay a significantpremiumforitbypurchasingandusingdieselgenerators.Whileit isrelativelyeasy to see the nonconsumption of electricity in a rural village, it is moredifficult to see it in a thrivingAfrican city. But the sound of every generatorproviding electricity to a home, an office building, or a hospital representsstruggle.Andinessencethisisacluetoabigmarketcreationopportunity.SomecitizensinNigeria,forinstance,payasmuchas25centsperkWhforelectricity,morethantwicetherate(12cents)theaverageAmericanpays.25Considerthatthepercapita income in theUnitedStates is roughly25 times thatofNigeria.Electricity is unavailable for most in Africa, and for those for whom it isavailable,itisexpensive.

AspirePowerSolutions (APS) is anAfrican company targeting thosewhocurrentlypayexorbitantratesforelectricitythroughdiesel-poweredgenerators.Thecompanyinstallssolarpanelsforitsclientsandprovidesinformationaboutusagesocustomerscanbetteroptimize theirenergyconsumption. Insodoing,APSprovidesmorereliableandlessexpensiveenergyforitsclients.InChapter3,wenotedthatnonconsumptionisn’tlimitedtojustthepoororthosewhoareunable to afford existing products. Nonconsumption is often characterized bystruggle andworkarounds, andAPS is tapping into that struggle and creatingopportunity.

Agriculture—MoringainGhanaMoringaisarichandsturdytreethatgrowsacrosstropicalregionsoftheworld.Itisknownasa“miracletree”becausealmosteverypartofthetreehasvalue.The foliage can be cooked and served as greens; the roots can be used as asubstitute forhorseradish; the leaf canbedriedandpulverizedandaddedasanutritionalsupplementtomeals;theseedscanberoastedandeatenasnuts,andtheycanalsobeprocessedintocosmeticoilsthataregoodfortheskin.Butevenasmiraculousasthemoringatreemightseem,moneystilldoesnotgrowonit.

Cultivatingithowever,doespresentuswithasignificanteconomicopportunityinGhanaandWestAfrica.

Ghana ishome tomillionsof farmers,mostofwhomearn less than$70amonth.Ghana’sannualpercapita incomeisaround$1,513.Nutrition,ormoreaccuratelymalnutrition, isknownasasilentkiller inGhana.More thanone infivechildrenarestunted.More thanhalf thechildrenunder theageof fiveareanemic.26ButGhana’sclimateisverywellsuitedforgrowingthemiracletree.In fact, decades ago an aid organization planted hundreds ofmoringa trees inGhana in an effort to spur development. Unfortunately, while the trees grew,developmentdidn’t,becausethetreeswereonlyonecomponentofthesolution.

Consideringthenutritionalandeconomicbenefitsofthetree,itisclearthatan opportunity exists to create amarket formoringa products. If an innovatorcapitalizes on this, it could be significant. First, the innovator could helpGhanaian farmers more efficiently grow and harvest moringa by providingcapital for seeds, fertilizer, and equipment. Second, the innovator would alsohave to connect the farmers to a market for their products. How can a ruralGhanaian farmerconnect toamoringamarket in thecity?Oreven in thenextvillage?Thesearesomeofthequestionstheaidorganizationfailedtoaskwhenit planted hundreds of moringa trees in the country. But these are the hardquestionsthatmustbeaskedwhentryingtocreateanewmarket.ThesearethequestionsthatMoringaConnect,ayoungGhanaiancompany,isasking.

Founded in 2013 by an MIT-trained engineer and a Harvard-traineddevelopment economist, MoringaConnect has set its sights on creating andgrowingamarketformoringaoilsandpowder.Sinceitsfounding,thecompanyhas plantedmore than 300,000moringa trees and nowworkswith over 2,500farmers inGhana.Byproviding inputs suchas fertilizer, seeds, and financing,andbyconnectingfarmerstothemarketthatMoringaConnectiscreatingforitsoilsandpowder, thecompanyhasbeenable tomultiply farmer incomesbyasmuchasten.27

DevelopmentPractitioners

One of the joys in writing this book has been learning about differentorganizations solving specific development challenges—fromproviding accessto safewater to improving access to education—in interestingways.Wehavewrittenthisappendixtohighlightsomeoftheworktheseorganizationsaredoingin the hope that it not only inspires copycats, but also challenges other

organizationsintheindustrytomodifytheirbusinessmodelssotheycanmoresustainablysolvesomeofthesechallenges.

TheIDPFoundationWhenIrenePritzkerfoundedtheIDPFoundation,Inc.totransformeducationinsome of the poorest parts of our world, she avoided traditional methods ofproject-based grant-making, and instead set out on a journey to see how shecould use philanthropic dollars as catalytic capital to develop a sustainablesolution in countries where many children didn’t have access to qualityeducation.Pritzker’sfirststopaboutadecadeagowasGhana,theWestAfricancountrywherefewerthan40percentofchildrenfinishsecondaryschool.Insteadofcoming inwitha setproject inmind,however,Pritzkerandher teamspenttimetryingtounderstandtheeducationlandscapeandthebarriers toprovidingqualityeducation.

Throughthecourseoftheirresearch,theyfoundthat,whilepettytraderswhosellyams, tomatoes,andpineapplescanveryeasilyaccessmicroloans togrowtheirsmallbusinesses,hardworkingentrepreneurswhoestablishlow-feeprivateschoolshave little tono access to financing.Yamsandpotatoes, it seems, arebetterbusinessesthanschools.ThismakesnosensetotheIDPFoundationteambecause there isextremedemand for these low-feeprivate schools.Thepublicschools,whicharesupposedtobe“free,”areeithertooexpensive(parentsstillhavetopurchaseuniformsandpayadministrativefees),arelocatedtoofaraway,oroffersuchextremelysubparqualitythatattendingmightactuallybeaset-backfora family—withachildwastingprecioushours inaschoolwithout learningmuch.Often,classesareovercrowdedwithuptoonehundredchildrentoaroomandare taughtbyheavilyunion-protectedteacherswhofacefewconsequencesfor missing work. Because of the uneven public school offerings, there isenormousdemandforprivatelyrunschools,evenbyverypoorfamilies.

So after extensive market research, where Pritzker interviewed schoolownersacrossurbanandruralareas,theIDPFoundationsawanopportunitytofill a gap and address amarket barrier for these schools to improve access tocapital. IDP Foundation partnered with a Ghanaian microfinance institution(MFI),SinapiAba,tocreatetheIDPRisingSchoolsProgram.

Instead of immediately setting up shiny new classrooms, the IDP RisingSchools Program tackled the problem differently by building the capacity ofexisting proprietors—grassroots social entrepreneurs already running privateschools in their local communities—through training in financial literacy andschool management accompanied by access to capital through small business

loans.Thefunds,coupledwiththetraining,helplow-feeschoolsimprovetheirlearning environment and enable them to attract more students. Schoolsparticipating in the IDP Rising Schools Program have average class sizes oftwenty-twostudents,andteachersareheldaccountable.Sincetheprogrambeganin2009, it has expanded tonearly600 schools andhashelpednearly140,000students(asofAugust2017).

The IDP Rising Schools Program has already proven to be profitable andscalable,andishelpingschoolslikewisebecomesustainableandself-sufficient.TheIDPFoundationhascommissionedagreatdealofresearchontheefficacyand impact of the program. It has also been very active in engaging thegovernmentofGhanatovigorouslypushforthesubsidizationofschoolsservingvery poor families using public-private partnerships.As Pritzker sees it: “TheIDP Foundation’s goal is to see the IDP Rising Schools Program replicatedaroundtheworld.TheprogramisgivinghundredsandthousandsofchildreninGhana access to quality education and a shot at a bright future. Everydevelopment organization, including the IDP Rising Schools Program, mustconstantlyaskitself,‘Howcanweextricateourselves,somuchsothatwehavecreatedsustainability,andourprogramsarenolongerneeded?’”

Thatisanimportantquestiontoask.WhatmighthavehappenediftheIDPFoundationwenttoGhanaandspent

millionsofdollarstosimplybuildschoolsforGhanaians?Thatwouldconstituteapushstrategy,oneinwhichthecostsforsetuparecertain,buttheimpactafterexecutionislessso.Unfortunately,wehaveanideawhatwouldhavehappened.Visit any poor country today and take stock of the public or NGO-fundedschools.Theyarenotalwayssignsofprosperity.Ifanything,theyare,toooften,symbols of poverty. Those who have visited low-to middle-income countriesknowwhatImean.Whenyouseefloodsofstudentscrammedintoprimaryandsecondaryschools,wheretheeducationis likelysubpar,doesitnotbreakyourheart?Ihaveyettomeetapersonwhothinksofthisasasignofprosperity.Infact,it’savisiblereminderoftheenduringstrugglesofacountry.

HarambeEntrepreneurAllianceSoonaftertheIDPFoundationteambeganexperiencingsuccesswiththeRisingSchoolsProgram,theyrealizedthatsimplyeducatingchildrenintoaneconomywhere there were few opportunities was not enough. What would the newlyeducated students do after they’d completed their schooling? It wasn’t as ifthousands and thousands of good jobs had gone unfilled waiting for thesestudents to finish theireducation.Does thevalueofaneducationnotdissipate

precipitouslywhentherearenojobsfortheeducated?It turns out, as Pritzker and her team found, that Ghana’s “education

problem”isn’tjustan“educationproblem.”Itisaninnovationproblem,onethatcan be better solved with improved financing, management, and partnershipswithentrepreneursseekingtocreateviablebusinessesthatcanemployeducatedstudents.

Todothis,theIDPFoundationhaspartneredwithHarambeEntrepreneurAlliance.FoundedbyOkendoLewis-Gayle,Harambeisagrowingnetworkofmorethan250highlyeducatedyoungAfricanentrepreneursbuildingcompaniesall across Africa. The organization’s efforts have been recognized by TheEconomist,VanityFair,andthequeenofEngland.Harambeentrepreneurshaveraised money from Mark Zuckerberg and Priscilla Chan’s Chan ZuckerbergInitiative, Pierre Omidyar’s Omidyar Network, and YCombinator. They aresome of the best that Africa has to offer. In 2016, for instance, the ChanZuckerberg Initiative invested $24 million in Andela, one of the companiescofounded by aHarambean (entrepreneurs in the alliance).One ofHarambe’sgoalsistohelpitsentrepreneurscreatemorethantenmillionjobsinAfricaoverthenextdecade.Assuch, theorganizationisdevelopingthenecessarysystemsto support innovation and entrepreneurship in Africa. To that end, CiscoFoundationinvested$5millioninHarambeandisworkingwiththeorganizationtodevelopaninvestmentfundforitsentrepreneurs.TaeYoo,Cisco’sseniorvicepresidentforcorporateaffairs,whospearheadedthiseffortatCisco, ishopefulthatthispracticebecomesmoreprevalentintheindustry.

The IDP Foundation, Harambe, and the Cisco Foundation partnershipdemonstrateswhat’spossiblewhenweseeaproblemthroughadifferentlens—whenwe see that the solution to an education problem isn’t simply to “buildmoreschools.”This isnot tosaythat therewillnotbedifficultdaysaheadforthe partnership and its efforts.These are enormously complex challenges theyaretryingtosolve,andtheyhaven’tpickedasimpleanswer.Butwearehopefulthat,with their different perspective, these organizations can create somethingthatwillstandthetestoftime.

OneAcreFundOne Acre Fund is a similar organization in the sense that it thinks aboutproblemsholistically.The organization has developed amarket-based solutionfor farmers in several poor countries because it doesn’t see the problems thatthesefarmers,andbyextensionmanypeopleintheseregions,facesimplyasalackoffood.Theyseeitasalack-of-access-to-a-marketproblem.SoOneAcre

Fundprovidesfinancing(forseedsandfertilizer),distribution(offarminputs),training(onagriculturaltechniques),andmarketfacilitation(tomaximizeprofitsfromharvests) to thousandsof farmers inKenya,Rwanda,Burundi,Tanzania,Malawi, and Uganda. Since its inception in 2006, the organization has madealmosthalfamillionfarmersmoreproductiveandnowemploysmorethanfivethousandpeople.

OneAcreFundhasseenfarmer incomes increasebymore than50percentandplanstoreachoveronemillionfarmersby2020.AndrewYoun,cofounderandexecutivedirectorofOneAcreFund,wroteintheir2016annualreportthat“in2006, I thoughtofOneAcreFund solely as an agriculturalorganization. Ididn’taccountforalltheotherthingsfarmersneededtoimprovetheirlives.”Itwastheorganization’sfocusonimprovingthelifeofthefarmerthatcausedittosee the issue facing poor farmers not solely as an agricultural problem. In sodoing,theorganizationhasbetteralignedwiththeprogressfarmersaretryingtomake.

SafeWaterNetworkSafeWaterNetwork,whichiscommittedtosolvingtheaccess-to-waterprobleminpoorcommunities,isanexampleofanorganizationworkingtoextractitselffromitsprojectsovertime.Theorganizationworkstoensurethesustainabilityof its projects in the communities where it works. Safe Water Networkunderstandsthatthesolutiontoawaterproblemisnottosimply“buildawell”or“providewater.”Theorganizationhasfoundthattheremustbeasystem,oramarket,thatsustainsthewaterinvestmentsitmakes.

Instead of viewing people in the communities where it works asbeneficiaries,SafeWaterNetworkviews themascustomers.ChristineTernentof the Inter-AmericanDevelopment Bank (the regional development bank forLatinAmericaandtheCaribbean)putsitthisway:“Wemustchoosenottoseethe economically poor exclusively through the lens of their needs, but alsothrough their potential.”SafeWaterNetwork livesby that statement, and thusidentifiesentrepreneurswithin thecommunitieswhere itworks,provides themwiththenecessaryequipmentforpumpingandpurifyingwater,andtrainsthemon how to sell their services. In essence, Safe Water Network goes into acommunityandbuildscapacity,andmakesitpossibleformarketstobecreated.

Althoughthismodeltakesalotlongertoexecutethanbuildingawell,ithasproven to bemore profitable and sustainable. It also has the added benefit ofcreatingjobsforlocals.Sofar,SafeWaterNetworkhasimplementeditssolutioninfourhundredcommunitiesandhasprovidedwater tomore thanonemillion

people.LiketheIDPRisingSchoolsProgram,SafeWaterNetworkworkswithlocalpartnersandbuildsitscapacitysoastoultimatelyextricateitselffromthecommunity.

*

Oneofthebenefitsofcreatinganewmarketisthatthemarketneedsareoftenmatched with the capabilities of people in the country.When the capabilitiesdon’texist,themarketpullsinwhatisneeded.Thisisimportantbecauseoneofthe things we noticed as we studied some of the development projects beingexecuted across the globe today is thatwe often don’tmatch the level of theprojectwith the localcapabilities.Unfortunately, thispractice leaves toomanypoor countrieswithverygoodbut highly technical and advancedprojects thatdon’t work in their contexts. Hospitals are provided with advanced medicalequipment that locals can neither use nor repair; computers are donated inregions without electricity; schools are built without trained teachers andcontextual curriculums; andperhaps all too commonly,wells arebuiltwithouttrulyunderstandinghowtheywillberepairedwhentheybreak.

We are not suggesting here the aid spigot be turned off around theworldwhilelocaleconomiesstruggletorightthemselves.Butthoseactivitiesmustbeseen in the local context—theymustmake sense for the regionand theymustfocuson thegoalofhelpingbuildcapabilities thatcanhelp the localeconomydevelopitself,intime.Aidcangoaverylongwayinhelpingachievethatgoalifit’sdirectedtotherightplace.

Governments

Governmentshaveacriticalroletoplayinensuringcountriesremainprosperousovertime.Overthepasttwocenturies,however,theresponsibilitiesplacedupongovernmentshavegrownsignificantly.Today,governmentsnotonlyaretaskedwith ensuring law and order in society—a tall order by itself for many poorcountries—butalsomustseetoitthatcitizenshaveaccesstoqualityeducationandhealthcare, roads, rails, andotherpublic infrastructures,andaplethoraofsocialprograms.Infact,governmentsarenowtaskedwithdoingitall,andmanypoor-countrygovernmentsaretryingtodoitall.Butfewgovernmentshavethefinancial,technical,andmanagerialresourcestoprovidethemyriadofservicestheyarenowresponsiblefor.Assuch,yearafteryear,governmentsfinditharder

tobothmeettheirbudgetsandprovidetheseservices.By studying the responsibilities placed on many governments across the

world,we have learned that there is often a gap betweenwhatmany low-andmiddle-incomecountrygovernmentsareexpected todoandwhattheyareabletodo.Sowiththissectionweseektoofferhopetothemanygovernmentsthataretrying.Onceagovernmentunderstandstheprogressthepeopleitservesaretrying to make, governments can become more effective at performing theirresponsibilities. By providing several case studies from different countries—from the Philippines to Rwanda—we will highlight the ways in whichgovernmentsaresupportinginnovativeprogramswiththelimitedresourcestheyhave.Wehopeyoufindthesehelpfulandinspiring.

Nigeria—TheTasktoCreateJobsTherearefewjobsintheworldmoredifficultthanthatofapublicservantinapoororunder-resourcedcountry.Buttherearealsofewthataremoreimportant.Millionsof lives literallydependonthem.WhenAkinwunmiAmbodedecidedto run for governor ofLagosState in 2015, byhis ownadmission, hedidnotappreciate“thenumbers.”Bysomeestimates,morethantwentymillionpeoplelive inLagos,with roughlyeighty-fivepeoplemoving to the state everyhour.The rapid urbanization of Lagos has led to a severe dearth of housing,employment,andmanypublicservices,includingschools,healthcare,andgoodroads.

To his credit, Governor Ambode understood that he couldn’t possibly fixeverything all at once, and certainly not all by himself. With a keenunderstanding that the role of government is to develop an environment thatsupports entrepreneurs looking to solvemanyof society’sproblems,GovernorAmbode created theLagos StateEmploymentTrust Fund (LSETF) soon aftertakingoffice.

Thevisionof the$70millionLSETF is simple: to create employment andentrepreneurship opportunities for all Lagos residents. The fund has a goal toenable the creation of more than six hundred thousand jobs and to achievefinancial sustainability by2019.Although theprogram focused extensivelyonresearchandstrategyduring its firstyear, todate the fundhasdisbursedmorethan$11millionof long-term, low-interest loans to thousandsofentrepreneursin Lagos. The program has even gotten the attention of the United NationsDevelopment Programme (UNDP), which has committed $1 million toprovidingvocationaltrainingtothousandsofLagosStateresidents.

Governor Ambode handpicked a team of young, ambitious, and high-

potentialNigerianstomanagethefund.Theboard,whichreportsdirectlytothegovernor,ischairedbyIfuekoOmoigui-Okauru,aHarvard-trainedprofessionalwhoonceledthenation’sinternalrevenueservicesandservesasanadviseronseveralother influentialboardsin thecountry.Anotherboardmember,BilikissAdebiyi-Abiola,isarespectedMIT-trainedentrepreneurwhohasbeenhonoredby several prominent organizations including Intel, Cartier, Oracle, andmanyothers.Toleadtheday-to-dayoperationsGovernorAmbodeselectedAkintundeOyebode,arenownedeconomistknownforhisunflinchingintegrity,withoveradecadeofexperienceworkinginsomeofNigeria’smajorfinancialinstitutions.

TheverdictisstilloutonwhethertheLSETFwillmeetitsambitiousgoalsofhelpingNigerianentrepreneurscreatehundredsofthousandsofjobs,butsofaritseems to be on the right track. As we have noted repeatedly throughout thisbook,justasonecompanycannotsingle-handedlydevelopNigeria,acountryofmorethan180millionpeople,oneLSETFinitiativealsocannotdevelopNigeria.But the principles and processes cultivated by one LSETF initiative can havesignificantimpactinthetrajectoryofthenation.

Philippines—TheBusinessofWaterWatermaybe life, but unfortunatelywater is not free. In fact, far frombeingfree,safewaterisquiteexpensiveandoftensubsidizedinprosperouscountries.With a GDP per capita less than $3,000, however, the Philippines is not aprosperouscountry,andasmanyas tenmillioncitizensdidnothaveaccess tosafewater in 1995. In the eastern region ofManila, theworld’smost denselypopulated city, barely a quarter of people living there had access to safe andpotablewater.The situationgot sobad that thegovernmentwas compelled toenactaNationalWaterCrisisAct,pavingthewayfor innovators toworkwiththe government to solve this problem. Through this crisis, Manila Water, apublic-privatepartnershipbetweentheMetropolitanWaterWorksandSewerageSystemandthePhilippines’oldestconglomerate,AyalaCorporation,wasborn.

When Manila Water was formed, the organization didn’t simply look toserveonly itsexistingcustomersmoreprofitably. Instead, theirmissionwas tosustainably and profitably get water to as many people as possible.Fundamentally, they understoodwhat consumerswanted: easy and convenientaccess to water at an affordable price. In order to accomplish this, theorganization focused on developing its workforce and reshuffling the existingorganizationstructure.Theorganizationwasabletoincreaseaccesstosafewaterfromaroundaquarteroftheresidentsto99percentofresidents.In2016,ManilaWater servedmore than6.5millioncustomers. Indoingall this, theybuilt the

necessary infrastructure to support theirwork, increasedefficiency,and tripledthe volume ofwater delivered from 440million liters a day tomore than 1.3billionlitersaday.

The interesting facts aboutwaterandManilaare that thewaterhasalwaysbeenthere,thepeoplehavealwaysbeenthere,thetechnologyhasalwaysbeenavailable, and the need for water has always been there. But the partnershipbetween the government and the private sector hadn’t been there. If residentsandthegovernmentinManilahadstillseentheprovisionofwaterasexclusivelya public-sector function, there would be no ManilaWater today. Thankfully,theydidn’t.Andasaresult,ManilaWaterhastransformedthelivesofmillionsofpeopleinthePhilippines.

Whengovernmentsmakedecisions that are targeted at providing solutionsfor the people they serve by supporting organizations that are technically,financially, and managerially more capable to provide the services, lives andeconomiesaretransformed.

Rwanda—OpenforBusinessUnderOneUmbrellaBefore the creation of theRwandaDevelopmentBoard, doing business in thesmall, twelve-million-strong East African country was incredibly difficult. Inorder to get a permit, register a company, or pay taxes, investors andentrepreneurs had to interact with multiple agencies that didn’t communicatewith one another. The system was inefficient and seemed more as if theRwandangovernmentdidn’twantpeopletodobusinessinthecountry.Allthatchanged, however, after the government began asking itself some simplequestionsthathelpeditbetterunderstanditsroleincreatinganenvironmentthatsupportedinvestments.Thegovernmentbeganaskingquestionslike:Whydowemake thosewithcapitalwhowant to startcompanies,create jobs,andprovideopportunities forRwandans jump through somanyhoops?Howcanwemaketheprocesseasierforthem?Isthereareasonwecan’tstreamlinetheprocessofinvestinginRwanda?TheseweresimplequestionsthatledtothecreationoftheRwandaDevelopmentBoard(RDB).

Createdin2009,theRDBisnowoneofthemostimportantorganizationsinthe country and reports directly to the president. The job of the RDB is tosimplifytheinvestmentprocessforthoselookingtodobusinessinRwanda.Toaccomplishthat,theorganizationbroughtalltheagenciesanddepartmentswithwhichinvestorshadtointeractunderoneroof.Itisaone-stopshopforinvestors,andprovidesaccesstoinformationsuchastaxes,licenses,immigration,utilities,mortgageregistration,andmanyotherservices.TheRDBreducedprocessesthat

could takeweeks andmonths to days andhasmade the business environmentmoretransparentintheprocess.Sofar,theRDBhasbeenaremarkablesuccess.

In 2017, the RDB registered total investments (domestic and foreign) ofapproximately $1.7 billion, up about 50 percent from 2016. Foreign directinvestments totaled just over $1 billion, up fromaround$8.3million in 2000.ThegovernmentofRwanda,throughtheRDB,hopestocreatetensofthousandsof jobs annually. It is well on its way. In 2017, more than 38,000 jobs wereregisteredbytheRDB,a184percentincreasefrom2016.

It was only twenty-five years ago that Rwanda experienced a painfulgenocide where, estimates suggest, up to one million people lost their lives.There seemed to be little hope for this small, poor, and landlocked country.Many deemed it too poor, but the government has turned things around byprioritizingitsserviceandsupportroleintheeconomy.AlthoughRwandaisstillapoorcountry today, there ishope that if thecountrycontinueson its currenttrajectory,itsfuturewillbebright.PerhapsitcanbeabeaconofhopeformanyotherAfricancountriesasSingaporewas,andstillis,formanyAsiancountries.

Singapore—JobsThroughInnovation“Weinheritedaheartwithoutabody”ishowLeeKuanYew,Singapore’sfirstprime minister, described the birth of his country. “[Singapore] facedtremendous oddswith an improbable chance of survival. Singaporewas not anaturalcountry.”Byall rights, thesmall islandnationofSingaporeshouldnotexistatall,andsixtyyearsago,fewwouldhavepredictedthatSingaporewouldbecomeoneoftherichestsovereignnationsintheworld.Withjust5.6millionpeople, Singapore’s GDP of $300 billion is one-fifth that of sub-SaharanAfrica’s.Singaporewassuccessfulbyprioritizingjobs,throughinnovation.

Decadesago,Dr.GohKengSwee,oneofSingapore’sministers,wouldgetheartbroken whenever he saw hundreds of children streaming out of schools,becauseheknewhisgovernmenthadtofigureoutawaytosupportcompaniesthat would provide jobs for them. Dr. Keng Swee and the governmentunderstoodthatgoingtoschoolwasnotenough.Whatwouldstudentsdoafterschool?Thatwasthequestionthegovernmentwastryingtoanswer.Singaporefound its answer in prioritizing innovation,which is no easy feat. One of theways Singapore did thiswas by setting up the EconomicDevelopmentBoard(EDB),whichisstillfunctionalandinfluentialtothisday.

ThejoboftheEDBwastoattractforeigninvestmenttoSingaporeinordertocreate employment, which at the time was in very short supply. Singaporeangovernment officials visited investors inChicago,NewYork, andmany other

Americancities,withthegoalofconvincingthemthatSingaporewasopenforbusiness.AmericanslovedthefactthatSingaporewasnotbeggingforhandouts—they were asking for investments. They constantly met with Americanexecutivesandnotwiththeaidcommunity.Theydidthistosendamessagethat,thoughSingaporewaspoortoday,itdidnotintendtoremainpoorindefinitely.Once word got out that Singapore was a safe and profitable place to invest,capital flowed—or rather gushed—into Singapore. In 1970, FDI to Singaporewas around$93million.By2017, Singaporewas attractingmore than around$60billionworthofFDI,morethantheFDIattractedbythewholecontinentofAfrica.28

ItisalsoimportanttonotethatSingapore’sFDIhasnotonlyincreased,butthe nature of the FDI has changed as well. Today, Singapore isn’t attractinginvestmentstofocusonjobcreationinthegarments, textiles, toys,andlumberindustries, like it did fifty years ago. Instead, it is attracting investments inbiotech and pharma, aerospace, electronics, and other advanced industries likecleantechnology.Apple,Microsoft,Bosch,Novartis,andmanyothercompanieshavetheirregionalheadquartersinSingapore.WhatthisshowsisthatSingaporefocused on innovation, not just industrialization or exports. It didn’t focus onsimplycreatingjobs,butjobsthroughinnovation,whichisamoredynamicandsustainablewaytodevelopaneconomy.

Wehavesaidthroughoutthisbookthatprosperityisaprocess.ThecaseofSingaporeshowsthatwemustcontinuallylearnnewthingsifwewanttokeepmakingprogress.

Mexico—ExchangingTrashforFoodAsmoreandmorecountriesurbanize,manygovernmentsnotonlyhavetodealwithasignificantinfluxofpeopleintocities,butalsohavetodealwiththewastethe newcomers generate. While Mexico City has always struggled withmanagingitswaste,thesituationworsenedwhen,in2012,thecityshutdowntheBordoPonientelandfillsite,oneofitslargest.AsareportintheGuardianputit,theclosureoftheplant“highlightedtheabsenceofacomprehensivepolicyforurbanwastecollection,disposal,andprocessing”inthecountry.29ResidentsofMexicoCity didn’t all of a sudden stop generatingwaste because the landfillwasclosed.Insteadthewastetheygeneratedsimplyfounditswaytothecity’sstreets. That is, until the local government created Mercado de Trueque, orBarterMarket.

AtMercado deTrueque,Mexicans can exchange their recyclable trash forfood vouchers. These food vouchers are good at many of the city’s farmers’

markets,whichpatronize localMexican farmers.Since inception, the programhasbeenwildlypopular.Onesmallholderfarmer,AlexCastañeda,notedabouttheprogram,“It’sgreat forus [farmers].Theprice isgood,and thevolume isgreat.”Theprogram is alsopopularwith a growingnumberofMexicanswhonow recycle by exchanging theirwaste for food vouchers. ErikaRodriguez, aregular,said,“Itisreallyworththeeffort.Onceyoustart,itisdifficulttostop.”

The program has been responsible for recycling hundreds of thousands ofpounds of waste since the landfill was closed in 2012. By providing a readymarket for recyclableproducts andproduce from farmers, theprogram isbothcreating jobs for recyclers and improving the livesofMexican farmers.Whilethisprogramalonewillnot solveMexicoCity’s trashproblems, it illustratesadifferentwayofapproachingaproblemthatcancreate immensevalueforcityofficialsandlocalcitizens.

India—FintechOnNovember8, 2016, anunexpected shockwavehit India.Withno advancewarning, Prime Minister Narendra Modi’s government declared the 500-and1,000-rupeenotesobsolete,amovethatalmostbroughttheIndianeconomytoastandstill. At the time, both the 500-and 1,000-rupee notes made upapproximately 86 percent of the cash in circulation in India, and about 98percentofconsumertransactionsinthecountryweredonewithcash.30Thebanofthosenotescausedaneconomictsunami,whichledtoreducedGDPgrowthandindustrialoutput,andthelossofjobsformanyIndians.TensofmillionsofIndians stood in line for hours as they tried to convert their old notes so theywouldnot lose value.There aremixed reactions to the demonetizationpolicy,butmostwouldagreethatitcreatedsignificantstruggleinIndia,astrugglethatcausedmanyIndianstoinnovate.

Althoughthepolicywasfraughtwithseveralexecutionissues,fromlimitingthe amount of cash people could collect from their banks and ATMs to nothaving enough new notes in circulation, the policy has also led to severalinnovationsinpaymentsthatwouldhaveotherwisetakenmuchlongertocometo fruition. Even Google capitalized on this struggle and launched a digitalpayments app, as analystsproject thedigitalpaymentsmarketwill reach$500billionby2020.31Digitalpaymentsrosebymorethan80percentafterthepolicytookeffect.32

Thedemonetizationpolicyandthefollow-ondigitizationoftheeconomyarealso impacting other aspects of the Indian economy. For example, before thedemonetization policy, approximately 3 percent of Indian workers paid taxes.

But the number of filed tax returns went up by 25 percent the year after thepolicy tookeffect,asmillionsofIndianswerepulled into thedigitaleconomy,wheretheywouldnowhaveadigitalprofile.33Insomelocalities,taxcollectionincreasedbymorethan250percent.Inaddition,partofthereasonforthepolicywas to disrupt the human trafficking and terrorism networks in the country.Estimatessuggestthepolicyhasbeeneffective,atleastfornow,incurbingthesebadbehaviors.34

The point here isn’t that other governments should also enact a sweepingdemonetizationpolicythatisboundtohaveadverseeffectsontheeconomy,inthe hopes of spurring some innovation that could make it all worth it. Thecircumstanceinwhicheverycountryfindsitselfisdifferent.Instead,thebroaderpoint is that sometimes the government has the power to create just enoughstruggle in the system,which can catalyze innovators todevelopproducts andservicesthatwillultimatelymakelifeeasierforpeople.Inlargepart,thatiswhatIndia’sdemonetizationpolicy—intentionallyorunintentionally—hasdone.

Noneoftheinitiativesprofiledinthisappendixcansingle-handedlychangeacountry,butwehopetheyarehelpfultoyouasyoucontinuetothinkofwaystogenerateprosperityinthecornersofourworldthatneeditthemost.

Conclusion

IntheclassIteachatHarvardBusinessSchool,ItellmystudentsthatmyhopeisthattheyareabletoputonthetheoriesandframeworksIteachthemasasetoflensestoenablethemseetheworlddifferently.Thatwasthepurposeofthisappendix:topresentenoughopportunitiesindifferentpartsoftheworldthatareoften written off in the hopes that you would begin to see them differently.Investingininnovation,and,morespecifically,creatinganewmarket,isoneofthemostimportantthingswecandotonotonlyreapoutsizedreturns,buttoalsosustainablydevelop these regions.Theworld is fullofopportunity, ifyou justknowwhatyouarelookingfor.

NOTES1. Break-bulkcargoisaprocessbywhichgoodsareloadedintoatruckanddriventoaportwarehousewhereworkers,calledlongshoremen,unloadthegoodsfromthetruckandstoretheminawarehouseorinashippingvessel,ifoneisavailable.

2. CharlesDuhigg,AaronBird,andSamanthaStark,“ThePowerofOutsiders,”NewYorkTimes,video,accessed January 29, 2018, https://www.nytimes.com/video/business/100000004807604/the-power-of-outsiders.html.

3. At the time, togrow thebacteria longer than forty-eighthourswouldhavebeen inefficient.Existingrules,conventionalwisdom,andacceptedsciencesuggestedthatthespecimenswouldhavebeenuselessfortheirpurposes.Assuch, therewasgoodreasonfortheexperts togrowthebacteriafornomorethantwodays.

4. Marshall Barry and Paul C. Adams, “Helicobacter Pylori: A Nobel Pursuit?”Canadian Journal ofGastroenterology22,no.11(2008):895–896.

5. “Sales of washing machines in India from 2007–2016,” Statista, accessed January 29, 2018,https://www-statista-com.ezp-prod1.hul.harvard.edu/statistics/370640/washing-machine-market-size-india/.

6. “ElectronicDevices:WashingMachineMarketShare&Size,IndustryAnalysisReport,2025,”GrandViewResearch,December2016,https://www.grandviewresearch.com/industry-analysis/washing-machine-market.

7. “Press Room:WashingMachineMarket Size to Reach USD 42.16 Billion By 2025,” Grand ViewResearch, December 2016, https://www.grandviewresearch.com/press-release/global-washing-machine-market.

8. AnIndiancompany,MetroElectronicLab,hasdevelopedaportablewashingmachinethatretailsforroughly$40.Themachineattachestoabucket,weighslessthan5pounds(2.2kg),andcanwash6.6poundsof clothes in six-minute cycles. See more here: http://www.waterfiltermanu facturer.in/handy-washing-machine.html#handy-washing-machine.

9. “The World Bank in Cambodia,” The World Bank, last updated October 2017,http://www.worldbank.org/en/country/cambodia/overview.

10. “Exports: Mexico,” Observatory of Economic Complexity, accessed January 29, 2018,https://atlas.media.mit.edu/en/profile/country/mex/#Exports.

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Index

Thepaginationofthisdigitaleditiondoesnotmatchtheprinteditionfromwhichtheindexwascreated.Tolocateaspecificentry,pleaseuseyourebookreader’ssearchtools.

Pagenumbersoffiguresandchartsappearinitalics.

Abramovitz,Moses,39n7Acemoglu,Daron,200n2,202–3n16Ackerman,Kenneth,218Adams,Paul,281Adebiyi-Abiola,Bilikiss,304–5Afghanistan,ix,191–92,225–27,241,242Africa,viii,ix,x–xii,65,80,202n11,255n9,292–93,295;insurance,46–47,53,56–59,63;mobilephones,

4–7, 48, 63, 236–38; One Acre Fund, 300–301. See also Celtel; MicroEnsure; M-PESA; specificcountriesAlexander,Jeffrey,139

Ambode,Akinwunmi,304AmericanResearchandDevelopmentCorporation(ARDC),120Andrews,Matt,191–92,201n6Angola,viii,188Annan,Jeannie,42–43n20Anthony,Scott,50Apple,24,40n10,42n18,309AravindEyeCare,248–49,268–69Argentina,196–99,222AspirePowerSolutions(APS),295Aswani,HareshandSajen,81,85AT&T,49Audi,164Auerswald,Philip,226

BacktotheFuture(film),151n2Bangladesh,46,67,160,188,270,293–94,315n24banking,6,62,63,91,102,114–18,273–74BankofAmerica,102,114–18,128n45Bates,Robert,221,233n26Baumol,William,203n20Benin,ixBernasconi,Andrés,198BigRoads,The(Swift),111–12,126n32,219

Birdzell,LutherE.,xv–xvin5Blagojevich,Rod,217Blattman,Christopher,42–43n20Bosch,309BossesoftheSenate,The(cartoon),218BourgeoisDignity(McCloskey),xviiin9,255–56n10Bower,Joseph,240Brandeis,LouisD.,261,270Brazil,247,269Bridges,Kate,185,201n8Britain,4,255–56n10,256–57n17,261,264,282Burma,223Burundi,viii,ix,301businessmodels,30,34,59,101,102,123n12,124n15,145;Aravind,268;BankofAmerica,102,114–18;

Celtel, 12, 30; Commonwealth Edison, 119; EastmanKodak, 107, 108; Ford, 34, 110;Galanz, 60;GrupoBimbo,172;Honda,143;integrated,51,65,87–88,95n12,110,116,132,138,143,144,147,148, 172–73, 225–27, 252, 266–67;MicroEnsure, 47, 57;NH, 265–66; POSCO, 148; Singer, 103;Tolaram,81,87–88;Toyota,138

Butterick,Ebenezer,104

Calderisi,Robert,255n6Calderón,César,255n9Cambodia,286Campos,J.Edgar,233n28Canon,51,143CapitalismwithChineseCharacteristics(Huang),xvi–xviin7Carnegie,Andrew,127n37Carrier,166Casablanca(film),214Castañeda,Alex,310Celtel,5–7,12,15n1,26–27,30,31,48,53,63,83,236–38,272–73CentralAfricanRepublic,ix,xiiChang,Ha-Joon,76,94n4,125–26n25Chaplin,Charlie,117Chávez,Hugo,212Chile,204n24China,viii,xvi–xviin7,174,204n24,215,288;corruptionin,214–16;Galanz,59–62,64,70n10,71n12Christensen,ClaytonM.,18,95–96n12,285Chrysler,34,138,140,162Chu,Michael,169Cirera,Xavier,37n3CiscoFoundation,300Clark,Edward,103ClinicasdelAzúcar,51,65,158,159,160,173,174,269Coase,Ron,134Colombia,65,130,171ComingProsperity,The(Auerswald),226CommonwealthEdisonCompany,119Congo-Brazzaville,6,236containershipping,280–81,313n1

corruption, viii, 4, 13, 16, 16n6, 205–34, 231n13; Afghanistan, 226–27; America, 11, 99, 101, 217–20,231n15;average level,global,206;causes,207–8;China,214–16;costs,205;CzechRepublic,183,200n3; development before anticorruption programs, 220; East Asia, 204n24; Europe, 220–22,233n26; FCPA in the U.S., 216; how to reduce, 224–227, 229; Job to Be Done and, 208; lawsineffective,215;Liberia,213–14;mitigationof,229;Montenegro,200–201n5;music industry,227–29; revenue-cost relationship and, 209; Romania, 200–201n5; South Africa, 212–13; South Korea,204n24,206,223,229;Taiwan,212;threephasesto“transparent”society,210–11,211–16,222–24;whyhire,208–11

Coted’Ivoire,ix,204n24,223Cutler,Lloyd,182Czechoslovakia,182,183,200–201n5

DemocraticRepublicofCongo,ix,6,63,236Detroit,Mich.,138,290–92DigitalEquipmentCorporation,120Disney,291–92Disney,Walt,117Doriot,Georges,119Dower,John,143Dr.Consulta,269Drucker,Peter,198Dulles,JohnFoster,130–31,133duPont,T.Coleman,239

EarthEnable,65,293Easterly,William,xEastman,George,100,106–8,120,125n23,270EastmanKodakCompany,11,106–8,125n23,134economic development, xv–xvin5, 7, 13, 20, 35, 36, 94n4; efficiency innovations and, 162–68;

government’s role, 129, 137, 141, 268, 298, 303–11; infrastructure and, 132, 229, 235–57, 254n3,255n9; innovation and, 15–16n5, 37n3, 39n7, 73, 285; institutions and, 181–204; organizations forsustainable development, 296–303; pull strategies for, 10, 73, 78–79, 85–87, 112, 273, 299; pushstrategies for, 73, 75, 77–78, 89; resource-dependent nations, 167–68; Solow and, 39–40n7;unsustainable projects, 89. See also market-creating innovations; specific countries EconomicDevelopmentasSelf-Discovery(HausmannandRodrik),xv–xvin5

Economist,The,235economy, xv–xvin5, 39n6, 41–42n17; calculating growth, 47, 48, 69n2; circular flow, xv–xvin5;

consumptioneconomy,23,45,48,49,52,62,70n3,164;free-market,36;gray-orblack-market,195–97; “market,” 15n2; market-creating innovations and, xv–xvin5, 7, 26–36; nested system, 39n6;nonconsumption,5,11,45,48,56–68;Pritchett’sfourentities,38n5,40n8;productivityandgrowth,39–40n7; regulatory rents, 38n5; “resource curse” or “paradox of plenty” and, 41n13; sustaining orefficiency innovation and, 22–23, 26; types of innovation, impacts of, 9, 17, 19, 20–22, 28, 34–36;virtuouscycle,28,33,102.Seealsomarket-creatinginnovations;nonconsumptionEcuador,65,171,188

Edison,Thomas,118–19education, 112, 168, 173, 185, 213, 240, 241, 244–45, 256n11; IDPFoundation and, 297–99; asmetric,

38n4;poornationsand,244–45,256n11;pullstrategiesfor,78–82,86,93,123–24n14,132,138,139,148–49, 172, 178n21, 248–49, 266–69, 298–99; push initiatives, 89; unemployed graduates, 245,256n11,299–300;value,244,245

“Educator’sDilemma,The”(HornandFisher),95n12

electriccars,272,287–89entrepreneurs,xv–xvin5,xvi–xviin7,4–7,16n6,28–29,41–42n17,79,203n20,251–52,279,305;emergent

strategy, 31; five keys to targeting market-creating innovations, 29–32; Harambe EntrepreneurAlliance,299–300;identifyingnonconsumption,45–47,50–68;JobstoBeDoneand,52–54;powerofoutsiders, 279–80; recognizing local needs, 132; understanding customer’s decision-making, 52–59,70n3.SeealsospecificpeopleFacebook,241

FamousLeadersofIndustry(Wildman),123n11FiatChryslerAutomobiles,162FieldofDreams(film),251FIFAWorldCup,77–78Fisher,JuliaFreeland,95n12Flyvbjerg,Bent,247,256–57n17Ford,Henry,100,109–14,120,121,126n26,263–64,270FordMotorCo.,34,83,102,109,110–14,138,14,145,164–65,165,172–74,178n21,240,253;ModelT,

11,32–34,33,64,108,111–14,169,270foreigndirectinvestments(FDI),28–29,48,86,163,163–64,175n6,215,309FortuneattheBottomofthePyramid,The(Prahalad),69n1Fox,Vincente,155Fried,Charles,182Friedman,Lawrence,219Friedman,Milton,36FutureofFreedom,The(Zakaria),126–27n33FyodorBiotechnologies,64

Gabon,6,236Galanz,59–62,70n10,71n12,83,270Gambia,ixGandhi,Mahatma,74Garbus,Martin,182GeneralElectric,119GeneralMotors(GM),34,138,140,145,164Georgia(country),192Ghana,ix,223,245,284;energyfromwaste,286–87;Moringa,295–300Giannini,Amadeo,100,114–18,120,270Glaeser,EdwardL.,205,210,220,224Globacom,6GohKengSwee,308Goodyear,Charles,119Goodyeartire,239Gordon,Robert,99GrupoBimbo,65,169–73,178n21,178n22,199Guatemala,viii,160

Haiti,viiiHamamatsuMotorcycleManufacturers’Association,142Hanson,Gordon,176n12HarambeEntrepreneurAlliance,299–300Hausmann,Ricardo,xv–xvin5,15–16n5,175n7HBS’sAfricaBusinessClub,80Helicobacterpylori(H.pylori)bacterium,280–81,313n3

Henderson,David,152n11Hewlett-PackardInc,117Hicks,Cheryl,90Hidalgo,César,15–16n5,175n7Hidekichi,Ozeki,142Honda,131,141,142–43,164Honduras,160,251Horn,Michael,95n12“How(Not)toFixProblemsThatMatter”(BridgesandWoolcock),185Howard,Dick,182Howe,Elias,123n12HowMusicGotFree(Witt),228HowtheWestGrewRich(RosernbergandBirdzell),xv–xvin5Huang,Yasheng,xvi–xviin7Hufbauer,Gary,176–77n14humancapital,xv–xvin5,xviiin9,78,172Hungary,182,200–201n5Huntington,Samuel,200n1Hyundai,144,147

Ibrahim,Mo, 3, 4–7, 12, 15n1, 26–27, 30, 32, 48, 53, 202n11, 236–38, 269–70. See also Celtel Ibuka,Masaru,131,133

IDPFoundation,Inc.,297–99;RisingSchoolsProgram,298–99,301IGNIAFund,169,177n19IguanaFix,198–99,222“ImpactofCorruptiononInvestment,The”(Campos),233n28India: Aravind, 248–49, 268; Bollywood, 91; corruption, 209, 230n3; demonetization policy, 310–11;

education, 78–79, 81, 248–49;KarnatakaProject, 192;MicroEnsure, 46, 58, 68, 270;NH, 263–69;pull strategies for, 90, 266; sanitation concerns, 74–76, 89–90; TBC, 89–90; TCS, 78–79;washingmachines,282–84,313n8

Indonesia,94n8,223infrastructure,viii, ix,xviiin9,4,7,10,11,13,17,38n4,235–54,255–56n10;categorizing,242–44,243;

company investment in,5,39n6,94n8,105,117–18,148–49,236–41,249–52,294,306;corruptionand, 218; costs of, 247–48, 252; defined, 243; development, 247–49; economic development and,254n3, 255n9; for education, 123–24n14, 244–45, 256n11; efficiency innovations and, 166; foreignaid,failureof,x,xi,7,241–42,248,253,255n6;governmentand,238,241,246,249–52,254n3,303–11;inIndia,90,248–49,266;inIndonesia,94n8;infrastructurefirstapproach,235,238,253,255n9;in Japan, 130, 239–40;MAREA, 241; market-creating innovations and, 5, 28, 88–89, 90, 117–18,125–26n25,126n32,132,235–38,240,245,248,251–52,253,266,270,272,294,306;megaprojects,247,256–57n17; inNigeria,80–84,86,88–89,285,290;poornationsandcosts,246,248,250–51;pull strategies for, 73, 90, 92, 112, 229, 237, 248, 252, 253, 270, 272, 285; push strategies for, 77,241–42,246,248,254n3;pushvs.pull,SouthAfrica,77–78;sequencingand,249;sustainable,235,241–42,248,251–53,255n9;twoimportantattributes,244;U.S.,100,104–5,109,111,124n15,239,240,251

“InfrastructureandEconomicDevelopmentinSub-SaharanAfrica”(CalderónandServén),255n9InfrastructureDevelopmentCompanyLimited(IDCOL),294,315n24Innosight,18innovation,xv–xvin5,17–43,38n4,51;cultureof,11,12,87–88,100,102,114,120,143;defined,10,15–

16n5, 19, 263; democratizing solutions and, 195; disruptive, 18, 37n2; economic development and,15–16n5,37n3,39n7,73,285;efficiencytype,17,18,24–26,48–49,127n37,162–68,165–66;forces

forchangevs.forcesopposingchangeand,54–56;historyof,inAmerica,99–128;inventionvs.,15–16n5, 19;market-creating type, xv–xvin5, 7, 17, 18, 26–36 (see also market-creating innovations);processtype,25;profilesofinnovators,279–302;prosperityand,9,10,224;sustainingtype,17,18,20–24,21,34,40n10,41n12,48;typesof,7,9,17,18–19,38n5;visionand,109

InnovationParadox,The(CireraandMaloney),37n3Innovator’sDilemma,The(Christensen),18Innovator’sGuidetoGrowth,The(Anthonyetal.),50Innovator’sSolution,The(ChristensenandRaynor),95–96n12institutions,181–204,200n1,200n2;cartbeforethehorseand,191–92;Colleganza(Venice),189–91,194–

95;economicgrowthand,204n24,229;entrepreneursand,203n20;ofEurope,188–89;failedreformprograms,191–92, 201n6; formerSovietBloc countries, 182–83;hownot to fixproblems,185–86,201n8; “importing” as ineffective, 184–85; innovation as glue, 193, 194–95; “institutional voids,”183–84; local context of, 193;Malawi case study, 185–86; market-creating innovations preceding,193–94; as a process, 194; prosperity and, 188, 203–4n21; push strategies and, 183, 184–85; risingincomes and, 191, 202–3n16; rule of law and, 181, 183, 188; shared learning and, 187; society’scultureand,185,186–88

Insull,Samuel,119Inter-AmericanDevelopmentBank,301InternationalMonetaryFund,205investments/capital investments: for Brazil’s Dr. Consulta, 269; bribes and, 214–16, 233n26, 233n28;

buildinginstitutionsand,188–89;forCeltel,5;inChina,215–16;corruptiondeterring,205,211;FDI,28–29, 48, 86, 163, 163–64, 175n6, 309; FPI, 42n18; for infrastructure, 240; loans to Europeanmonarchs,221–22;market-creatinginnovationsand,28–29,49;forMicroEnsure,58;microfinancing,297–98; nation-building and, 36; Rwanda’s RDB and, 307–8; in Singapore, 308–9; sustaininginnovationsandROI,48;timing,94n4

InvestmentinHumans,TechnologicalDiffusion,andEconomicGrowth(NelsonandPhelps),xv–xvin5

Japan, 9, 13, 129–43, 151n2, 152n11, 152n14, 188, 261; auto manufacturers and, 138, 141; auto andcultural change, 140; consumer electronics and, 143; culture of innovation and, 143; exportmarketand, 129, 131, 138; government’s economic role, 152n11; motorcycle market, 141–43, 239; road-building,130,137,239–40;Sonyand,132–37;threelessonsof,132;Toyotaand,137–41

Japan’sMotorcycleWars(Alexander),139Jaycox,Faith,231n15jobcreation,11,26,27,35,59;ClinicasdelAzúcar,159;crimereductionand,35,42–43n20,82;Eastman

Kodak, 107, 108; efficiency innovation and loss of jobs, 25–26;Ford, 109, 112;GrupoBimbo, 65;Honda,143;Ibrahim’sCeltel,12;iPhone,42n18;KiaMotors,145;localandglobaljobs,27–29,29,61,143,272;LSETF,304–5;MicroEnsure,59,61;ModelTeffect,33,33;M-PESA,63;inNigeria,80,83,84,85,92;oilindustrylacking,25–26;Roshan,226;Samsung,147;Singapore,308–9;Singer,104;Sony,134,135,136–37;sustaininginnovationand,21;Tolaram/Indomienoodles,61,80,83,84,85;Toyota,139;Walkerand,119;Zhaoxian’sGalanz,61

JobtoBeDone,52–53,57,68,70n8,87,107,110,136,158,197,208

Kagame,Paul,279Kahneman,Daniel,55Kamiya,Shotaro,140–41Kar,Kamal,75Kawasaki,142Kellogg’s,85,86Kenya,184,187–88,245,262,293,301;Mombasa-NairobiRailway,246–47;M-PESA,62,91,273–74Khan,Mushtaq,223

Khanna,Tarun,183Khoja,Karim,226KiaMotors,129,144–45KickingAwaytheLadder(Chang),76,94n4Kim,Jim,93Kim,Nate,147“knowledgemarketing,”60–61Kuhlmann,Katrin,187–88Kun-hee,Lee,146Kuwait,ixKyocera,143

LagosStateEmploymentTrustFund(LSETF),304–5Landes,David,xv–xvin5Langley,SamuelPierpont,274–75LeeKuanYew,308Leftley,Richard,45–47,53,56–59,67–68,270LegatumProsperityIndex,xiiLesotho,160Lewis-Gayle,Okendo,299–300LG,144,147,164LGTImpactVentures,269Liberia,ix,42–43n20,213,251LifestoresPharmacy,285Lipton,SirThomas,40n9LiptonTea(Unileverbrand),20,40n9Lozano,Javier,156–60Lucas,Robert,xv–xvin5

MacDonald,Thomas,219Madagascar,ixMaineFoundationforPediatricCardiacSurgery,262,270MakingaMiracle(Lucas),xv–xvin5Malawi,ix,6,185–86,236,270,301Malaysia,223Malesky,EdmundJ.,233n28Maloney,WilliamF.,37n3ManagingtheResourceAllocationProcess(Bower),240Mandela,Nelson,212–13ManilaWater,305–6market-creating innovations, xv–xvin5, 5–7, 12, 13, 15–16n5, 16n6, 17, 18, 26–36, 40n9, 63; affordable

productscreatinggrowthmarkets,272;bettergovernanceand,12,16n6,36,92;culturalchangeand,11,35–36,111,139–40,203n20,229,275;defined,10–11;democratizingproductsandservices,27,28, 115, 190, 240, 272–73; emergent strategy and, 31; enabling technology and, 30; as an entiresolution,83;executivesupport,32;fivekeystotargeting,29–32;infrastructureand,5,28,80–84,88–89, 90, 125–26n25, 126n32, 132, 235–38, 245, 248, 251–52, 253, 270, 272, 294, 306; institutioncreationand,193–94;integratedbusinessmodeland,87,95n12;jobcreationand,11,26,27,35,59,61,62,63–66,119,120;Job toBeDoneand,52–54,56,68,70n8,107,136,197; localandglobaljobs,27–29,29,61;localcapabilitiesand,301;localneedsand,132;ModelTeffect,32–34,33,64;nation-building and, 36, 132; naysayers tooriginal ideas, 30; organizational or government support,

268;aspathtoprosperity,10;principlesof,270–74;profitcreationand,11,35,62;prosperityand,6–7, 17, 29, 99, 130; pull strategies and, 11, 36, 108, 110, 111, 112, 132, 229, 270, 272–73, 302;resourcesneeded,32;riskand,48–49;societalimpact,191;struggleasopportunity,5,10,35,45–68,69n1, 79, 131, 132, 135, 136, 169, 197, 199, 237, 264, 272, 279, 286, 293, 294–95, 311; targetingnonconsumption,30,35,50–68,110,111,115–16,133,135–39,190,271,272,288–89,290; threeoutcomes, 11; as transformational, 16n6, 26, 32–34, 36, 108, 109, 111–14, 115, 118; understandingcustomer’sdecision-makingand,52–59;valuenetworkand,31.Seealsospecificcompanies,people,andproductsMarocTelecom,6

Marshall,Barry,281–82Mathias,Charles,Jr.,182Mazda,141McCartney,Matthew,204n24McCloskey,Deirdre,xviiin9,255–56n10McLean,Malcolm,280–81Mehta,Mira,290MercadodeTrueque,309–10MetroElectronicLab,313n8Mexico,9,13,130,155–78,162,175n2,175n5;Americanplantsin,155;automakersandFordin,164–66,

165,173–74,176–77n14;averageannualwages,166,166–67;Carrierand,166;ClinicasdelAzúcarand, 51, 65, 173, 174, 269; diabetes problem in, 65, 156–57; economic advantages for, 160–61;education,172;efficiency innovations in,155–56,162–68;electronicsmanufacturers in,164;exportmarketand,161,167,175n4,175n7,177n15,177n16;FDIin,163,163–64,175n6;globaljobsand,162; Growth in Exports and FDI, 163, 163–64; Grupo Bimbo, 65, 169–73, 178n21, 199;maquiladoras, 163–64, 176n12;Mercado de Trueque, 309–10;NAFTA and, 163, 173, 176–77n14;nonconsumptionpotential,168–74;oilexports,167,177n17;Opticasand,66,169–70,173,174;SouthKoreavs.,176n10;tradeand,160,173;Zacua’selectriccars,287–89

Mezue,Bryan,285MicroEnsure,46–47,53,56–59,63,66,67–68,270Microsoft,241,309Mitsubishi,141,145Modi,Narendra,74,310MoIbrahimFoundation,202n11Mombasa–NairobiStandardGaugeRailway,246Mongolia,viiiMontenegro,200–201n5MoringaConnect,296Morita,Akio,129,131,133,134,135–36M-PESA,6,62,63,91,273–74MTN,6musicindustry,227–29

Napster,228NarayanaHealth(NH),263–69;Yeshasvini(insuranceproduct),267Nelson,Richard,xv–xvin5Nepal,160Netherlands,202–3n16Niger,viii,ix,xviiin11Nigeria,x–xii,7,9,63,79–89,92,201–2n9,245,295,304–5; affordabledrugs,284–85; electricpower,

295; infrastructure,80–84,86,88–89,285,290;Lifestores,285;LSETF,304–5;Nollywood,91–92,291;oilindustry,25–26;Tolaram,61,79–89,95n10,95n11;tomatopaste,289–90

Nintendo,143Nisen,Max,189Nissan,131,141,164Nohria,Nitin,213nonconsumption, 5, 11, 13, 28, 54, 143, 164; APS solar power, 295; BoP and, 69n1; business models

targeting,30,59;Celtelphones,5–7,12,15n1,26–27,30,31,48,63;ClinicasdelAzúcar’sdiabetestreatment, 51, 65; Dr. Consulta health clinics, 269; EarthEnable floors, 65, 293; Eastman Kodakphotography,100,106–8;FordModelT,64,110,111;Galanzmicrowaves,60–62,64,70n10,71n12,270;Giannini’sBankofAmerica,115–16;GrupoBimbobread,51,169–73;habitsofthepresentand,55; IDCOL solar power, 294; identifying the opportunity, 45–47, 50–68, 273–74; importance oftargeting, 138–40; Japanese motorcycles, 142; Kia Motors, 145; lack of access and, 51; lack ofinfrastructuraland institutionalcompetencyand,183–84; lackofskilland,50; lackof timeand,51;lack of wealth and, 50–51; loss aversion and, 55; market-creating innovations and, 30, 35, 50–68;mattressesinCambodia,286;MicroEnsureinsurances,46–47,56–59,66;MoringaConnectinGhana,296;M-PESAbanking,63,91,273–74;NarayanaHealth,266;Opticasprescriptionlenses,66,169–70;principlesofmarket-creating innovationand,271,272;scalingas inexpensive,273;seeingwhatcannotbeseen,62–68;Sony,131,133;struggleasopportunity,5,10,35,45–68,69n1,79,131,132,135, 136, 169, 197, 199, 237, 264, 272, 279, 286, 293, 294–95, 311; targeting in America, 102;targetinginMexico,159,160,168–74;Tolaram/Indomienoodles,63,85;TomatoJos’stomatopaste,290; Toyota cars, 137, 138–40, 151n6; urine malaria test, 64; washing machines, 282–84, 313n8;Zacua’selectriccars,288–89

North,Douglass,xv–xvin5,183Novartis,309

O’Brien,Geoffrey,227OfficialDevelopmentAssistance,7Ojomo,Efosa,x–xii,7,253Olson,Mancur,16n6Omoigui-Okauru,Ifueko,304OneAcreFund,300–301OpticasVerDeVerdad,66,169–70,173,174OrganizationforEconomicCooperationandDevelopment(OECD),vii,xvn1,7,48,153n17,160,175n2,

318outsourcing,164OxfordEconomics,174Oyebode,Akintunde,305

Pakistan,46Palepu,Krishna,183Panasonic,136,143ParkChung-hee,223ParkGeun-hye,223patentsandintellectualproperty,123n12,125–26n25,232n21Paul,Rohini,266Peru,65,171Phelps,Edmund,xv–xvin5Philippines,305–6Phillips,164poor nations, vii–x, ix, xii, xiii, xvn3, xviin8, 3, 100–101, 160; company infrastructure investment and,

39n6,94n8,251–52;corruptionandpoorgovernance,7,11,101,204n24,206;creatingprosperityvs.

alleviating poverty, xii, 4, 6, 7; culture and institutions, 181–204; culture of innovation and, 12;educationand,244–45,256n11;efficiency innovationsand,168; failed institutional reform,191–92,201n6;foreignandnonprofitaid,vii,ix,x–xii,xviiin10,7,73;gray-orblack-marketeconomiesand,195–97; health care in, 264; infrastructure and, 80–84, 88–90, 236–41, 246–47, 250–51, 254n3;innovationvs.statefunding,12;lackofincentivetochange,40n8;pullstrategiesfor,78–79,82,85–86,92–93,190;pushstrategies for,73,75–78,89,92;“resourcecurse”or“paradoxofplenty”and,41n13; sanitation concerns, 286–87; UN Sustainable Development Goals, 144; World Bank, otherdevelopmentinstitutionsand,xviiin11.SeealsospecificcountriesPOSCO,147–49,240;POSTECH,148–49,240,253

poverty: changing push emphasis to pull and, 92–93, 190; as chronic disease, 76–77; infrastructure and,235;market-creating innovations toalleviate,27,85;paradoxof,93;ProsperityProcess forsolving,261–78;pushstrategiesfor,76–77;resourceproblemassumption,76

PovertyStopsHere,x,xi,7,253PowerandProsperity(Olson),16n6“PowerofMarketCreation,The”(MezueandChristensen),285Prahalad,C.K.,69n1“PredictableCorruptionandFirmInvestment”(SamphantharakandMalesky),233n28Pritchett,Lant,38n5,40n8,184,244–45,256n11Pritzker,Irene,297,298productivity,39–40n7,160–61,175n2profitcreation,11,12,35,108,135ProgressiveEra,The(Jaycox),231n15prosperity,xii–xiii;alleviatingpovertyvs.,xii,4,6,7;America’sjourney,viii,xvn3,xvn5,9–10,99–128;

critical drivers of, 19; culture and institutions and, 181–204; “economic complexity,” 15–16n5;entrepreneursandlocalneeds,132;goodgovernanceand,12;innovationand,9,10,224;institutionsand,188,203–4n21;investingininnovationand,132;Japan’sjourney,129–43,261;linkedtosocietalknow-how,15–16n5;market-creatinginnovationsand,xv–xvin5,7,12,13,17,29,85,99–100,102,130;pullstrategiesfor,10,73,79;recommendedresources,xv–xvin5;SouthKorea’sjourney,vii,viii,143–49,261;Taiwanand,150

Prosperity&Violence(Bates),221,233n26Prosperity Paradox: the idea in brief, 3–7; as overlooked path to prosperity, 10–12; understanding the

concept,8–10Prosperity Process, 130, 194, 261, 261–78; governments and, 303–12; innovators, profiles, 279–302;

market-creatinginnovationsand,263;NHand,263–69;principlesofmarket-creatinginnovationand,270–74;reframingtheproblem,274–77;resourcesand,263

Proust,Marcel,45Przeworski,Adam,126–27n33Puga,Diego,189pullstrategies,10,36,52,73–93,127n37,190;Aravindand,248,268;costcentertransformedintoprofit

centerand,87;digitizationofIndiaand,311;Eastmanand,108;efficiencyorsustaininginnovationsand,20,40n10,166;Fordand,110–11; Ibrahimand,12; IguanaFixand,199; for infrastructure,73,78–79, 90, 92, 112, 229, 237, 248, 252, 253, 266, 270, 272, 285; for institutions, 185, 203–4n21;integrated business model and, 87, 95n12; investing in innovation and, 132; Lifestores and, 285;market-creatinginnovationsas,11,36,108,110,111,112,132,229,270,272–73,302;Mexicoand,162, 173; Model T effect, 102; NH and, 266–67; M-PESA and, 63, 273–74; Nollywood and, 92;POSCO,149; reasons theywork,79;Singer and,105,123–24n14;Sonyand,136–37;SouthKoreaand,149;TolaraminNigeria,82,85–86.SeealsospecificcompaniesPutin,Vladimir,212

Qatar,26,168Quadir,Iqbal,16n6,41–42n17

Quinn,Reed,262

Rankin,William,254n3Raynor,MichaelE.,95–96n12Recchia,Matias,196–99“ResourceandOutputTrendsintheUnitedStatesSince1870”(Abramovitz),39n7resourceextractionindustry,25–26Ricoh,51,143RiseandFallofAmericanGrowth,The(Gordon),99“RiseofEurope,The”(Acemogluetal),202–3n16“RiseoftheRegulatoryState,The”(GlaeserandShleifer),205,210,220,224RiseoftheWesternWorld,The(NorthandThomas),xv–xvin5Robinson,James,200n2Rodriguez,Erika,310Rodrik,Dani,xv–xvin5“RoleofMaquiladorasinMexico’sExportBoom,The”(Hanson),176n12Romania,182,200–201n5Rosenberg,Nathan,xv–xvin5Roshan,225–27Roy,William,181Russia,9,105,123–24n14,167,168,212Rwanda,65,279,301,303,307–8,315n23;DevelopmentBoard,306–7;flooring,292–93

Safaricom.SeeM-PESASafeWaterNetwork,301–2SafiSana,286–87Samphantharak,Krislert,233n28Samsung,129,144,145–47SaudiArabia,26Schein,Edgar,186,190Schumpeter,Joseph,xv–xvin5,15–16n5Seiberling,Frank,239Senegal,ix,160,215Servén,Luis,255n9Servitjefamily,169Sharma,Ankur,84Sharp,143,164Shetty,DeviPrasad,263–65,267,270Shleifer,Andrei,205,210,220,224SierraLeone,ix,6,236SinapiAba,298–99Singapore,9,308–9Singer,IsaacMerritt,100,102–6,120,122n9,123n11,232n21,270Singercompany,11,104–5,122n9,122–23n10,123n12,123–24n14,124n15,239Singh,ChaudharyBirender,75,81Singhal,Deepak,73Sirleaf,EllenJohnson,213–14SocializingCapital(Roy),181Solow,Robert,39–40n7SonyCorporation,129,132–37,152n11,164

SouthAfrica,26,78,235,238–39,245;corruptionin,212–13;FIFAWorldCuphosting,77–78SouthKorea, vii, viii, 9, 13, 129–30, 132, 143–49, 153n17, 161,162, 163,166, 167, 176n10, 240, 261;

corruption, 204n24, 206, 223, 229; governance, 149, 204n24, 223; heavy industry, 153n17; KiaMotors,144–45;POSCO,147–49,240;Samsung,144,145–47;steelindustry,148–49;threelessonsof,132;U.S.foreignaid,144

SriLanka,viiistruggle:corruptionassolutionto,229;asopportunityforinnovation,5,10,35,45–68,69n1,79,131,132,

135,136,169,197,199,237,264,272,279,286,293,294–95,311Sudan,xiiSuzuki,141,142Swift,Earl,111–12,126n32,219Swift,GustavusFranklin,95n12SwissRe,45

Tae-joon,Park,148Taiwan,150,154n24,212Tanzania,241–42,255n6,301TataConsultancyServices,78,79,81TaylorMade,P790golfclub,24“TechnicalChangeandtheAggregateProductionFunction”(Solow),39–40n7telecommunications industry,6,48,49–50,55,272–73;Celteland,5–7,12,15n1,26–27,30–31,48,53,

63,272–73;M-PESAand,63,91Telkom,6Ternent,Christine,301–2Thailand,223TheoryofEconomicDevelopment,The(Schumpeter),xv–xvin5,15–16n5Thomas,Robert,xv–xvin5Togo,ix,251Toilet:ALoveStory(film),74,75–76ToiletBoardCoalition(TBC),89–90TolaramGroup,73,79–89,94n8,95n10,95n11,224,240,253,267;businessmodel,87–88,225;Hypo

bleachproduct,95n10;Indomienoodles,61,79,80;Kellogg’sand,85,86;logisticscompanyof,83–84

TomatoJos,290Topolánek,Mirek,200n3Toshiba,136Toyoda,Eiji,139Toyoda,Kiichiro,138,151n6Toyota, 22–23, 31, 41n12, 131, 137–41, 145, 151n6; Chubu Nippon Drivers’ School, 138; Nisshin

EducationandTrainingCenter,138TransparencyInternational,206;CorruptionPerceptionsIndex,208,211,212,213,215,216,223,226Trefler,Daniel,189Tribe,Laurence,182TroublewithAfrica,The(Calderisi),255n6Trudeau,Pierre,182Tunisia,245Tversky,Amos,55Tweed,“Boss,”217–18,231n15

Uganda,ix,6,236,301

UnitedNationsConferenceonTradeandDevelopment(UNCTAD),235UnitedNationsDevelopmentProgramme(UNDP),304UnitedStates,viii,xvi–xviin7,xvn3,xvn5,9–11,13,70n3,76,95n12,99–128,105,109,111,119,120–21,

122n1,125–26n25,126–27n33,127n37,130,166, 167,188,250,261,264,284;BankofAmerica,114–18;corruptionand,216–20,231n15;crimein,101;cultureofinnovation,11,100,102,114,118–20;Eastmanand,106–8;FordModelT,32–34,33, 109–14; foreignaid,vii, ix,x;ForeignCorruptPracticesAct (FCPA), 216; infrastructure, 100, 104, 105, 108–12, 124n15, 238, 239, 240, 249–50,252–53;innovationasthenewnormal,118–20;lobbyingin,195,216–17;road-buildingin,102,108,109,111–12,126n32,219,239;Singerand,100,102–6

Venezuela,ix,26,211,230n4Venkataswamy,Govindappa,249venturecapital,16n6;ARDC,120;IGNIAFund,169,177n19verticalintegration,110,225,252Vodacom,6Vogel,Ezra,143

Walker,SarahBreedlove,119Warren,Robin,281–82washingmachineindustry,282–84WAVEAcademy,285Waze,210WealthandPovertyofNations,The(Landes),xv–xvin5WhiteMan’sBurden,The(Easterly),xWildman,Edwin,123n11Wilson,Woodrow,218,231–32n17Winter,Sidney,15–16n5Winton,Alexander,110Witt,Stephen,228Woolcock,Michael,185,201n8WorldBank,xviiin11,3,42n18,69n2,74,78,93,147,184,255n6;EaseofDoingBusinessrankings,161,

192,201–2n9;InnovationParadox,37n3Wright,OrvilleandWilbur,274,275

XiJinping,215

Yamaha,142Yemen,xiiYeshasvini,267Yoo,Tae,300

Zacua,287–89Zakaria,Fareed,vii,126–27n33Zambia,ix,46Zhaoxian,Liang,59–62,270Zimbabwe,ix;ParirenyatwaHospital,242Zoho,253Zuma,Jacob,213

AbouttheAuthors

CLAYTONM. CHRISTENSEN is the Kim B. Clark Professor at HarvardBusiness School, the author of twelve books, a five-time recipient of theMcKinseyAwardforHarvardBusinessReview’sbestarticle,andthecofounderof four companies, including the innovation consulting firm Innosight. He isrepeatedly recognized by Thinkers50 as one of the most influential businessthinkersintheworld,whohavenotedthat“hisinfluenceonthebusinessworldhasbeenprofound.”

EFOSAOJOMOworkssidebysidewithChristensenasaseniorfellowattheChristensen Institute for Disruptive Innovation, where he leads theorganization’sGlobal Prosperity Practice.Hiswork has been published in theHarvard Business Review, the Guardian, Quartz, CNBCAfrica, and theEmergingMarketsBusinessReview.HegraduatedwithanMBAfromHarvardBusinessSchoolin2015.

KARENDILLON is the former editor of theHarvard Business Review andcoauthoroftheNewYorkTimesbestseller,HowWillYouMeasureYourLife?,and Competing Against Luck. A graduate of Cornell University andNorthwesternUniversity’sMedillSchoolofJournalism,sheisalsotheeditorialdirectorofBanyanGlobalFamilyBusinessAdvisors.ShewasnamedbyAshokaasoneoftheworld’smostinfluentialandinspiringwomen.

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THEPROSPERITYPARADOX.Copyright©2019byClaytonM.Christensen,EfosaOjomo,andKarenDillon.All rights reservedunder InternationalandPan-AmericanCopyrightConventions.Bypaymentoftherequiredfees,youhavebeengrantedthenonexclusive,nontransferablerighttoaccessandreadthetextof this e-book on-screen.No part of this textmay be reproduced, transmitted, downloaded, decompiled,reverse-engineered,orstoredinorintroducedintoanyinformationstorageandretrievalsystem,inanyformorbyanymeans,whetherelectronicormechanical,nowknownorhereafterinvented,withouttheexpresswrittenpermissionofHarperCollinse-books.

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Library of Congress Cataloging-in-Publication Data Names: Christensen, Clayton M., author. | Ojomo,Efosa,author.|Dillon,Karen(Editor),author.

Title:Theprosperityparadox/ClaytonM.Christensen,EfosaOjomo,andKarenDillon.Description:Firstedition. |NewYork,NY:HarperBusiness,[2019] | Includesbibliographicalreferencesandindex.

Identifiers: LCCN 2018028690 | ISBN 9780062851826 (hardcover) Subjects: LCSH: Economicdevelopment.|Wealth.|Poverty.

Classification: LCC HD82 .C5224 2019 | DDC 339.2—dc23 LC record available athttps://lccn.loc.gov/2018028690

DigitalEditionJANUARY2019ISBN:978-0-06285183-3Version12082018PrintISBN:978-0-06285182-6

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