Many
countries have been altering their growth strategies to reflect this
insight. But they are being distracted by some of the greatest – but
atypical – examples of success.
We all have heard of Steve Jobs, Bill Gates,
and Mark Zuckerberg – twenty-something college dropouts who built
billion-dollar companies at the cutting edge of global innovation. We
have heard of the many start-ups that they and others acquired for
hundreds of millions of dollars - Instagram, Skype, YouTube, Tumblr,
and, most recently, Waze. So why not emulate these successes?
The
main problem is that these examples are peculiar to the software
industry, which provides a woefully insufficient blueprint for the rest
of the economy.
The
software industry is unique, because it has unusually low barriers to
entry and ready access to a huge market through the Internet. A start-up
is typically just a group of kids with a good idea and programming
skills. All they need is time to write the code. Incubators provide them
with space, legal advice, and contacts with potential clients and
investors.
But
consider a steel, automobile, or fertilizer plant – or a tourist
resort, a hospital, or a bank. These are much more complex organizations
that must start at a much larger scale, require much more upfront
investment, and need to assemble a more heterogeneous team of skilled
professionals. This is not something at which a young college dropout is
bound to excel, because he lacks the experience, the organization, and
the access to capital that these ventures require.
And,
compared to software development, these activities also require more
infrastructure, logistics, regulation, certifications, supply chains,
and a host of other business services – all of which demand coordination
with public and private entities. Most important, these activities are
most likely to be central to economic growth in developing and emerging
countries. So, how will companies in these sectors arise, and what can
be done to stimulate their formation?
Many
developing-country governments are ignoring that question. For example,
Chile’s government, obsessed with so-called “horizontal” policies that
do not tilt the playing field in favor of any industry, recently
implemented Start-Up Chile,
a program with standardized rules to encourage new ventures. Although
the rules were designed for all industries, the scheme attracts almost
exclusively software ventures – the only ones that can be formed with
the low level of support that the program provides.
Other
industries face more daunting chicken-and-egg problems: countries lack
the capabilities that growth industries demand, yet it is impossible to
develop these capabilities unless the industries that require them are
present. One way to solve this coordination problem is through vertical
integration – that is, firms that can solve internally the coordination
of the supply and demand for any new capability.
That
is why national business groups – conglomerates – often play a key role
in transforming an economy and its exports. This is especially true in
developing counties, where many markets are missing and the business
environment is often extremely challenging.
Conglomerates
can use their knowledge, managerial skills, and financial capital to
venture into new industries. They can start things at a scale that would
be impossible for a start-up. They can make credible commitments to
future suppliers and influence the business ecosystem to make new
industries feasible.
Consider
South Korea. In 1963, the country exported goods worth less than $600
million at today’s prices, mostly primary products such as seafood and
silk. Fifty years later, it exports goods worth almost $600 billion, mostly electronics, machinery, transportation equipment, and chemical products.
This transformation was not achieved through independent start-ups. It was done through conglomerates, or chaebols
in Korean. For example, Samsung started as a trading company, moved to
food processing, textiles, insurance, and retail, and then on to
electronics, shipbuilding, engineering, construction, and aerospace,
just to name a few activities. South Korea’s transformation was
reflected in the transformation of its leading companies.
But,
in many developing countries, conglomerates have not played an
equivalent role. They have focused on non-tradable goods and services –
those that cannot be imported or exported – and have eschewed
international competition. They have focused on banking, construction,
distribution, retail, and television broadcasting.
Once
these companies dominate one market, they move to another that is
equally sheltered from competition and devoid of export opportunities,
often using their size and political influence to keep out would-be
competitors. Instead of becoming agents of change, they often prevent
change. (Indeed, the big economic debate in South Korea nowadays
concerns whether the chaebols are stifling innovation by preventing
start-up competitors from challenging them.)
The
productive transformation that developing countries need is much easier
to achieve with the support, rather than the obstruction, of their
conglomerates. But ensuring such support requires policies that nudge
(or even shove) conglomerates toward export industries that can grow
beyond the limits of the domestic market – industries in which
competition will encourage the discipline that they lack as a result of
dominating local markets.
To
succeed, conglomerates need the support of government and the
acceptance of society. They must earn it through their contribution to
the growth of employment, exports, and tax revenues, and to the
country’s technological transformation. That is what General Park
Chung-hee (South Korea’s longtime ruler, and father of current President
Park Geun-hye) pressured the chaebols to do in the early 1960’s. And it
is what governments and civil societies in developing countries today
should demand of their conglomerates.
Ricardo Hausmann, a former minister of planning of Venezuela and former
Chief Economist of the Inter-American Development Bank, is a professor
of economics at Harvard University, where he is also Director of the
Center for International Development.
