Wednesday, March 01, 2006
Re-Introducing the International Private Enterprise Group
Regular readers of ZS will know of my involvement with the International Private Enterprise Group (IPEG). Briefly, the group was founded in June 2005 as a way to get together professionals with a serious interest in economic development issues, but also believed that the private sector and capital markets were the best catalysts of economic development, not traditional aid-driven approaches. I myself arrived at this conclusion through the course of my Ph.D. and during my work with the RISC Project. A few things became very clear to me in the course of the last few years, besides the obvious about the role of the private sector/capital:
1. The role of outsiders (including MNCs, the World Bank etc) should be to reduce transactions costs of doing business and to act as enablers. Specifically, transactions costs exist vis-a-vis access to finance (equity and debt), access to the best technologies, and access to knowledge networks and best practices. Reducing the transactions costs in this fashion will allow local entrepreneurs to cater to local demand.
2. The SME sector is key to development. Much as I admire microfinance and other such initiatives, I do not for the life of me see how they can be scaled up to provide economic opportunities for 500-700 million people (in India alone). That sort of employment can only be generated through the SME sector. And lest we forget, some of the biggest employers in America today started as SME businesses. And no, services are no panaea to the SME sector and there is no way for a country like India to leapfrog across the manufacturing stage straight into services. You have to be drinking the Kool-Aid if you think there are going to be 700 million Indians writing C++ or answering phone calls for Dell. No, not gonna happen!
3. There is more than sufficient entrepreneurial talent in India. In fact, I'd say India is one of the most entrepreneurial countries in the world. So, what is the hitch? As I mentioned earlier, the lack of access to capital, technology and best practices. You may have some terrific ideas, but if you do not have access to the capital (all the way from micro-finance to angel to venture to private equity) required to bring it to fruition, the idea is not going anywhere. And, you also need access to best practices and best technologies. For instance, if you wanted to start a private franchise to do Electricity T&D services (just by way of an FYI, the Indian govt is looking for 10,000 such franchisees), it would help for you to know that South Africa has implemented an excellent pre-paid model for electricity that drastically cuts bill collection costs.
4. Let's not get bogged down with definitions of social enterprise, private enterprise etc. I would argue that any investment into an economically moribund region will almost always have a net positive social impact. For instance, let's look at the multiplier effects associated with IT jobs in Bangalore. Conservative estimates are that the multiplier effect of an IT job is about 4X. Assume that Infosys hires about 15,000 people very year. Factor in the multiplier and you end up with 60,000 additional jobs, almost all of which go to people in BOP markets, including drivers, food services, construction workers etc. Now, assume that every big IT company hires about 10,000 new workers, and you see what I am driving at through the multiplier effect. Yes, you can call it trickle down, but it's pretty damn fast trickling then. More importantly, is Infosys a private enterprise or a social enterprise, once you factor in the multipliers? I don't know and I don't care. The time has come to simply accept that private enterprise is good news and everything must be done to facilitate it.
5. Let's not fetishize technology as was done by the proponents of the "digital divide." That's the classic case of misdiagnosing a symptom to be the problem. No people, the problem is poverty. What can technology really do? Well, technology can be a tool and an enabler. Period. You can have all the technology in the world, but if you don't have the other relevant institutions in place (including access to capital), it adds up to nothing, as my research clearly demonstrated. Technology is of no use in an institutional vacuum.
6. Finally, there is a lot of money sloshing around the world's capital markets. The numbers I've seen tossed around last was to the tune of $130 trillion. There is no reason why some of this capital cannot be deployed as investment capital in emerging market opportunities, assuming of course that the real barriers to entry can be dealt with and interesting investment vehicles found. Last year, the IFC estimates that about $358 billion in private capital flowed into emerging markets. In the same period, development aid ran at about $70 billion. It's also fairly safe to say that the former number will increase, while the latter number may stay stable or decrease. I'd argue that whatever public money exists in the aid arena should be ploughed into humanitarian missions and into capacity building, rather than be wasted on misdirected economic development projects, where this aid more often than not displaces private capital as well. What development aid has done very efficiently thus far is to pad the Swiss bank accounts of kleptocrats in third world countries.
You may be wondering where I am going with all of this. Well, IPEG was founded precisely to highlight these sort of issues and to promote the role of the private sector, capital markets and technology in catalyzing economic development. We started with four members, but now have over 80 members, mostly in the NYC area. The members are from diverse backgrounds, ranging from academia and the multilaterals to consulting, private equity and hedge funds. We have interesting meetings in New York, with the last one being last night with Alan Patricof of APAX Partners, who spoke about the role of private equity and venture capital in fostering economic development. That said, we take great pains to avoid being just a talk shop and there are some seriously interesting projects that IPEG members are working on. This ranges from East Africa's first VC fund to a Tier 3, Tier 4 focused India fund to numerous start-up activities in the technology arena focused on emerging markets.
To make life easier for us and for those of you who would like to get involved, we have put up a website, with a fairly comprehensive list of members, links to resources, events etc. We are more than happy to welcome new members, so if you'd like to join, just shoot me/us a note explaining why you would like to be part of IPEG's activities, and we'll invite you to our next event in NYC the end of this month. Of course, if you'd like to form a chapter of IPEG in another city, we're more than happy to facilitate that as well. In the meanwhile, if you have any feedback on the website and some of the comments I've made on here, shoot me a note.
I know this is already one of the longest posts ever on ZS, but I would be remiss if I did not acknowledge the help provided by Madhu Menon and Sonal Vaidya in putting the IPEG website together. Thanks, Madhu and Sonal.
1. The role of outsiders (including MNCs, the World Bank etc) should be to reduce transactions costs of doing business and to act as enablers. Specifically, transactions costs exist vis-a-vis access to finance (equity and debt), access to the best technologies, and access to knowledge networks and best practices. Reducing the transactions costs in this fashion will allow local entrepreneurs to cater to local demand.
2. The SME sector is key to development. Much as I admire microfinance and other such initiatives, I do not for the life of me see how they can be scaled up to provide economic opportunities for 500-700 million people (in India alone). That sort of employment can only be generated through the SME sector. And lest we forget, some of the biggest employers in America today started as SME businesses. And no, services are no panaea to the SME sector and there is no way for a country like India to leapfrog across the manufacturing stage straight into services. You have to be drinking the Kool-Aid if you think there are going to be 700 million Indians writing C++ or answering phone calls for Dell. No, not gonna happen!
3. There is more than sufficient entrepreneurial talent in India. In fact, I'd say India is one of the most entrepreneurial countries in the world. So, what is the hitch? As I mentioned earlier, the lack of access to capital, technology and best practices. You may have some terrific ideas, but if you do not have access to the capital (all the way from micro-finance to angel to venture to private equity) required to bring it to fruition, the idea is not going anywhere. And, you also need access to best practices and best technologies. For instance, if you wanted to start a private franchise to do Electricity T&D services (just by way of an FYI, the Indian govt is looking for 10,000 such franchisees), it would help for you to know that South Africa has implemented an excellent pre-paid model for electricity that drastically cuts bill collection costs.
4. Let's not get bogged down with definitions of social enterprise, private enterprise etc. I would argue that any investment into an economically moribund region will almost always have a net positive social impact. For instance, let's look at the multiplier effects associated with IT jobs in Bangalore. Conservative estimates are that the multiplier effect of an IT job is about 4X. Assume that Infosys hires about 15,000 people very year. Factor in the multiplier and you end up with 60,000 additional jobs, almost all of which go to people in BOP markets, including drivers, food services, construction workers etc. Now, assume that every big IT company hires about 10,000 new workers, and you see what I am driving at through the multiplier effect. Yes, you can call it trickle down, but it's pretty damn fast trickling then. More importantly, is Infosys a private enterprise or a social enterprise, once you factor in the multipliers? I don't know and I don't care. The time has come to simply accept that private enterprise is good news and everything must be done to facilitate it.
5. Let's not fetishize technology as was done by the proponents of the "digital divide." That's the classic case of misdiagnosing a symptom to be the problem. No people, the problem is poverty. What can technology really do? Well, technology can be a tool and an enabler. Period. You can have all the technology in the world, but if you don't have the other relevant institutions in place (including access to capital), it adds up to nothing, as my research clearly demonstrated. Technology is of no use in an institutional vacuum.
6. Finally, there is a lot of money sloshing around the world's capital markets. The numbers I've seen tossed around last was to the tune of $130 trillion. There is no reason why some of this capital cannot be deployed as investment capital in emerging market opportunities, assuming of course that the real barriers to entry can be dealt with and interesting investment vehicles found. Last year, the IFC estimates that about $358 billion in private capital flowed into emerging markets. In the same period, development aid ran at about $70 billion. It's also fairly safe to say that the former number will increase, while the latter number may stay stable or decrease. I'd argue that whatever public money exists in the aid arena should be ploughed into humanitarian missions and into capacity building, rather than be wasted on misdirected economic development projects, where this aid more often than not displaces private capital as well. What development aid has done very efficiently thus far is to pad the Swiss bank accounts of kleptocrats in third world countries.
You may be wondering where I am going with all of this. Well, IPEG was founded precisely to highlight these sort of issues and to promote the role of the private sector, capital markets and technology in catalyzing economic development. We started with four members, but now have over 80 members, mostly in the NYC area. The members are from diverse backgrounds, ranging from academia and the multilaterals to consulting, private equity and hedge funds. We have interesting meetings in New York, with the last one being last night with Alan Patricof of APAX Partners, who spoke about the role of private equity and venture capital in fostering economic development. That said, we take great pains to avoid being just a talk shop and there are some seriously interesting projects that IPEG members are working on. This ranges from East Africa's first VC fund to a Tier 3, Tier 4 focused India fund to numerous start-up activities in the technology arena focused on emerging markets.
To make life easier for us and for those of you who would like to get involved, we have put up a website, with a fairly comprehensive list of members, links to resources, events etc. We are more than happy to welcome new members, so if you'd like to join, just shoot me/us a note explaining why you would like to be part of IPEG's activities, and we'll invite you to our next event in NYC the end of this month. Of course, if you'd like to form a chapter of IPEG in another city, we're more than happy to facilitate that as well. In the meanwhile, if you have any feedback on the website and some of the comments I've made on here, shoot me a note.
I know this is already one of the longest posts ever on ZS, but I would be remiss if I did not acknowledge the help provided by Madhu Menon and Sonal Vaidya in putting the IPEG website together. Thanks, Madhu and Sonal.
