Drones, originally developed for military purposes, weren’t approved for commercial use in the United States until 2013. When that happened, it was immediately clear that they could be hugely useful to a whole host of industries—and almost as quickly, it became clear that regulation would be a problem. The new technology raised multiple safety and security issues, there was no consensus on who should write rules to mitigate those concerns, and the knowledge needed to develop the rules didn’t yet exist in many cases. In addition, the little flying robots made a lot of people nervous.
Such regulatory, logistical, and social barriers to adopting novel products and services are very common. In fact, technology routinely outstrips society’s ability to deal with it. That’s partly because tech entrepreneurs are often insouciant about the legal and social issues their innovations birth. Although electric cars are subsidized by the federal government, Tesla has run afoul of state and local regulations because it bypasses conventional dealers to sell directly to consumers. Facebook is only now facing up to major regulatory concerns about its use of data, despite being massively successful with users and advertisers.
It’s clear that even as innovations bring unprecedented comfort and convenience, they also threaten old ways of regulating industries, running a business, and making a living. This has always been true. Thus early cars weren’t allowed to go faster than horses, and some 19th-century textile workers used sledgehammers to attack the industrial machinery they feared would displace them. New technology can even upend social norms: Consider how dating apps have transformed the way people meet.
Entrepreneurs, of course, don’t really care that the problems they’re running into are part of a historical pattern. They want to know how they can manage—and shorten—the period between the advent of a technology and the emergence of the rules and new behaviors that allow society to embrace its possibilities.
Interestingly, the same institutional murkiness that pervades nascent industries such as drones and driverless cars is something I’ve also seen in developing countries. And strange though this may sound, I believe that tech entrepreneurs can learn a lot from businesspeople who have succeeded in the world’s emerging markets.
Entrepreneurs in Brazil or Nigeria know that it’s pointless to wait for the government to provide the institutional and market infrastructure their businesses need, because that will simply take too long. They themselves must build support structures to compensate for what Krishna Palepu and I have referred to in earlier writings as “institutional voids.” They must create the conditions that will allow them to create successful products or services.
Tech-forward entrepreneurs in developed economies may want to believe that it’s not their job to guide policy makers and the public—but the truth is that nobody else canplay that role. They may favor hardball tactics, getting ahead by evading rules, co-opting regulators, or threatening to move overseas. But in the long term, they’d be wiser to use soft power, working with a range of partners to co-create the social and institutional fabric that will support their growth—as entrepreneurs in emerging markets have done.
What Emerging-Market Entrepreneurs Know
Let’s look quickly at what I mean by institutional voids. Most entrepreneurs setting up a business in the United States or Germany can trust that an array of institutions will be in place to support them. For example, courts will uphold property rights, universities will provide a skilled workforce, and credit rating agencies will provide essential information about suppliers and buyers. The table “The Roles of Intermediaries in Mature Settings” lists typical institutional supports available in established markets.
Many of those supports don’t exist in developing markets, though, so entrepreneurs need to either fill in some of the blanks themselves or work with others to do so. Successful emerging-market entrepreneurs actively shape the institutional context they work within, usually to the benefit of the entire system. Let’s look at some examples.
One involves Charles Shao, who founded Huaxia Dairy Farm in 2004 in reaction to the quality problems endemic in China’s agricultural sector. The country’s regulatory structure was not robust enough to ensure that food was uncontaminated—and businesspeople knew they could get away with ignoring the regulations that did exist. In the wake of numerous damaging scandals, wealthier Chinese elected to purchase expensive products imported from other countries, but most consumers didn’t have that option.
Shao resolved to go above and beyond the poorly enforced regulatory standards—in fact, he decided he’d try to meet the more stringent U.S. food safety standards. In an earlier life, he had worked in California’s technology sector, from which he borrowed the idea of open-source information collection and sharing. Over time, Huaxia Dairy became known for giving away intellectual property and research to other farms—including competitors—to propel the whole industry forward. Working with Cornell University’s College of Veterinary Medicine, Shao also created free seminars with the aim of developing talent for a high-tech Chinese dairy industry. One of his goals was to make dairy farming “cool” so that top performers would be attracted to it. He thus became an aggregator of know-how and talent, in the absence of other intermediaries filling that role.
What Shao was doing, in essence, was trying to upgrade the entire institutional infrastructure. His efforts to exceed Chinese regulatory standards and his willingness to share best practices with competitors were not initially popular with his investors. But he persisted because he realized that unless quality standards improved throughout the industry, and unless the entire industry prospered, his business would eventually suffer.
Before Shao intervened, many agricultural businesspeople in China simply ignored regulations. Shao rejected such an approach, obviously. But he could have decided that lobbying the government to privilege his own efforts was his best strategy. Instead he chose a non-zero-sum approach that expanded the pie for everyone. Over time, independent certifiers of quality began to arise and act as credibility enhancers, filling another institutional void. The hope is that regulatory standards—and producers’ and buyers’ adherence to those norms—will also become stronger as time passes