NEW BOOK: Legal and social institutions that support entrepreneurs are often not well established in developing countries. Tarun Khanna’s new book explains how companies can compensate for this by building trust.
Why is trust important for starting a business in developing countries?
Interview with Dina Gerdeman
Fear swept China in 2008 with the deaths of six babies and about 300,000 other people taking baby food with melamine, an industrial chemical used in plastics, and fertilizers that can cause kidney failure.
The contaminated milk scandal prompted milk entrepreneur Charles Shao to double quality control in developing countries. He used the technology to improve his dairy’s milk processing and went far beyond the requirements of Chinese regulations.
Today, all traces of melamine in baby food have disappeared, but the cleansing of milk in China has not eliminated a major problem: fear has made Chinese consumers so nervous that six years later, feel safer to drink.
So, Shao can not only sell milk. Instead, he and other entrepreneurs must take steps to restore a broken relationship of trust between the Chinese and the country’s dairy industry, says Tarun Khanna, Professor Jorge Lemann of Harvard Business School. Developing country, which was released on Tuesday.
“A system-wide change is necessary,” says Khanna, who studied entrepreneurs in developing countries and started projects in Asia. “This is achieved through constant experimentation, an understanding of the specific origins of distrust of the Chinese food system and, of course, all the time it takes to determine what experiences will have lasting effects.” It’s up to entrepreneurs like Shao. Establish and maintain a network of trust between consumers, producers, regulators and the public. ”
“Pointing the finger and criticizing the government used is not at all”
In his book, Khanna talks about the challenges Shao and other entrepreneurs face as they try to build a productive track in countries like Brazil, China, India, and Mexico. While consumer confidence in developed countries such as the United States is being bolstered by enforceable contracts, an impartial legal system and stringent regulations, this is not a reality in developing countries.
And entrepreneurs who are not trying to suppress the mistrust that permeates these countries are doomed to fail, says Khanna. Khanna shares tips on how entrepreneurs should tackle the delicate process of building trust in skeptical regions of the world.
Dina Gerdeman: You say that entrepreneurs do not have the luxury of focusing only on the specific problem they want to solve in developing countries. Do you think that many of them stumble because they do not realize that they need trust before they immerse themselves in their products and services?
Tarun Khanna: It is not enough to have domain expertise in which you want to be an entrepreneur. So many things can go wrong.
In the United States, it’s fair to say that you can look at a solution like the angle of technology, the angle of analysis, or a particular secret sauce, and you can create a business around it. The other people you need, eg. As the regulatory side or the sales area, can be combined into a team.
Many of these pieces would be missing in Johannesburg or another developing country. They do not have the luxury of these support structures. So you must first work on the trust that will inspire others to join you.
Gerdeman: Why is it important for entrepreneurs to adopt their own trusted network without waiting for others to solve their goals?
Khanna: In simple words, I think the approach I suggested is the most practical. I have spent a lot of time as an entrepreneur in developing countries. You must create the conditions for creating. Instead of assuming that a number of circumstances will arise to solve your problems, you must realize that you must address this issue of general mistrust. It’s neither productive nor enough to wait for the government or someone else to interfere. Showing and criticizing the government generally does not solve anything.
One reflex is that these countries do not work because of corruption. There is something true. But that may not be the main story. The main story is mostly a lack of understanding. This is the practical task of finding people who are willing to work with you and help shape the conditions for creation. You have to hold your hand as you go.
Critics could say that with this approach they have put too much emphasis on the entrepreneur’s shoulders. You’re right! It’s harder to build an app in a Harvard dorm, surrounded by expert pools, relatively high risk capital, and so on. That’s why “development” is difficult. But the alternative is tougher, waiting for the government, even well-intentioned, to become a silly race and take generations.
Gerdeman: When building his dairy farm in China, Shao offered to get other farmers to produce clean milk for free because he did not want to be confused with competitors who were producing spoiled milk. Is this type of information exchange with competitors necessary to build trust?
Khanna: With the crisis of melamine milk poisoning, he found that the problem, as an isolated actor trying to produce clean milk in China, was very difficult to solve. It was difficult to get there as a lonely person. It was like whistling in the wind.
But if there is a critical mass of people doing things in a particular way, then people can see milk production differently. When other people offer complementary services, the public is more likely to trust them than an isolated actor. So he thought that I had this trump and insight, and that he could be used by others, so he made it available to a larger number of people. Obtaining this critical mass makes it possible to become this viable option.
Shao’s alternative would have been to wait for the emergence of an industry association that would train others. But who would do it? Instead, he tries to create a constituency for change. This is an example of an entrepreneur paying more attention to the creation of public goods than in Boston.
Gerdeman: What role do you think technology can do to help entrepreneurs build trust?
Khanna: The largest biometric program in the world is by far in India. The biometric database of the FBI contains data on 60 to 70 million people. The Indian database has nearly 1.3 billion. Before this biometric database existed, there was no way to identify the vast majority of people in India. When children are born, half of them will not receive a birth certificate, even if it is required by law. So the government would help with India’s big welfare program, but could not believe it would end up in the pockets of the poor it was waiting for. It could be stolen. Euphemism is “flight”.
Technology was used to uniquely identify people and solve this problem. With the use of biometrics, the government is able to target the person who needs them directly. You do not need a card or a fingerprint. You can only get your money by showing your eye.
This technology has surpassed everything. This is an example of a technology that addresses a lack of trust between the government and its citizens. But this technology creates additional secondary problems that India can not handle, such as privacy issues. Technology is an arrow in your quiver as an entrepreneur, but it’s not a panacea. If you have this new technology, it is your responsibility and interest to help shape the infrastructure for the responsible and cost-effective use of this technology.
Gerdeman: Why is it crucial for entrepreneurs to meet the standards of a society instead of fighting it?
Khanna: In these developing countries, you have a system that has been running for hundreds of years. We tend to say that everything should be annoying. I do not know that it makes sense to me. Sometimes it is possible to work with existing practices. You can swim upstream on some dimensions of a problem, but not all, and it is likely that you will be using other basic practices and standards that you do not want to see changed.
Rather, we should look for ways to use existing practices. It’s better than a reflex approach that says, “I’ll come and stir things up.”
“GOOD ENTREPRENEURS ARE VALUABLE RISKS AND GREAT DREAMERS, THEY CAN NOT BE LIGHTED.”
In today’s microfinance, the best companies in India, Mexico, and elsewhere are using centuries of social norms and practices, for example, to consider how poor women band together to use their capital in a productive way.
Gerdeman: It seems that trust in a developing country can take many years. I imagine entrepreneurs need to be very patient when they expect success, right?
Khanna: Some of the organizations I’ve been involved with over the past decade have been former students (at HBS). Their assumption is often that we build that and go out in three or four years. They are fascinated by the phenomenon of “Facebook in a Harvard dorm.” You are seduced by it.
You could always be happy. But that does not happen often in the United States. It’s one in a million, with the gods smiling.
Good entrepreneurs are wise risk takers and dreamers. You can not put on lightning. It takes four or five years for a US company to succeed. This will take longer than in a fast-growing developing country. Yes, in most cases you need patience. The result is satisfaction with building a country’s software infrastructure, delivering critical services and, if you wish, financial success.