Innovations from Emerging Market Economies

Stephen DeAngelis

March 27, 2009

In a draft report entitled, “Innovation Shift” to the Emerging Economies: Cases from IT and Heavy Industries, Leonard Lynn and Hal Salzman wrote:

“In a widely accepted interpretation, Alfred Chandler (1990) attributed the success of U.S. industrial firms from the late 19th century through the first two or three decades after World War II to their effective exploitation of economies of scale and scope. To achieve and maintain economies of scale and scope, Chandler wrote, the successful firms built strengths in production (ensuring that economies of scale could be obtained), marketing and distribution (seeking both economies of scale and scope), and management (to efficiently coordinate resources and to effectively respond to new threats and opportunities in the environment). Early success in achieving the economies of scale and scope by the giant U.S. firms essentially kept others from entering the rich U.S. market. When the U.S. firms moved offshore it was to further exploit the advantages they had derived from their economies of scale and scope. Here again, their strengths in scale and scope made their position in global markets virtually unassailable. The widely followed prescription until recently was that firms needed to maintain tightly integrated, well coordinated structures.”

As labor costs increased along with infrastructure modernization/replacement costs, economies of scale became less of a differentiator for developed countries — which is why so much manufacturing has moved to so-called “low cost” countries. Lynn and Salzman argue, however, that policies supporting innovation were also important in strengthening the U.S. economy. They argue that “notable among these policies were: strong national and local support for land grant colleges that emphasized practical technology, strong antitrust policies to spur competition, [and] heavy government spending on technology (much of it related to military research and procurement, but also substantial amounts on medical research).” Business analysts have developed a number of theories for why businesses fail to keep up with change. Lynn and Salzman list a number of those theories — from lack of organizational integration to failure to create value chains to a loss of focus on corporate core competencies. They argue that a more fundamental (but related) change is now occurring. This is a change in the patterns of ‘geographical stickiness’ of technological development and innovation. If I understand their argument correctly, it supports Michael Porter’s theory that competitive clusters built around natural advantages are essential for competing in a globalized world. I also believe the concept of “geographical stickiness” supports the idea of regionalization within globalization.

BusinessWeek published an interesting article about a business called Fabindia (I’m assuming it’s a contraction for fabric and India). What is interesting about Fabindia is that it is “encouraging its suppliers to become shareholders” [“Weaving a New Kind of Company,” by Manjeet Kripalani, 23 & 30 March 2009 print issue]. Kripalani writes:

“Fabindia, a purveyor of hand-woven garments and home furnishings, is one of India’s premier retail brands. It has reached that level in part by bringing its suppliers inside the tent. The private company encourages the artisans who make its wares to become shareholders. Selling suppliers a piece of the company is unconventional, especially when most of the partners are illiterate. But if it succeeds, Fabindia could become a model for all kinds of companies, especially in the developing world.”

Fabindia has managed to exploit a number of advantages in its organizational model, such as, access to large numbers of experienced hand weavers, short supply chains, a natural domestic market, and a clear understanding of the business environment and culture in which it operates. By encouraging suppliers to become shareholders, the company not only secures its suppliers, it continues to foster a unique competitive cluster of artisans.

“As Fabindia has grown, it has come to depend entirely on some 22,000 weavers, block printers, woodworkers, and organic farmers to provide the handmade goods it sells. ‘We’re somewhere between the 17th century, with our artisan suppliers, and the 21st century, with our consumers,’ says [William] Bissell, [Fabindia’s president].”

Bissell and his staff have the unique challenge of connecting disconnected artisans to the modern economy. One of the first things they did was help artisans refine their traditional designs so that they would appeal to “chic urban tastes.” They also helped them improve the quality and consistency of their products. Bissell went even further to foster the growth and survival of his competitive clusters.

“Two years ago, Bissell went even further. He set up 17 centers throughout India, each organized around a particular region’s artisanal tradition. These centers, in turn, were incorporated as companies in which artisans collectively own 26%. Fabindia encourages each artisan to buy shares, which cost $2 apiece—a reasonable sum for a weaver who might make a monthly profit of $100 from selling his woven cotton to Fabindia. A wholly owned Fabindia company controls 49% of each subsidiary; the rest is held by other Fabindia employees and private investors. So far, 15,000 artisans have become shareholders. The ownership structure is mutually beneficial for Fabindia and the artisans; the retailer ensures it has the supplies it needs, while the weavers, dyers, and so forth lock in steady income. “We pool our effort and funds, the artisans pool theirs, and we share the risk,” says Bissell.”

Fabindia is thriving even during these dark economic times. Bissell says he plans to open another 150 stores over the next four years. The unique nature of Fabindia’s wares also creates unique challenges, especially when it comes to inventory. Because its products are handmade (and, therefore, they take a relatively long time to create), Fabindia can’t use a “just-in-time” supply line. Bissell says, “Here, it’s more like just-in-a-year.” Bissell helps prove my long-held assertion that entrepreneurs create jobs. In Bissell’s case, he is also helping preserve culture. His company “depends on some 22,000 weavers, block printers, woodworkers, and organic farmers to provide the handmade goods it sells.” More importantly for an emerging market country, these are people who have been laboring in poverty and could soon become part of India’s growing middle class.