Emerging markets: Will technology deliver the promise?

TNW Magazine

By: Tessa Sterkenburg, The NextWeb – September 1, 2012

In 1994 I did research for my thesis at a Philips factory in a so-called Free Trade Zone in Penang, Malaysia. At the time — and maybe still today — local governments gave incentives to multinationals (tax breaks and other favorable conditions) to set up local plants in these Free Trade Zones. The idea was that development would spread itself through the region, as these multinationals would use local suppliers, and these suppliers would need suppliers as well, etc. In this way prosperity would spread, and the new emerging markets, the East-Asian “Tigers” were born.

I certainly had a great time at the beautiful Penang Island but the outcome of my research was a bit depressing: the “local” subcontractors turned out to be other multinationals, and when conditions became more favorable in China, the whole factory, including its suppliers, and their suppliers relocated. Of course, there was some progress in the region through talent development and local schooling, but probably not to the extent the Malaysian government had hoped for.

With technology and the Internet as major drivers for economic growth, I suspect that the dynamics are very different today. The fastest-growing companies are now growing at a much quicker rate than the fastest-growing companies twenty years ago. Local presence is a lot less important. Initial startup costs for corporations are much lower. People don’t have to be located in one place to work together (in theory). The world can be reached through the Internet. All you need is a good idea and a bit of tenacity, right?

On the other hand: the current most successful technology companies in the world, Apple, Amazon, Facebook and Google, are all from the US.

According to Wikipedia, the eight largest emerging and developing economies by either nominal GDP or GDP (PPP) are China, Brazil, Russia, India, Mexico, South Korea, Indonesia, and Turkey. The four biggest and fastest growing emerging markets are the so called BRIC countries (Brazil, Russia, India, and China). Jim O’Neill from Goldman Sachs, who coined the term BRIC in 2001, argues that the economic potential of these countries is such that they could become among the four most dominant economies by the year 2050.

What is the role of technology in this? Will the next successful technology companies come from these countries? Will technological dominance be spread more evenly and what are the mechanics behind this?

Let’s hear it from the experts. We asked Brazilian investor Jose Marin; Esther Dyson, an investor, Russia fan and Yandex board member; Werner Vogels, Chief Technology Officer at Amazon; and Frank Yu, founder of Kwestr who moved to China in 2004, to comment on the influence of technology on the BRIC countries.

Brazil

Jose Marin: Founding Partner and Managing Director of IG Expansion. IG Expansion builds new technology and Internet companies in Spain and Latin America. A large number of their current investments are Brazilian companies: AO Viajanet, Shoes4you, 55social, MyAlert. 

Technological potential in Brazil

Brazil represents the largest e-commerce market in Latin America and its online population, 78 million people, is larger than the total population of Spain, France or the UK. E-commerce has been skyrocketing in Brazil. According to Forbes, it had an average growth of 32.5% in the last two years and an expected 26% growth in 2012.

And, according to Jose Marin, there is certainly no lack of ideas in Brazil.

Obstacles

However, there are some barriers that make technology innovation less successful than in developed markets.

1. It is very hard to raise capital for startups locally. Some foreign business angels and large VC funds (mainly from the US) are becoming active in the country, but they are still learning about the market and things go slowly.

2. Human capital is an issue. There is a qualified workforce in Brazil’s IT sector. This is key for innovation, but IT professionals are becoming more and more expensive. The Brazilian government is making an effort in this area, with significant investments in technical schools and universities.

3. The financial culture of local investors has no “technology DNA” yet. We need more successful entrepreneurs and relevant exits to push investments in this space and educate investors from other sectors to follow them. It is very difficult to compete in innovation when investment in R&D is low.

Brazil invested 1.2% of the GDP in R&D in 2010. This percentage is below the level recommended by OECD (2.5%), and the rate invested in countries such as the US (2.8%), South Korea (3.3%) and even China (1.5%).

The influence of technology on development in Brazil

The government should stimulate private investment in innovation. In South Korea, 2.25% of the 3.3% of the GDP invested in innovation comes from the private sector. In Brazil, most investments come from the government.

In 2011, venture capital funds invested some $30 billion in companies in the USA — that’s US$100 per person in the country that year. In Israel $1.9 billion was invested during the same year (US$400 per person). This ratio is 10 times that of Brazil’s: VC investment during 2011 reached US$8 billion according to LAVCA* — an improvement at 27% higher than the previous year, but still only US$40 per person.

Brazil is a country of opportunities and there is a lot of work to do. But we need more time, education of local investors, successful exits, and support from the government to promote technology development.

* Latam Association of Venture Capital

Russia

Esther Dyson is a former journalist, Wall Street technology analyst, angel investor, entrepreneur. She’s a lifelong Russia fan who’s fluent in the language and on the boards of several Russian technology companies including AO Yandex, Russia’s largest search company.

Technological potential of Russia

What is the technological potential of Russia and could the new Google or Amazon emerge from Russia?

Dyson: Actually, you could argue that the old Google did emerge in this country: search-engine company Yandex started about a year before Google. But unlike Google, it lacked a huge domestic market, so it now trails the US company in size though it remains one of the world’s top-three search companies.

Obstacles

The biggest obstacle to becoming a world player in Russia are two-fold. One is the lack of a large, competitive domestic market, though that is now changing as Russia has become the largest Internet market in Europe.

The second is the relative immaturity of Russia’s business culture; although there is huge technical talent, which you can be born with, few people have management and business skills, which are best learned through experience and through working with good managers. To some extent you can see this now in Silicon Valley. It’s easy to build an app, but hard to build a company around the app — which is why so many startups are getting acquired.

Of course there are the usual issues around bureaucracy and the like, but those are minor compared to the first two.

In the future, however, Dyson expects to see more and more world players emerging from Russia, which has not only technical talent but imagination and creativity.

The influence of technology on development in Russia

Technology – and more specifically, information technology — is beginning to have a strong influence on Russian economic development.  It brings three things into the economy: efficiency, transparency and a change in the balance of power between individuals and large institutions. The first two are fairly obvious; the third is worth explaining.

It is much easier to operate as an independent individual or a small company in the age of the Internet. In the past, economies of scale gave power to big institutions; now, smaller entities or individuals can acquire information and reach markets almost as efficiently (for their size) as large outfits. For many people, a computer is capital equipment that enables them to be productive and to control their own lives.

Similarly, the Internet allows individuals to be “present” online outside their own physical presence. That gives them the ability to write their own history without the need for an institution. That changed the balance of power, and its psychological impact on people’s sense of self is a key factor in Russia’s future development.

India

Werner Vogels is the Vice President and CTO of Amazon. Amazon has presences across three locations in India: Bangalore, Chennai and Hyderabad. Vogels visits regularly. 

The technological potential of India

The potential of India is unlimited. There is a great entrepreneurial spirit combined with an excellent engineering education system. You can see that already in the breadth of young businesses that are becoming very successful, from Bollywood streaming companies such as Hungama to Indian travel business disruptors such as Redbus and MakeMyTrip; from Classle which brings online education to rural areas to more traditional businesses such as Druva which does enterprise backup and archiving.

Obstacles

India’s biggest challenge is to make sure that they keep the talent they have or motivate the talent that went to study abroad to return to India. We are slowly seeing a shift with the rise of Indian companies making it more attractive to build a career in India.

The influence of technology on development in India

Werner believes that the combination of open-source software and cloud computing is enabling a whole new generation of Indian entrepreneurs to be successful, not only in India but around the world. Redbus is now expanding into Asia and Hotelogix is growing big in South America. Next to the big outsourcing firms in India a whole range of young, new technology companies are growing that are social and cloud focused. One example is Kuliza, a company that enables other enterprises around the world to grow.

China

Frank Yu is the CEO and co-founder of Kwestr. Frank was born in the US and moved to China in 2004.

Technological potential of China

Frank Yu: I don’t think the next Google or Amazon will come out of China, but I do think that maybe the next Oracle or even GE has the potential to come out of China. These tech giants are not known for innovation but are known for their ability to deliver service and products to the public that though not groundbreaking, have their own reputation of usefulness and consistency. China is strong in fine-tuning processes, not in groundbreaking technology… yet.

Obstacles

Education and mentorship are the biggest problems. The Chinese educational system is geared for volume and not quality. Skills important for a knowledge economy such as critical thinking, risk-taking and conceptual meta-thinking just don’t get taught in the universities well. There are many smart people in China but without the proper nurturing, these talents are wasted. The chain of mentorship the US and European tech industry takes for granted is not developed here because its all relatively recent. The command and control style of Chinese management which trickles down into their mentorship and leadership style doesn’t help.

The influence of technology on development in China

Chinese developers are naturally agile. Natural prototypers, they work fast and dirty to get something to work. China is leapfrogging into the information age — it has had an industrial phase but it has also gone from an agricultural society into an information society in less than three decades. China will be a tech leader as a manufacturer, but not as an innovator.

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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