Startup books #1: How Asia Works, by Joe Studwell

We at Innovation is Everywhere are fans of history and economics, as we try during our travels to see why some countries succeed in developing their economic strengths and reap benefits in terms of growth, wealth and global influence.

How Asia Works – Success and Failure in the World’s most dynamic region, by Joe Studwell (Amazon), is not your typical startup book, but it’s a wealth of knowledge on the development of what were developing countries not so long ago. The insights gathered in the book, and, we hope, in this review, are also an excellent stimulation to re-think the way startup ecosystems are being nurtured across Asia and more broadly in emerging markets.

Author Joe Studwell showcasing “How Asia Works”

The thesis of the author is simple yet incredibly detailed and supported by his analysis: North-East Asian countries (namely China, Japan, South Korea and Taiwan) did follow a three-step roadmap to go from developing countries to economic powerhouses with global influence.

If the topic of the book is about agriculture, manufacturing and finance, it offers insightful learnings on how the emerging markets could develop tech & startup ecosystems, since we know today that future growth will depend on this new entities, rather than huge industrial conglomerates.

How Asia Works, a three-step roadmap from land reform to export-focused manufacturing and directed finance

Joe Studwell goes back far in history to see how China, Japan, South Korea and Taiwan all did successfully follow a similar pattern to be the economic giants or tigers we reckon today. We suggest you to read our own Martin Pasquier’s full and thick review on his blog, but here’s a wrap-up of these three steps:

1. Reform land to break the concentration of ownership. Redistribute land to small-scale agriculture workers, and they will – with support from the government in terms of infrastructure and marketing – increase yields, get richer, and open new opportunities with their surplus. It’s a rather easy step to do as countries are still fully in control of their land policy. All north-east Asian countries did follow the same path, providing small farmers the opportunity to grow and change their lives. South-East Asian countries (Philippines, Indonesia, Thailand, Malaysia) did not (yet?) succeed to break this monopoly of rent-seeking and non-innovative landowners.
2. Organise the manufacturing industry in a way it is incentivised and constrained to export. Read again: EXPORT. By culling non-exporting companies and offering free money, infrastructure and bureaucratic support to the best-in-class, North-East Asian countries proved able – in decades, not years – to grow a class of big manufacturing & industrial champions, from Sony in Japan to Samsung or Hyundai in South Korea, ACER in Taiwan and the big state-owned companies in China. The key is really to help companies to export. Without this “export discipline”, the author of How Asia Works shows, you only feed rent-seekers. Money and the necessary quality and innovation features from products sold abroad help to buy new technologies and talent.
3. Keep finance on a short leash. Don’t deregulate too soon. “Infant industries” are like kids, says Joe Studwell. They need protection and help until they can walk by themselves. Central Bank policies (rediscounted loans) and government tricks to avoid entrepreneurs (always on shorter terms than the state) control the banks (tycoons in post-war Japan could not control more than 1% of a given bank) can help the finance industry to be aligned on the nation’s longer-term, industrial goals. Japan’s MITI, South-Korea’s General Park Chung Hee, and Deng Xiaoping’s China all managed to control the financial flows to their strategic goals. South-East Asian countries did not, and ended up with real-estate bubbles (at best) or just pure theft/corruption (at worst) and systemic crisis.

Again, do take the time to read the book, as the details, historical research and anecdotes from the author support this amazing vision of a planned policy that can work (also showing the don’ts).

Applying How Asia Works’ learning to tech & startup policies in emerging markets

With this in mind, we can now exercise our brain to apply the learnings of the book to today’s priority of a lot of governments: building an efficient tech & startup ecosystem to produce the next Google, Facebook or at least grabbing a piece of a fast-growing cake of internet companies (be it software or hardware startups as the ones we saw in Shenzhen).

1.  YES, there’s a role for government, a big and smart one. A recurring topic of almost any tech conference today, what government should do in a startup ecosystem gains in clarity with How Asia Works. The way the land reform is a redistribution tool for equal opportunities, turning anyone into a potential entrepreneur, makes a lot of sense when it comes to technology. Today’s startup success stories shows a lot of drop-outs and non-technical profiles can make it by being bold. You’re bolder when everyone starts with the same chances to be there. Take Jack Ma from Alibaba, as seen in Crocodile in the Yantgze, the documentary movie retracing his story. He’s a stubborn English teacher. Government didn’t help him to grow his company, but if we must give credit to one thing in communist countries, it that more people start on the same line (yes, there are caveats and history is not so simple, still, people in former communist countries all receive a basic education package you don’t find elsewhere). Globally, out of the top 100 richest people in the world today, 73 are from poor families (including 13 orphans)
2. YES, economic planning makes sense to protect “infant industries” and help them grow. Governments in many countries help VCs and angel investors to subsidise (sometimes heavily like in Singapore) investment in the knowledge economy. It’s a good thing as it allows startup to be funded, to grow, and hopefully to create a first generation of entrepreneurs who can in turn be investors, mentors, if they’re successful. The control, or at least the “strong orientation” of finance flows into strategic industries (startups is one) makes a lot of sense. But caution, as the book shows, there’s a risk to generate a cast of “rent-seekers”. In some countries, the term of “grantrepreneurs” reflect a generation of founders who will do anything to fit in the generous funding schemes rather than actually delivering an innovative technology.
3. NO, there shouldn’t be any affirmative action for specific groups (especially, race-based). We’re sorry again to tackle Malaysia (which we already did partly in our report on their startup ecosystem). How Asia Works shows, again, how a discrimination have terrible effects. The Malaysia government started quite early to promote the local bumiputera people (literally the “sons of the soil”), with grants and fast-tracks to high positions in the private sector. It didn’t work then (Joe Studwell shows how placing what were civil servants in top private initiatives failed miserably), it doesn’t work now. Diversity is one key – if not the main one – of a successful ecosystem, be it nature (biodiversity) or startup. In the US, and in the Silicon Valley in particular, 55% of PhDs in Engineering are foreign-born (Wikipedia), and as this map shows, foreign talent is a key asset.
   
4. YES, there should be conditions to “free money”. A lot of monetary and fiscal tools helps innovative companies to get grants today, but biases are strong and loopholes numerous. In France for instance, the “Crédit Impôt Recherche” (a tax exemption for innovative companies) is supposed to help SMEs and startups to grow. In reality, 64% of the total amount given in 2012 went to companies with more than 5000 employees, where less jobs on average are created and less help is needed to innovate. In Lebanon, we saw how the Central Bank had put $400m on the table for the knowledge economy, a huge amount for a country with only 4.5m people. No KPIs were offered, and many doubted than banks would prove able to invest this money wisely as they’re rarely prone to risk.

All in all, How Asia Works is a textbook for economic development, far from the IMF or the World Bank one-way ideology of deregulation. A lot of insights can help government agencies in their efforts to build and nurture a successful startup ecosystem.