How Innovative Companies Help Frontier Markets Grow

ALISON BEARD: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Alison Beard. In 1960, South Korea had a GDP per capita of $155. It was one of the poorest countries in Asia. Today, it’s one of the most successful, with a GDP per capita of $27,500, and has gone from being a foreign aid recipient to a foreign aid donor. What sparked the transition from frontier economy to developed one in the space of a generation?

According to a new book by Clayton Christensen, Efosa Ojomo and Karen Dillon, the catalyst was not an influx of international aid or government investment and intervention. It was homegrown entrepreneurialism. It was Koreans seeing opportunities where outsiders didn’t, creating markets where none had previously existed, and, most importantly, investing in the infrastructure they needed to sustain those businesses. These innovators didn’t wait for South Korea to grow into a stable, predictable, prosperous country before they jumped in; they jumped in, and prosperity followed.

Efosa Ojomo, who’s in the studio with me today, has studied how this process plays out in markets around the world, from his native Nigeria to India and China. He’s also looked at countries that seem stuck in their economic development and believes that executives, entrepreneurs, and investors should find opportunities to both do good and earn a profit in those struggles.

He’s the global prosperity lead at the Clayton Christensen Institute and co-author of both the book The Prosperity Paradox and the HBR article “Cracking Frontier Markets.” Efosa, thank you so much for joining me.

EFOSA OJOMO: It’s really good to be here, Alison. Thanks for having me.

ALISON BEARD: So, my first reaction and I think many people’s reaction when hearing your premise is that undeveloped markets — frontier markets — just really aren’t easy places to do business. Your potential customers are poor, your suppliers are unreliable, infrastructure is nonexistent or unstable, governments might be corrupt. So, why are you suggesting that people start looking at these markets rather than, or in addition to, developed ones?

EFOSA OJOMO: Yeah, I mean I think perhaps the biggest reason we think people should look at these markets is the understanding that at some point, we were all frontier markets. There was a time when the demographics in the United States resembled or were even worse than many of the demographics in frontier markets today. Similar, Europe; you just talked about South Korea.

Where a market is today, doesn’t necessarily mean that’s where it’s always going to be. Markets can evolve. And so, I think that’s the first understanding. The second is if you go into a frontier market with the right strategy, understanding the role of business, innovation, and capitalism, even if the circumstances are bad, you can make a significant return on investment. You can also engage in what we call nation-building. You can help the country begin to start building many of its infrastructures and institutions and things that can lead it to prosperity.

ALISON BEARD: That seems like such an overwhelming task though to, while you’re trying to build your business, also help build a nation. So, how do you get the energy, the vision, the capital for that?

EFOSA OJOMO: Yes. So, it’s one of those, you kill two birds with one stone. It’s by virtue of developing an organization that makes products and services simple and affordable, you create a new market. When you create a new market, the market tends to pull in many of the resources and things it needs to thrive and survive in an economy.

And so, it’s really understanding that when you go into these markets, and you go in with the strategy to create a new market for people who historically haven’t had products or services available to them, by doing that, you not only provide jobs for the people, but you also provide tax revenues and the new market you’ve created pulls in many of the resources that it needs to thrive.

ALISON BEARD: What is the business model for creating products and services for people who are very poor though? How do you actually earn money?

EFOSA OJOMO: Well, the first thing that I’ll explain here is just how do we look at a market, frontier or even developed? And there are three types of ways you can go in. You can go in with a market-creating innovation, and we’ll get to that in a second. The second is going in with a sustaining innovation strategy. This is where there’s already a market that exists. You essentially just make the good products better. You give them a new flavor for the herbal tea, or you give them a new toothpaste flavor.

And the third type, which is one that many frontier markets are known for is what we call efficiency innovations. Now, these are innovations that make good products cheaper. You essentially outsource and take advantage of lower wages in a different region. Or you do a lot of resource extraction. In many frontier economies, Nigeria as an example, Ghana, Saudi Arabia, people exploit the natural resources.

Now, with regards to market creating innovations, the first thing that you’d have to identify is what we call non-consumption. Non-consumption is essentially a phenomenon that explains how many people in a region would benefit from getting access to a particular product or a service, but due to cost, due to the technical expertise required to use the product, due to availability, they just don’t have access. Once you identify non-consumption, it’s a huge marker that there’s a huge market for creating opportunity in the country.

ALISON BEARD: Even if the specific product or service that you’re selling to each person is very cheap?

EFOSA OJOMO: Absolutely. So, once you identify non-consumption, your strategy has to be: how do I get this product that I believe these people need and make it simple and affordable? Now, an example of that illustrates this really well is Celtel. It’s a cell phone company that went into many countries in Africa.

But if you think about it, 20 years ago, the cell phone penetration in Africa was less than 2-3%. And the majority of the phones were in South Africa, one country. Mo Ibrahim, who is a Sudanese entrepreneur, who was living in London at the time, said, “I can see a lot of non-consumption. But when I look at their lives, it would be improved if we provided this service to them.”

If I wanted to go see my mom, I had to make the trek to the village. If I wanted to send a message to a friend or an employer, I had to actually physically go there. There was no mechanism to communicate. Mo Ibrahim decided that there was a huge market opportunity for this. He told a bunch of his friends in London. They said “Mo, you’re crazy. This is Africa. They’ve got AIDS, they got corruption, they got poverty.” I mean the list was endless.

Now, the interesting thing is, they weren’t wrong, but Mo Ibrahim was also not wrong because he saw it through a different lens. Well, he decided in 1998 to begin building the cell phone infrastructure in about seven countries in Africa. He was able in seven years to not only build a company that attracted millions of people who at the time had bought into using his products and services, but he was also able to create thousands of jobs for people and really trigger this mobile phone revolution on the continent that’s now worth upwards of $200 billion to the African economy.

ALISON BEARD: Again, though, that sounds like it was a lot of upfront investment: building cell towers, educating a workforce, everything that he needed to do. So, how do you raise the money to do it when no one believes it’s possible?

EFOSA OJOMO: It’s an incredible amount of work. There’s no doubt about it. Now, what’s fascinating about it though is as we were doing research for this book and the article, what we found is what Mo Ibrahim did is not vastly different from what an entrepreneur we all love, Henry Ford, did in the United States about 120 years ago.

You go back early 1900s, cars were toys for the rich and it was sort of like private jets today. Now, Henry Ford, Detroit farm boy who barely had a high school education, comes around. He was brilliant. He comes around and says, “I’m going to figure out how to make a car affordable and accessible to the average American.”

Now, Henry Ford had a ridiculously hard time convincing investors. He actually lost a lot of investors because he had a car company that made high end cars and custom-made cars for wealthy people. When he said I want to make a car and try to sell it for under $1,000 at the time, he lost investors. They said, “You’re crazy. This will never happen. How do you make cars in a country that didn’t really have roads?”

But he stayed committed. He was able to raise the funds, typically from individual investors. But what’s interesting to look at is what he did with those funds. Henry Ford didn’t just revolutionize the assembly line. He built steel mills in order to provide the necessary steel he needed. He built glass factories. He built railroads in order to move his cars around. He built gas stations. He built a lot of the infrastructure necessary for him to be able to provide the car for people so that when people used the car, they could experience wonderful service.

We see a similar thing happen with successful companies that go into frontier markets. If you’re patient enough to create the market and build the infrastructure around the things you need to provide the product and service to as many people as possible, your future is going to be vastly bright.

ALISON BEARD: How much time does it typically take though?

EFOSA OJOMO: Now, that’s a question. I’m not punting it, but it depends.

ALISON BEARD: I sort of knew you were going to say that, so it’s OK.

EFOSA OJOMO: It depends. Now, Mo Ibrahim who I talked about was able to sell his company in seven years for $3.4 billion. He’s comfortably sitting as one of the richest Africans today. But another company called Tolaram, they went into Nigeria about 30 years ago, in 1988, and they said we’re going to go into this country that has a military dictator, 80% of people living on less than $2.00 a day, poverty. No infrastructure, education is abysmal. I mean, you name it we got it. I’m originally from Nigeria.

And so, they go in, about 30 years ago, and they say, “Let’s figure out how to sale instant noodles to these people.” Now, you’ve got to understand. This is West Africa. We didn’t eat noodles. Many Nigerians thought noodles were worms. But they went in with a similar strategy that Henry Ford, Mo Ibrahim went in with, and said, “We believe there’s a lot of non-consumption. This country’s urbanizing rapidly. People are pressed for time and they can’t cook whole meals or have the time to cook whole meals like they used to.”

And so, they began to invest. So, they trained people, they educated people on what noodles were. They modified the taste so that it fit the population. They began building factories. They provided their own power and water. Now, these are things they did over time. But the focus was always to figure out a way to target this mass non-consumption that they saw.

Now in doing that, this company now grosses about a billion dollars a year, provides employment directly to about 50,000 in the country, runs 13 manufacturing plants and has tens of thousands of retail and distribution sites. Now, it’s that process of creating a new market that really begins to trigger the development of many countries.

ALISON BEARD: And we started this show talking about South Korea and their examples of entrepreneurs and businessmen who started companies, market-creating companies, and then it really did transform the whole economy in the space of 50 years. What about South Korea made that happen so fast and do you see potential for it to happen elsewhere in the world?

EFOSA OJOMO: Yes. So, South Korea is a very interesting country. After the Korean War, it was pretty much decimated. Many people might not know this, but North Korea was actually a lot more industrialized and richer than South Korea after the war. Now after the war, South Korea did get some funding from the United States in terms of rebuilding and aid.

But what was interesting about that was the aid that went to South Korea was essentially termed “aid to end aid.” In other words, it wasn’t this endless supply of funds. It was: we’re going to help you guys rebuild your economy, but we’re going to have an exit strategy, a date that we’re going to go out. So, first of all, that was, there was a focus there.

Now, in order to do that, South Koreans understood we have to become economically viable. And so, in this particular circumstance, the government did play a role in making sure that the South Korean economy became more productive. The reason that I struggle to talk about the South Korean government is a lot of times, when people hear that story, they take away the idea that, okay, that means we have to have some sort of authoritarian kind of government. We have to go in and just push an agenda. That’s been tried in many countries in the world and that often doesn’t work. Our win-loss ratio is quite unfortunate.

And so, instead of that, what we like to focus on is: what were the underlying mechanisms really that helped the country prosper? And when you look at it, the mechanism remains the same. It is this notion of creating products, making them simple and affordable so that many people in the economy, and actually outside, could afford them.

ALISON BEARD: Right. And one of the prominent examples is Kia, right?

EFOSA OJOMO: Yes. So, Kia. When you look at where Kia is today, 70, 80 years ago it’s not really where it began. The company began by making cars for South Koreans in South Korea. And cars that really fit the South Korean, or southeast Asian demographic, so to speak. They had to make them so that they could drive on the rugged roads. They had to make them in such a way that they were affordable to many South Koreans. And, they had to also make them in a way that integrated well with other industries that the Koreans were building at the time, one of which was steel.

Well, in making these cars, they found that, oh wow, we can create a lot of employment and over time, as you create this new market, you begin to invest to make the product better and better and better. And then you start to export the product, and you can start to be more and more competitive. All these layers create jobs and opportunity for people in your economy.

ALISON BEARD: So, does this process work best when the entrepreneurs are homegrown? When it’s people who know the market in and out?

EFOSA OJOMO: Yes, but then there’s an explanation. As long as you as an investor or an entrepreneur are focused on creating a new market that helps many people make progress in a society, then it really doesn’t matter where you’re from. It just so happens that you’re most likely going to be from the region because you understand the struggles, you understand the cultures. But if you’re an outsider you do also have opportunities to participate in market creation activities.

I think it’s having the understanding that, when I go into this market, I can’t go in for just a short-term play. I can’t go in and invest and, if the political situation changes, I’m out. Or, if the exchange rate fluctuates a bit, I’m out. You have to go in with a little bit more of a long-term view with the knowledge that we can actually create a market.

ALISON BEARD: In areas of the world where there are high levels of corruption, how do you deal with that specifically?

EFOSA OJOMO: So, corruption is a big problem in many countries in the world. And it’s also one of the things that we addressed in the book. Let me be the first to say there’s no easy answers, okay.  No easy answers for corruption. Now, what we tried to do in writing this book and doing this research, especially when it comes to telling investors to go somewhere long-term and invest a lot of capital, is we try to understand what is corruption and why do people engage in corruption.

And what we found is corruption for many people in these economies is, to them, the best way they can use to solve their problems. It’s not like people wake up and just can’t wait to be corrupt. It’s that the economy does not provide productive means for them to take care of their families, send their kids to school, pay healthcare bills and so on and so forth. Once we understood that, we began looking at how other countries have solved their corruption problems. And we realized that there really was an evolution.

Many countries started out when they were all overtly corrupt like most poor countries today. But as entrepreneurs began to create new markets in these countries, in circumstances that were not inviting, people began to have more options and the monies that they made was now able to begin to fund the building of better governments and better institutions.

And so, if you’re a company today looking at frontier markets, number one, it’s really understanding that, first and foremost, these people are not from a different stock, or they’re just weird, they’re just corrupt. No, no. We also have a journey of corruption. Number two, it’s: because a country’s corrupted today, doesn’t mean it will be corrupted tomorrow. And so, developing a strategy that says, I’m going to go in, and I’m not going to engage in corruption. Instead, I’m going to provide economic opportunity. The best way we know to do that is to make things simple and affordable, create a new market.

Admittedly, it will take a little longer because you’re not paying off. People can hold your products at the port and so on and so forth. Those things will happen. But the minute people begin to understand this organization is here for the long-term, it’s now part and parcel of our economy. In fact, you start to be a beacon of hope to many people in the economy.

And one of the company’s we talk about is Roshan in Afghanistan that is identified as one of the most corrupt countries in the world, but this company has never really paid a bribe. They provide mobile telecommunications to many Afghans and they’ve never actually paid a bribe.

You think about that kind of industry where you have to get licenses from the government, you have to employ a ton of people, build cell towers, and they’ve never paid a bribe. And now, they’re at the point where they’re sort of corruption watchdogs. Now, it took them a little longer than if they paid bribes, but that’s really how you begin the process of getting rid of corruption.

ALISON BEARD: Yeah. So, you shared a lot of really compelling success stories, but surely there are many companies and people who have gone into these markets and failed spectacularly too. So, when that happens, what do people get wrong?

EFOSA OJOMO: Yeah. I mean I think you can go into frontier economies and focus on what we call the consumption economy. The people that are already consuming many products and services. Ultimately that is a very small market. And so, you go in, and you end up competing, a lot of times, on just price and it’s hard to differentiate yourself.

The other thing that we noticed is, many companies that go into these countries and ultimately don’t do well, they follow demographic trends. And so, they follow for instance, the Africa-rising trend and this big middle class that’s coming. And they think they can import the business models that have worked in more developed economies right to different economies where people say there’s a rising middle class without really understanding the specifics in how they need to go into those economies, understand the culture and systems and then create business models that speak to people in those economies.

ALISON BEARD: So, I know that you initially came at this problem in a very different way in trying to help your fellow Nigerians live better lives. So, tell me about your personal journey, sort of from really believing in international aid to thinking that we need to take a broader approach.

EFOSA OJOMO: Absolutely. I came to the United States, immigrated in 2000. I came for college, and I kissed Nigeria goodbye. I was never going back. And then I read this book written by a professor at NYU, an economics professor. It’s called The White Man’s Burden. And it was really explaining why the efforts in the West had really failed to create economic prosperity. He dedicated the book to a 10-year-old Ethiopian girl who had to wake up at 3 a.m. in the morning, walk miles, fetch firewood and take it to the market to sell so that she could fend for her family.

That was February 2008, and it rocked my world. And I said, “We have to do something about this.” So, I got some friends together. We started an organization called Poverty Stops Here and the focus was let’s go in, and build wells, let’s provide funding for education and let’s give people some, you know, $200, $300 microloans so they could run businesses. After a couple years, wells broke down and there was no mechanism to fix it.

And I just felt: man, I’m asking people for a lot of cash that they work hard to get. I’m going to invest it in building a well, and, in six months to a year, the well’s going to break down. Something is wrong with that equation. And that’s really what began the process by which I said I need to learn this.

And I came to business school, and I was fortunate to meet with Professor Clay Christensen and he said “Efosa, let’s actually write a book about this. I think innovation has something to say.” And now, instead of focusing on just trying to alleviate poverty, or seeing all these countries — these frontier economies — as just a bunch of poor people, there’s not opportunity there. If we change the lens with which we looked at them and said, “Oh my, by virtue of the fact that they wake up every day and struggle, that presents a lot of opportunity.”

Now, we don’t know what the answers are, but I can guarantee if an entrepreneur and investor goes in, looks at the problem through a different lens, tries to provide a solution that’s simple and affordable, they will reap a lot of rewards, but they will also have the added benefit of making life better for millions of people.

ALISON BEARD: Thank you so much. It’s been such a pleasure talking to you today.

EFOSA OJOMO: No, the pleasure’s all mine. Thank you.

ALISON BEARD: That’s Efosa Ojomo. He’s the global prosperity lead at the Clayton Christensen Institute and co-author of The Prosperity Paradox. You can find his article, “Cracking Frontier Markets” on HBR.org.

This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast. I’m Alison Beard.