Module 1: Frameworks of Innovation in Developing Countries

Innovation is one of the key avenues by which individuals at the base of the economic pyramid (BoP) can be brought out of poverty.(1),(2) Innovation creates companies, it reduces operating costs, it creates jobs, and it develops the national economy. Each individual business has a low economic impact, but the collective weight of these enterprises can create a robust middle-class of businessmen that markedly improve a nation’s Gross Domestic Product (GDP). Most importantly, entrepreneurial innovation has enormous potential to reduce the disparities between rich and poor countries by increasing the competitiveness of developing countries in the global marketplace.

Innovation is an inherently risky proposition. By definition, innovation involves finding a new solution to an old problem, a proposition at best uncertain, at worst, financially ruinous. This module analyzes how innovation has worked in developing countries, suggesting frameworks by which innovation can be encouraged and nurtured in the developing world.

To begin with, innovation in developing countries must be ethical. When implementing a new practice, several factors must be considered, such as whether there will be a positive impact on health, whether the intervention is culturally-sensitive and locally-relevant, whether the plan is financially feasible within a reasonable time window, and whether there will be negative environmental implications. At least two ethical frameworks have also been proposed: utilitarianism (the greatest good for the greatest number) and human rights (the rights of the individual should not be violated). A synthesis between these two frameworks is likely to yield strong guiding principles going forward.

On the other hand, innovation must not only be ethical, but also useful, pragmatic, and creative. A recent study conducted in Ghana involving 496 entrepreneurs(3) from primary, secondary, and tertiary sectors identified a few factors that characterize innovation in developing countries, and how these factors could be addressed to encourage innovation:

Incremental Innovation Over Novel Innovation

Problem

In the developing world, innovation is preferentially done by introducing incrementally-innovative products, which are new to the firm but not to the industry. Since risk is especially consequential in resource-poor settings, this approach enables the firm to manage risk by building on the innovations of others. The lower-risk approach, while less likely to cause a large loss of money, also holds fewer rewards and is a compromised approach to genuine entrepreneurship. Furthermore, at some point, novel innovation is inevitable if progress is to be made.

Solution

Because incremental innovation spreads among different organizations, governments and other organizations could promote this process by encouraging the exchange of ideas between firms and across borders, and by helping to support technology transfer. To encourage novel innovation risk-taking, organizations can help establish venture capital funds or other financial safety nets to lessen the impact of innovation failure.

Size of Enterprise

Problem

Both small and large firms have advantages and disadvantages in creating innovation. On the one hand, small firms are more responsive to consumer needs and environmental changes and also can communicate this information more rapidly internally. They also have a flatter management structure, which facilitates dialogue between workers and executives. On the other hand, large firms have considerably more financial and human resources, as well as more developments in infrastructure, in research and development, marketing, and finance. Moreover, their large scale provides them a higher capacity to manufacture and distribute products. Overall, it is observed that large-scale firms introduce the lion’s share of innovation in developing countries. The result is that innovations are not as sensitive to local needs.

Solution

In Ghana, little legislation has been enacted to support small business in the post-colonial area. These policies have contributed to the relative trickle of Ghanaian entrepreneurial activity compared to the high levels practiced before colonial times. In the same vein as the incremental versus novel innovation approach, one of the ways in which innovation by smaller firms can be encouraged is to provide some form of financial backing to allow these firms to take risks without the fear of bankruptcy. Another approach is to provide training programs to smaller firms, teaching them how to rapidly scale up products to market. This approach could help temper risk-taking with the promise of greater pay-offs.

Education

Problem

Time after time, studies have shown a strong correlation between how educated an entrepreneur is and how much innovation is introduced to the company. In many Sub-Saharan African countries, however, only middle or upper class families are educated. Of these, the majority are men. Attempts to encourage more education relate to general schooling and do not specifically apply to entrepreneurship or innovation. Such approaches might not increase innovation, but instead result in more civil servants and bureaucrats. Other problems include the brain drain, which causes educated entrepreneurs and professionals to leave their host country for better opportunities and compensation abroad.  

Solution

Educating more girls has been an approach with near-unanimous support by global health experts, so much so that eliminating gender disparities in primary and secondary education is enumerated within the Millennium Development Goals. Part of the problem is that the prioritization of educating sons rather than daughters is ingrained within many social and cultural norms, especially for families that can only afford to send a select few of their children to school. Nevertheless, long-term behavioral change policies to overcome these gender barriers would substantially increase national entrepreneurial capacity. One untested solution would be to extend the presence of online education in developed countries, which would tremendously reduce the cost of traveling to school, and make access to education more convenient.

To concentrate the ability of more education to translate to entrepreneurial talent, there could be an emphasis on non-traditional entrepreneurial classes starting at the secondary school level. This approach is exactly what the elite African Leadership Academy (ALA) in South Africa has done. The ALA began admitting students in 2008, from throughout Africa and the rest of the world. The objective is to take highly gifted youth and develop them into future leaders of Africa. In addition to the standard course load, ALA students also take courses in entrepreneurship and leadership. Students are thereby given the proper tools to become successful entrepreneurs.(4) If the ALA model results in success, it would be desirable to expand the model in different developing countries, allowing young talent to be identified and nurtured. One drawback of the model is that it caters only to an elite few, and a large factor of the admission process is based on standardized tests. Such a process runs the risk of missing the identification of unconventional talent, especially among the poor, who may not have access to formal education or to the standardized tests.      

To decrease the rates of brain drain, developing countries can introduce more incentives for continued post-secondary study and increase economic and social incentives to retain graduates. 

International Trade

Problem

New businesses inevitably begin by trading with local partners. This activity can help establish the brand and financial stability of the company. Nevertheless, international trade is important to achieve a high level of economic growth, simply because domestic demand is not sufficient. The profits and revenues obtained from international trade can be used to develop the company domestically as well, creating a positive feedback loop for company growth. Most pertinently, trading internationally can improve one’s ability to innovate. Despite these benefits, only 20.2 % of the firms in the Ghanian study engaged in international trade.

Solution

Standardization of medical as well as non-medical equipment can encourage international trade by unifying import and export regulation, making companies more able to market their products abroad. Governments and NGOs can help by enforcing international standards, which can be lax in developing countries. It is also important to educate budding entrepreneurs about the benefits of international trade and how it can be brought about.   

Location of Firm

Problem

Densely populated areas can expose people to new ideas and greater social networks, leading to more innovation. Small towns consistently had the lowest rates of innovation.

Solution

It would be unreasonable to suggest that all entrepreneurs should move to metropolises to grow their businesses. Businesses located in rural areas are more sensitive to rural needs and are more likely to involve rural entrepreneurs. Given that the greatest humanitarian potential of innovation is to bring the poor out of poverty, rural businesses should be encouraged. A useful compromise would be to increase the lines of communication between rural and urban businesses. The growth of the mobile phone industry in the developing world promises to help improve communication. The Internet holds even more potential, but is burdened by obstacles in its path, most notably, the lack of electricity in most developing countries.  

Family Employees

Problem

Social networks can have both positive and negative effects on the entrepreneur. Social networking can allow the employment of family relatives and friends, a source of inexpensive, below-market value employees who are often easier to trust than strangers. This sort of networking introduces competitive advantages for the company. On the other hand, using social networking to establish family ownership decreases innovation by constraining risk taking. Other related socio-cultural factors can impede innovation, such as a common belief of the owner-entrepreneur to centralize and control many tasks and the belief that the elderly are the source of wisdom, despite the reality of most new ideas coming from young people. 

Solution

In the interest of innovation, it might be time to suggest the abandonment of family relations for employment; however, this would be difficult because the practice is heavily ingrained in cultural values. Instead, a less controversial approach would be to accept family employment, and to maximize the use of formal and informal networking to exchange business ideas and promote innovation.

Fields of Innovation

Problem

Different fields of business have different levels of innovation. The Ghanaian study found that the sector with the most innovation was products and services from service firms, whereas agricultural firms had consistently little innovation, due in large part to their financial and labor constraints. Incidentally, most of the poor in Sub-Saharan Africa are subsistence farmers, and the ability to introduce new innovations in agriculture promises to alleviate a great deal of poverty.

Solution

The agricultural sector is a good target for NGO intervention because of its low level of innovation. One basic way in which agriculture can be improved is to introduce wider irrigation. The organization KickStart markets pumps in the developing world that allow simple irrigation, which can swell farm yields. In a similar vein, NGOs can focus on other ways to introduce and spread innovations between farms, making farming easier, and allowing farmers to move from subsistence to commercial agriculture.   

Other Factors in Promoting Innovation

A number of factors were also found to have no influence on innovation. For instance, the age of the firm was an unreliable predictor of innovation. Employment growth in a firm also failed to be correlated with innovation, perhaps because innovation could either lead to employment growth, or to employment shrinkage through mechanization.

Surprisingly, there was also no correlation between innovation and worker training, which would have been expected to improve innovation by the instruction of new techniques. This anomaly might be because training in Ghana is done through an apprenticeship model, in which new ideas may not necessarily be encouraged. An educational reform that focuses on hands-on workshops might result in more ideas being exchanged, and a higher probability of translating training to innovation.

The Challenges of Measuring Innovation

A word must be said about the challenges of measuring innovation. The previous discussion has demonstrated the importance of local innovation in development, and has outlined many factors that are correlated with innovation. Nevertheless, these are only indirect measures of innovation, and tools to effectively measure innovation directly do not exist.(5) According to the scholar C.J. Schramm, being able to measure and encourage innovation is tantamount to global development:

“For those who worry about questions related to expanding human welfare through technical change and economic growth, the systematic measurement of innovation and its impact is…arguably the most important social science challenge of our times. Without effective measurement and assessment, poor decisions will follow. This is no small matter…It is a tragedy—it is, in a sense, killing people—when resources are poorly allocated.”(6)

Measurement is the first step to accountability, and those who best measure innovation in the developing world will be the countries that grow the most rapidly.      

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Footnotes

(1) Schramm, C. J. “Toward an Entrepreneurial Society: Why Measurement Matters.” Innovations. 3.1 (2008): 3-10. Accessed July 22, 2010.

(2) Robson, P.J.A., Haugh, H.M. and Obeng, B.A. “Entrepreneurship and Innovation in Ghana: Enterprising Africa.” Small Business Economics. 32.3 (2009): 331-350. Accessed July 9, 2010.

(3) Robson, P.J.A., Haugh, H.M. and Obeng, B.A., 2009.

(4) African Leadership Academy. “African Leadership Academy.” 2010. African Leadership Academy. Accessed July 12, 2010.

(5) Schramm, C. J., 2008.

(6) Schramm, C. J., 2008. p.p. 10.