Why Entrepreneurs Must Focus on Building
Trust
NEW BOOK: Legal and social institutions that support
entrepreneurs often aren't well established in developing countries. Tarun
Khanna's new book explains how businesses can make up for that by building
trust.
AUTHOR INTERVIEW AND BOOK EXCERPTS
Why Trust Matters
for Building Businesses in Developing Economies
Interview by Dina Gerdeman
Fear swept across China in 2008 as six babies died and about
300,000 others got sick from drinking infant formula that was sprinkled with
melamine, an industrial chemical used in plastics and fertilizers that can
cause kidney failure.
The tainted milk scandal spurred dairy farm entrepreneur Charles
Shao to double down on quality control in the developing country. He harnessed
technology to improve the processing of his herd’s milk, going far beyond what
Chinese regulations required.
Today, all traces of melamine in baby formula may be gone, but
still, cleaning up China’s milk hasn’t erased a broader problem: The scare made
Chinese consumers so skittish that six years later, people are still paying
significantly more for foreign milk they feel safer about drinking.
So Shao can’t focus merely on selling milk. Instead, he and
other entrepreneurs must take steps toward rebuilding a broken bond of trust
between the Chinese people and the country’s dairy industry, says Tarun Khanna,
the Jorge Lemann Professor at Harvard Business School, in his book Trust: Creating the
Foundation for Entrepreneurship in Developing Countries, which was
released Tuesday.
“Systemwide change is needed,” writes Khanna, who has studied entrepreneurs in developing countries and launched
ventures across Asia. “That will come from relentless experimentation, an
understanding of the specific origins of mistrust in the Chinese food system,
and, of course, plenty of time to sort out which experiments will have a truly
lasting impact. It falls to entrepreneurs like Shao … to weave and maintain a
web of trust between consumers, producers, regulators, and the public at
large.”
In his book, Khanna chronicles the challenges Shao and other
entrepreneurs face when trying to blaze a productive trail in places like
Brazil, China, India, and Mexico. While consumer confidence in developed
countries like the United States is bolstered by enforceable contracts, an
impartial legal system, and strict regulations, none of that is a given in the
developing world.
And entrepreneurs who don’t attempt to allay the mistrust that
permeates these countries are doomed to fail, Khanna says. In this Q&A,
Khanna shares advice on exactly how entrepreneurs should approach the delicate
process of building trust in parts of the world where skepticism runs rampant.
Dina Gerdeman: You say entrepreneurs don’t have the luxury
to be laser-focused only on the specific problem they want to solve in the
developing world. Do you think many stumble because they don’t realize they
need to build trust before diving into their product and service solutions?
Tarun Khanna: Certainly just having domain competence in
where you want to be as an entrepreneur is insufficient. So many things can
trip you up.
In the US, it’s a fair bet to say you can look at something like
the engineering angle, or the analytics angle, or some specific secret sauce,
and you can build a company around that. The other folks you need—the
regulatory side, say, or the delivery side—can be cobbled together to
collectively form a team.
Many of those pieces would be missing in Johannesburg or another
developing country location. You don’t have the luxury of those supporting
structures. So you have to work on building trust first that will entice others
to join you.
Gerdeman: Why is it important for entrepreneurs to take
ownership in weaving their own web of trust without waiting for others to solve
problems related to their goals?
Khanna: Put simply, I feel that the approach I propose is
the most practical. I have spent a lot of time as an entrepreneur in developing
countries. You have to create the conditions to create. Rather than assuming a
set of circumstances will materialize to solve your problems, you have to
realize you’re the one who has to address this problem of pervasive mistrust.
It’s not productive or sufficient to wait for the government or anyone else to
get their act together. Pointing fingers and criticizing the government usually
doesn’t solve anything.
A gut reflex is to say that these countries don’t work because
of corruption. There’s some truth to that. But it may not be the main story.
The main story is usually primarily a lack of understanding. It’s the practical
thing to do to find people who are willing to work with you and co-create the
conditions to create. You have to hold their hands as you go along.
Critics might say: You’re putting too much on the shoulder of
the entrepreneur with this approach. They are right! It is harder than building
an app in a Harvard dorm, surrounded by pools of expertise, relatively abundant
risk capital, and so on. That’s why ‘development’ is hard. But the alternative
is harder, to wait for the government, even a well-intentioned one, is a fool’s
errand and could take generations.
Gerdeman: In building his dairy farm in China, Shao offered
to train other farmers in how to produce clean milk for free because he didn’t
want to be lumped in with competitors who produced contaminated milk. Is this
kind of sharing of information, even with competitors, necessary to building
trust?
Khanna: With the melamine milk poisoning crisis, he found
that as a lone actor trying to create clean milk in China, it was a very difficult
problem to solve. It was hard as a solitary person to make that happen. It was
like whistling in the wind.
But if there’s a critical mass of people doing things in a
certain way, it allows people to look at dairy farming differently. If other
people are providing complementary services, (the public) is much more likely
to trust in it, rather than if it’s one solitary actor. So he thought, I have
this asset and insight and it can be used by others, so he made it available to
a larger group of people. Getting that critical mass allows it to become this
viable option.
Shao’s alternative would have been to wait for an industry
association to emerge that would then take on the task of educating others. But
who would create that? Instead, he’s trying to create a constituency for
change. It’s an example of an entrepreneur paying attention to public good
creation more than they might have to in Boston.
Gerdeman: What role do you think technology can play in
helping entrepreneurs build trust?
Khanna: The world’s biggest biometric program by far is in
India. The FBI’s biometric database contains data on 60 to 70 million people.
The Indian database has close to 1.3 billion. Prior to having this biometric
database, there was no way to identify the vast majority of people in India
accurately. When children are born, half of them don’t get a birth certificate
even though it’s the law to do so. So with India’s massive welfare program, the
government would provide assistance but had no way to trust that it would end up
in the poor person’s pocket they intended it for. It might get stolen. The
euphemism is ‘leakage.’
So technology was used to uniquely identify people and solve
this problem. With biometrics working, the government is able to directly
target the person who needs that aid. You don’t need a card or a fingerprint.
You can get your money just by showing your eye.
That technology has leapfrogged everything else. It’s an example
of technology being used to address a trust deficit between the government and
its citizens. But that same technology creates other secondary issues that
India is under-equipped to deal with, like privacy issues. So technology is an
arrow in your quiver as an entrepreneur, but it’s not a panacea. When you have
this new technology, it’s your responsibility and in your interest to co-create the infrastructure for that technology to be used
responsibly and profitably.
Gerdeman: Why is it crucial for entrepreneurs to respect
the norms of a society they are building a venture in, rather than fight
against the rules?
Khanna: In these developing countries, you have a system
that has been working for hundreds of years. We have a tendency to say that
everything should be disruptive. I don’t know that that makes much sense to me.
Sometimes going with existing practices may be the right way to do it. You can
swim upstream on some dimensions of a problem, but not all for sure, and very
likely you’re free-riding on some other foundational practices and norms that
you’d rather not see change.
Instead, we should be looking for ways to build on top of
existing practices. That’s better than a reflex approach that says, ‘I’m going
to come in and shake things up.’
In microfinance today, the best firms in India, Mexico, and
elsewhere are layering technology on top of social norms and practices that
have existed for centuries, taking into account, for example, how poor women
come together to pool capital and deploy it productively.
Gerdeman: It sounds like building trust in a developing
country can take many years. I imagine entrepreneurs need to have a great deal
of patience if they expect to see success, right?
Khanna: Some of the organizations I have contributed to
building in the last decade have involved former students (at HBS). Their
incoming assumption is often that we’re going to build this and exit in three
or four years. They’re captivated by the “Facebook in a Harvard dorm room”
phenomenon. They’re seduced by that.
You could always get lucky. But that doesn’t even happen in the
US very often. That’s one in a million when the Gods are smiling.
Good entrepreneurs are judicious risk-takers and big dreamers.
You can’t bet on lightning striking. It takes four or five years for a venture
to get traction in the US, if it does. It’s going to take longer than that in a
fast-growing developing country. So yes, in most cases, you are going to need
patience. The payoff is the satisfaction of building a country’s soft
infrastructure, providing much-needed services and, if you’re so inclined, of
course financial success.
https://hbswk.hbs.edu/item/why-entrepreneurs-must-focus-on-building-trust?cid=spmailing-21494058-WK%20Newsletter%2008-15-2018%20(1)-August%2015,%202018
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