USA - What the U.S. Has in Common with Emerging Markets

We should take a look at the most dynamic parts of today's global economy — the so-called emerging markets — while thinking about how to shore up American competitiveness.

Companies doing business in those markets understand very well that, before you get down to buying and selling, you may need to provide some public goods — both "hard" infrastructure, like roads and reliable electric power, and "soft" infrastructure, like adherence to the rule of law and commitment to transparency.

Zain, for example, whose African assets are now owned by the Indian telecom giant Bharti, has long provided security services in war-torn Iraq, and has done so profitably. Similarly, companies all over Africa and Asia routinely provide power-backups since the public grid is unreliable and inefficient. In South Africa, when the AIDS epidemic was at its height, companies provided healthcare services, for humanitarian reasons but also because the workforce was being devastated by that scourge. In these instances, law and order, electricity, and healthcare are the public goods that are absent — and companies fill in where they need to. Almost ten years ago, Ray Fisman and I wrote an essay showing Indian business groups that provide private infrastructure in this way do so profitably, even after accounting for the expenditure they incur to compensate for the absence of such services.

This brings us back to the United States. Krishna Palepu and I argued in our recent book, Winning in Emerging Markets, that a defining characteristic of "emerging markets" is the under-development of the institutional context. When the specialized services needed to facilitate the matching of buyers and sellers are underdeveloped, the market is emerging rather than emerged. As we've argued before, both the dot-com meltdown and the subprime crisis in the United States were characterized by institutional voids — that is, there was no reliable information, nor mechanisms to ensure sanctity of contract, in the rapidly developing financial markets, or the wild emerging world of online commerce. The institutional voids were just as present in the United States, albeit in these emerging areas of commerce, as they are in Nigeria or Indonesia.

Taking a page from successful emerging-market companies, U.S. companies will have to address this kind of institutional void proactively, rather than assuming that the government will take action. The clearest example I can see right now is in the market for talent. Even though much money is being spent to address this issue, there are still major skills shortages, which won't be solved by continuing infusions of talent through immigration (a golden goose about which we should not be complacent).

And many U.S. companies also already know how to tackle these institutional shortcomings. In some work I did with GE in China some years ago, its healthcare division was helping the Chinese healthcare authorities to develop the rules and regulations to administer and adjudicate the sale of used healthcare equipment. Of course, the development of these public goods — public in the sense that the rules will benefit not just GE but also any healthcare equipment provider and the public served by this equipment — is in the interest of GE, and one has to be careful about that from a public policy standpoint. But the right answer, I feel, is not to rule out private participation in public good provision, but to be careful about it and to do it transparently.

TARUN KHANNA

HBR Blog Network

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