How do we go from here?

I read Atanu Dey’s take on Innovation and Entrepreneurship in India in response to a question put forward by Sramana Mitra on her blog Why is the entrepreneurial ecosystem in India not coming together as well as it needs to?

Atanu makes a strong pitch for leveraging existing solutions for development, reasoning that India has not yet reached a stage where we need “cutting edge research and development.” It is sufficient to implement known innovations, he conjectures. A compelling argument but I feel there are a lot of points that need to be bought out in this respect.

To start with, let us understand that we are talking about two things “Does India need (more) innovation?” and “Why does India not innovate as much as it needs to?” And, in my opinion, the answer to the latter does not lie in the former.

Coming to the first question, India does need more innovation, in fact it needs lots of that. Why? A few reasons:

1. India cannot simply follow the development process that US followed. It can take cues but trying to imitate exactly the same cycle will lead to half baked results. To be sure, innovation does not necessarily imply high technology. It also implies a technology/concept that apart from being “innovative” is implement-able too. We did not have to go through the “pager usage phase” to reach “cell phone mobility” even though we did try that. Lets take up rural innovation. We need to innovate and find out ways to increase yields on small land holdings. We need to innovate when it comes to connecting villages to the national mainstream using IT and Internet. Innovation not just in terms of technology but in terms of pricing, marketing, sales & distribution. Isn’t the Amul cooperative model innovative? Ecoflo from Bhinge Brothers[PDF] is one such innovation in rural technology.

2. India needs scale. Incidentally while attending a class at CSIM, Chennai on Saturday, I had stated the same point. India cannot blatantly import models of growth or innovation from developed countries because of its sheer size. Being a democracy makes the task even more challenging. Taking cues from countries like Brazil seems more pertinent especially when it comes to designing solutions for the masses. Dr K L Srivastava at CSIM Chennai made a point in the class, that scale is not always the case – citing disability related issues as an example. In my opinion, looking at absolute numbers the “niche” in India dwarfs similar numbers in US. Scalable solutions are really important.

3. India is a unique country. When I say this, my point is not to allude towards our rich culture and the related. I am trying to draw attention to myriad languages, populations, cultural differences, attitudes, motivations. Even solutions customized for India may not necessarily work for the entire country. Regional innovation is also important. To give you an example, an Internet based micro lending organization like Rang De faces a lot of initial skepticism from lenders because of the non-profitable NGO thinking that social development is generally associated with.

4. India needs to leverage the technology to create more technology. The “low hanging fruits” of existing innovation may have either gone bad or may not even suit my palate. But I can use the seeds of these fruits to create hybrid varieties which I may be able to consume.

Coming to Sramana’s question of why are we not as innovative as we need to, a lot of answers have already been put on her blog. However, innovation is an exponential function. And the required start has been made. Readers can read this blog to find out innovations being undertaken in the social development sector. Not to mention, the Indian solutions like Tata Ace and Nano, Bajaj’s experiment with fuel efficiency. Aravind Eye Care may be cited as an exception that proves the rule – innovation is to be expected from the youth. But, nevertheless, it does prove that innovation can come from any field/age. We have organizations like RIN (Rural Innovations Network) and SRISTI which are fostering and encouraging innovation. One field that is seeing considerable traction is financial inclusion and for the right reasons, of course. I am hoping to see more progress in this one field which in turn will be one of the catalysts for more innovation.

I have been amazed at the optimism we share at TC-I, but it should not be mistaken for foolhardiness. It may be because we have the right balance in terms of experience and intellect.


Back to the drawing board? — A harsh look at microfinance

To start, I want to say that my mind has been racing despite sleep deprivation and jet lag since I touched down in Mumbai at 0135 IST this morning. This is the first I have set foot in India since 2005 and thus my first visit since the inception of TC-I, which makes the experience all the more exhilarating. But on to the post …

In the past, I have criticized microfinance’s shortcomings, particularly with regard to its inability to actually stimulate significant job creation. However, I also have recognized that despite its downfalls, microfinance still serves as a useful tool in the arsenal of a poverty alleviation strategy.

Now, microfinance has come under more scrutiny, as opponents argue that this financial product actually hurts the interests of the poor and that it can lead to the romanticization of the bottom of the pyramid, creating dangerous consequences. These new arguments further support my point that microfinance is relative to other approaches not an effective tool in combating poverty.

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On Bailouts, Boons and Bill Clinton

So living in New York City has made it damn near impossible to not be wrapped up in the minute by minute saga that is the US financial crisis. Moreover, the fact that here at Stern Business School, over 50% of our job prospects have evaporated with the slew of bankruptcies and buyouts has effectively forced this issue to the fore of nearly all of my conversations with people.

Given the magnitude, surprise and potential dangers of this crisis, I am about to break one of the unofficial rules of this blog and actually talk about something that is happening outside of India’s borders. I am doing this for three reasons: first, the effects of this financial crisis will no doubt have ripple effects the world over including people all the way in rural India; second, this financial crisis has very unique characteristics that we can learn from with regard to microfinance; and third, the global implications of how the US deals with this crisis has huge symbolic and practical ramifications.

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Op-Ed: The Potential Marriage of Private Equity and Microfinance – Dysfunctional or Blissful?

The composition of the microfinance sector is becoming increasingly hybridized, as microfinance institutions (MFIs) morph into profit-making entities, and global financial institutions such as Citigroup, Inc. or HSBC Holdings become (unintended) vectors of poverty alleviation (refer to “Global Financial Institutions and Microfinance: A Promising Marriage?” for further context). The equation isn’t anything new (in fact, I’ve waxed philosophical about it at length) – “self-interest” + “social good” = “sustainability”, but the actors involved are becoming increasingly fluid, and therefore, so is the landscape. In this post, I will analyze the emergence of another actor – private equity firms – and its implications for the Indian microfinance sector (also refer to and “Should SKS Microfinance go Public? for further background).

Currently, India’s microfinance sector reaches 36.8 million borrowers, of which approximately 25%, or 10 million customers, are associated with the 60 largest microfinance institutions (MFIs). Despite the rapid proliferation of these MFIs, however, the remaining 50% of the borrower market remains untapped, translating, therefore, into a reservoir of untapped profit. For this reason, the involvement of profit-oriented entities such as private equity firms is rapidly accelerating, with at least 4 PE investments totaling USD 43 million since 2007 alone.

For the purposes of providing some background on the nature of private equity firms, a brief summary from follows:

Private equity firms typically seek extraordinary returns and are seen as aggressive, non-transparent, difficult to regulate and uninterested in the broader social aspects of businesses they invest in. PE firms typically invest in closely held companies in which they see possibilities of extraordinary returns that can be obtained through an exit strategy involving initial public offer (IPO) or takeover by large firms.

Naturally, the question that follows, then, is – for what specific reasons are PE firms interested in MFIs? The aforementioned article cites two reasons:

First, there is a perception that the microfinance sector is capable of providing extraordinary returns. Compartamos, a Mexican bank specialising in microfinance, made a successful IPO of 30 percent of its shares with a valuation at 12 times its book value, implying an internal rate of return of roughly 100 percent per year from the time it became a for-profit entity.

Second, studies indicate that returns from the sector are not sensitive to swings in global economic cycles. This makes such investments desirable for risk diversification.

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Op-Ed: The Intersection between Self-Interest and the Social Good

Today, I attended a lecture at the Ahmedabad Management Association (AMA) entitled, “Social Entrepreneurship: Challenges and Strategies,” by Lisa Nitze, Vice President of the Global Entrepreneur to Entrepreneur Program at Ashoka. One of the themes that the lecture touched upon was the concept of “self-interest”, and how the effectiveness of social entrepreneurship ventures lies in aligning the interests of public, private, and non-profit parties. As an example, she cited an Ashoka fellow who enabled slum dwellers to organize into collectives, invest in slum property, and negotiate with corporations in need of land for commercial purposes. From this transaction, slum dwellers were then able to purchase another piece of land, construct low-income housing units, and build small stores for the purposes of sustaining income. In this case, a a win-win situation, right? Everybody goes home happy.

So where am I going with this? I don’t disagree with the premise that human beings operate on the basis of self-interest, though the statement does sound like a rather dismal assessment of the human condition to me. Neither do I disagree with the point that there is immense potential in the nexus between self-interest and social good – if I did, it would be impractical, and to a large extent, irrational, because it would be too idealistic to expect both the end and the means to be driven by “unselfish” principles. Clearly, profit and social good are not mutually exclusive, and neither should they be for the purposes of long-term sustainability.

So here’s the question – to what extent is the intersection between self-interest and the social good viable? If a private party is involved in a project intended for the benefit of the underprivileged, to what extent can profit be extracted (to put it crudely) from the community before the partnership becomes exploitative? In a transaction that is not dictated by social / moral values, but rather, profit maximization, how can we account for these types of conflicts of interest? More broadly, with the sudden surge of interest in social entrepreneurship and socially minded business models, where can the line be drawn between mutually beneficial and inherently exploitative ventures?

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[Guest Post] (Op-Ed): India announces “safe” climate change action plan, misses a chance for international leadership

Editor’s Note: Guest Blogger Jordan Bower is an intern at Indicorps, where he is promoting growth of Ultimate Frisbee in Ahmedabad as a means of inspiring leadership and community integration among local youth.

The defining struggle with climate change is that we can’t have our cake and eat it too.

The economic development boom currently occurring in India is directly related to the increased production of carbon emissions believed to contribute to climate change. Policy makers are faced with an uncomfortable choice between capping growth outright or encouraging “responsible” development without restrictive limits. Yesterday, in announcing a draft of its national action plan on climate change, India’s government sided with the latter option.

From the Indian Express:

India has decided to stick to the safe path on dealing with climate change. In the much-awaited draft of its national action plan, there is no word on carbon cuts or caps on industry. Instead, it is “avoidance of emissions.” In the penultimate draft, there were caps specified for various sectors, including industry, which have been dropped — for now. The catchword for the action plan is “saving” or “efficiency” rather than capping.

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Op-Ed: Why Traditional Income Generating Activities Simply Aren’t Enough

Recently, traditional income generating activities, specifically those associated with self help groups (SHGs), have gained acclaim as effective tools for poverty alleviation. The assumption is that if, for example, Sunita, a woman from an agricultural community in Gujarat, learns how to make papad, she will then have the skills necessary to sustain a productive livelihood, and hence, support her family. Typically, Sunita, who now knows how to make papad, will be part of a collective such as an SHG, and together, these women will produce papad in bulk to be sold on the market. So far, so good, right?

But what if the demand for papad in Sunita’s region plummets? Or what if the prices for the raw materials or the equipment required to produce papad spike upwards? Or, even more fundamentally, what if the market for papad simply does not exist? How will Sunita transition from papad making to another entrepreneurial activity when she (as well as her fellow SHG members) have been trained only to produce papads?

This is precisely where skills-based income generation activities falter – when women are required to draw upon a larger, more holistic skill set in order to transition to another, more profitable business venture. Because these types of trainings teach women only how to produce a specific product, rather than how to assess market needs and then produce, women like Sunita are poorly equipped to tackle market fluctuations or competition. In other words, training Sunita with the skills required to produce papad is effectively the same as teaching her how to read / write her name, but neglecting to teach her the remainder of the alphabet. How can we then expect Sunita to read a book, unless, of course, she teaches herself?

What is required is a paradigm shift away from skills-based, production oriented income generation to training on how to think like an entrepreneur. In other words, Sunita should be asking herself questions like, “What are the needs of the market?” and “How can I meet those needs?” before seeking to learn a specific skill set. This type of thinking turns the traditional income generation model on its head, as it places women in the position to negotiate the terms of their engagement with the market, rather than being pigeon-holed into a narrowly defined skill-set that is unsustainable over time.

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