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Start-up growth: how to sustain it

start-up-growthMy approach to law draws a great deal of inspiration from thinking by economists. What works in economics thinking for countries often also does for start-up, established or institutional business. The latest inspiration for this is The Next Convergence: The Future of Economic Growth in a Multispeed World. This 2011 book is by Michael Spence, a Nobel Prize recipient in Economic Science in 2001.

After serving as a dean at Stanford and Harvard, for the World Bank Commission on Growth and Development, from 2006 to 2010 Spence reluctantly took on the mission to research what made growth tick for developing countries.

What Spence's field research uncovered is to my mind as applicable for business growth as it is for growth by developing countries.

The research led Spence to unlearn what he thought was true about what made growth tick.

(What makes growth tick?) "When I started studying and learning about growth in the developing world, I thought the subject was mainly, or even exclusively, about economics. I no longer believe that. It is not that the economic moving parts in the dynamics of growth are uninteresting or irrelevant - far from it. They are an important part of the story. But they are not the whole story. The rest of the picture has more to do with leadership, governance, institutions, and politics, and the interaction of these factors and processes with economic outcomes."

start-up-growth-klRe-read that last sentence. Don't that mix also apply businesses? Don't start-ups, established businesses, and institutional business all need that mix?

Spence continues talking about the job of national leaders and stakeholders. This too resonates for businesses:

(What's the job leaders?) "Put bluntly, growth requires investment, and that means present sacrifice for future gain. The job of leaders is in part to get everyone on board, to build a consensus behind a forward-looking vision, under-pinned by a growth and development strategy that is credible. Multiple classes of participants and organised stakeholders need to be willing participants. These include labor, unions, businesses and entrepreneurs, civil society organisations, and households at various levels in the income distribution." (Page 33)

What inspires Spence is recognising that a host of developing countries have since 1950 had periods of sustained year-on-year gross domestic product growth of seven per cent or more.

start-up-growth-chartThat applies beyond China, India, Brazil and the Asian Tigers of Singapore, South Korea, Hong Kong and Taiwan. But did you know the following countries too had long sustained period of 7%+ growth since 1950: Botswana, Indonesia, Malaysia, Oman, Malta and Thailand?

These countries are listed by the World Bank on page 54 of the Spence book (accompanying chart). These 13 countries have managed to grow for 25 years or more at an average rate of seven per cent or more.

(7% year-on-year is huge!) "At 7 percent growth, income and output double every decade. Starting at $500 per person, that income would become $2,700 after 25 years, still not right by a long shot, but a huge change. At these rates, poverty reduction is dramatic."

What start-up would not like sustained year-on-year 7%+ growth in customer numbers, revenue, profit or staff numbers? For the above countries this has lifted hundreds of millions of people out of poverty in decades!

So what does four years of research by Spence tell him about how to achieve such growth? Start-up entrepreneurs, business managers, and big business directors and executives have clear focus points in his conclusions.

start-up-growth-hk(Money before governance and legals?) "Economic growth always occurs in parallel with the development of political, legal, and regulatory institutions. [Yes constitutions and partnership/shareholder agreements are important.] One can think of this as applying to national, subnational, and international levels. [Mr Spence, I'd say to businesses too!] It's a continuous process in which increments in economic capacity and the effectiveness of government complement each other.

Much ink has been spilled debating which comes first, institutional development or market dynamics. The right answer is both and neither. [Speaking to lawyers clients often say they'll only spend on legals when their business grows. Reading Spence, this is questionable logic.]

Most of us tend to think logically and linearly at the least some of that time. Logic suggests we think in terms of prerequisites: the idea is that first you need this, then you can achieve that. First you need well-defined, legally enforced property rights, and then you can have investment and growth.

But in reality when it comes to growth and effective government, it doesn't work that way. Or, rather, it does, but in tiny steps and positive feedback loops." [The advice then is to get governance and legal work done iteratively, and with feedback loops. Don't leave expecting to get to them after business grows.] (Page 39)

 


Photos: Noric Dilanchian: Petronius Twin-Towers, Kuala Lumpur and Lusine Shiraz: unit blocks in Hong Kong.


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