• Predatory entrepreneurship

    Ben D. Kritz

    Ben D. Kritz

    IN an article last Sunday in The Guardian (“Cheap cab ride? You must have missed Uber’s true cost”), Evgeny Morozov provides a compelling explanation for a decline in research and development —primarily by the government, but it applies to the private sector as well—and its negative consequences for the economy. A great deal of what he describes will undoubtedly sound familiar to people here in the Philippines.

    Morozov describes the experience of Kutsuplus, a local Uber clone in Finland. Even though it was pursuing the same basic idea, had the same or better technical capabilities as Uber, and was almost universally judged a superior service, Kutsuplus folded while Uber thrived.

    The reason for this, Morozov explains, is that Uber has funding from Google, Amazon’s Jeff Bezos and Goldman Sachs, while Kutsuplus had no such backing. The big investors practice “predatory entrepreneurship:” absorbing big losses in order to undercut and eliminate, within the shortest possible time, any competition in a market. It’s an aggressive gamble made necessary by the high market values of start-ups; the investors need a good return, and they want it as near to ‘now’ as possible.

    In Morozov’s view, the gamble is almost always going to be catastrophic. Right now, Uber’s backers can afford a loss of half a billion dollars in the first three quarters of 2015, but at some point before that tap dries up, the losses have to reverse themselves in a significant way. At some point, the cost to consumers will have to go up, which will eliminate the value proposition that attracted a market in the first place, which in turn, leads to predictable declines in revenue.

    Here in the Philippines, evidence that “predatory entrepreneurship” is alive and well is all around us, reflected in our relatively narrow options in things like major retail outlets, telecommunications services and basic household goods.

    Morozov goes on to draw a connection between corporate tax avoidance, the availability of resources to carry out predatory business, and decline in innovation, which may be a stretch; his overall thesis is that government should collect more taxes and manage R&D on its own, which is one side of a political conversation I’ll avoid for now, except to point out that historically, private enterprise has always had a better performance record when it comes to technical development and innovation than government-run concerns.

    Even in the US, which produced probably the two biggest technical accomplishments in the history of mankind—nuclear weapons and the Apollo space program—government’s achievements pale in comparison to what the private sector has been able to accomplish; that has been the case, in fact, since the beginning of the Industrial Age.

    The ‘big government’ perspective notwithstanding, Morozov’s observations do illustrate how misapplication of wealth is gradually degrading the global economy. Vast amounts of money are being invested, but for the wrong reasons; investors cannot afford to wait for the fruits of innovation efforts—which may take years to finally appear, and instead, put their money into what is likely to pay off the soonest. And unfortunately, that usually turns out to be some kind of rent-capture strategy.

    Fixing it—in other words, encouraging companies one way or another to pursue a reinvestment rather than a capture strategy—may be a matter of greater government regulation and direct activity, as Morozov implies, but our experience is that the payoff from greater intervention is not enough to change the fundamental direction of the global economy along a path of diminishing returns. Instead, business must be convinced that pursuing innovation (which requires a certain healthy level of competition to incubate it) is a significantly more profitable strategy than simply pursuing dividends. If it were easy to do, someone would likely be doing it already, and the leadership changes that are in the offing for some key countries this year are not, so far, looking like they will give us leaders who are capable of understanding the problem and suggesting plausible solutions to it.



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