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Risk-taking by the enterprise sector can support people’s resilience

Xubei Luo's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

Live in a poor country in Africa but get an ultrasound analysis by one of the top medical experts in the world? Sound like a dream? A tech firm, iMedcare Technologies Co., showcased a process at the 13th Infopoverty World Conference held in New York on March 25–26 by which using data transmitted like a mobile phone call, doctors thousands of miles away can analyze ultrasound results at low cost and prescribe treatment in real time

Is this innovation good? Clearly, yes. Long-distance medical treatments in India and several countries have shown the great potential that technology has in helping people manage risks, starting with  day-to-day health issues. Are all these innovations bound to succeed? Clearly, no. Taking risks to innovate is an integral part of pursuing opportunities. For an individual enterprise, the results are seldom guaranteed; in fact, a large share of innovative firms fail.  But for the enterprise sector as a whole, innovation is a risk worth taking. The small share of innovative firms that survive often push the frontier of productivity in the economy and produce great gains and improvements in well-being.

Innovation and technology are the most important factors that have fueled the acceleration of economic advance.  External sources of technology account for 90 percent of the growth in total factor productivity in most developing countries.  Looking back, the United Kingdom took 58 years to double its output per person, beginning in 1780; Japan accomplished this in 34 years, starting in the 1880s. More recently, the Republic of Korea did it in 11 years, starting in 1966; and China took a startling short 7 years, starting in 2002.  Technology adaptation and adoption have been a main driver of their rapid catch-up.

Risk taking has always been at the heart of the enterprise sector, and has become even more important since the world economy is increasingly interconnected.  Waves of technological improvement since the first industrial revolution have been changing the boundary of production and redefining the division of markets. The recent information and communication technology revolution has drastically reduced the cost of transactions and has been reinterpreting our notions of time and distance. Nowadays, millions of people are connected through Skype, Facebook, and twitter; billions of transactions are linked with one-click. Shocks across the world are linked, and easily magnified and transformed, bringing new risks and opportunities. A high degree of customization and just-in-time production, which have become new norms in modern production processes, increase benefits, but also increase the risks firms face. The largely unforeseen changes in the global arena, from the collapse of the dot.com economy in the early 2000s to the burst of the housing bubbles in 2008, to the ongoing Euro area turmoil, have had systemic implication for the survival and growth of enterprises in different corners of the world. But some risks can be well rewarded. Participation in the global production chain can create jobs and improve the resilience of individuals, households, and communities. In developing countries, contract production, with business made more predictable through “assured buy-back” arrangements, increases entrepreneurship; many new entrepreneurs are young people and/or female. Business outsourcing offers employment opportunities with higher and more stable income, compared to agricultural jobs and other alternatives. Compliance with  the quality standards of lead firms has the potential to improve the protection of workers, consumers, and the environment. For instance, the Equator Principles, a credit risk management framework for determining and managing environmental and social risk in project finance transactions, has increased the attention and focus on social standards and responsibility and contributed to poverty alleviation through sustainable development.

However, the distribution of costs and benefits varies widely across firms in different positions along the value chain, and among workers with different skills. Firms may choose to hire irregular workers in an effort to be responsive to buyers’ demands, and workers with casual contracts are often subjected to discrimination.  Because global value chains may not be linked to local value chains, the safety and quality benefits from industry standards that are enjoyed by global consumers may bypass domestic consumers.

Striking the right balance between supporting the flexibility of the enterprise sector while ensuring that enterprises follow sound regulations is crucial.   The government has a role to play in striking this balance over time by establishing the right business environment and incentives. On such a foundation, the enterprise sector can better perform its function of taking risks to serve as the engine of innovation and growth, thereby providing steady employment, and  providing better worker, consumer, and environmental protection—and thus increasing people’s resilience.