Why hasn’t impact investing taken off in China & Southeast Asia? An analysis of key cultural, demographic and perceptual factors could explain why North American and European firms are hesitant to enter the industry.
Of the 197 companies that attended the 2013 meeting of Partnering for Global Impact in Lugano, Switzerland, only 17 were from Asia. Of that 17, four were from China or Southeast Asia. During my stay at the conference, this statistic would profoundly mirror back to me, when Tao Zhang, Managing Director for the China Global Impact Fund, said, “China [is] being put on the shelf.”
Foundations, accelerators, and entrepreneurs are apprehensive about China and SE Asia – including perhaps most importantly North American and European funders who have been critical in the development of the social enterprise sector in the emerging markets of South America and Sub-Saharan Africa. However, the apprehension comes at an inconvenient time as it was recently reported that there is $10 trillion worth of untapped assets in SE Asia.
With more than 99 million people in SE Asia and 180 million people living in China on less than $1.25 per day, representing 22.5% of the world population below the poverty line, and rising environmental, social and governance concerns, Asia should not be ignored. In fact, McKinsey and the International Finance Corporation estimates that East Asia represents the largest quantifiable and proportional need for credit among all emerging market regions (with an estimated credit gap of between $900bn – $1,100bn at the end of 2010).
So what exactly is causing this apprehension? A combination of distorted perception and diversity not easily manageable are clashing with a business environment that is unprepared for entrepreneurship.
Sometimes, it’s More About Perception Than Reality
Basic business knowledge dictates that the first step to introducing a product or service in the market is identifying the need. Among other factors, it is the entrepreneur’s perception of this problem that determines the success of the venture. Similarly, the investor community’s perception of the need for funding is critical to providing their service, or in their case, the flow of money. Geographically, according to Zhang, “it’s often perceived that China does not lack money. Yet the majority of investment is commercial capital. Money flows in and out of China. But, most of it is opportunistic, rather than impact-oriented.”
Zhang also argues that there is a perception that China doesn’t have a bottom-of-the-pyramid market. Although, the Millennium Development Goal (MDG) of halving the poverty rate was met in China and SE Asia in 2011, there is still 265 million people living below the poverty line. Furthermore, chronic poverty is abundant in China’s rural regions and the country’s GINI co-efficient of 0.4 suggests an impending problem of wealth inequality.
Diversity isn’t Always a Good Thing
With over 41 different languages (not including local dialects) and 50 cultural groups in East and SE Asia, the range of diversity within this region is large and intimidating. For foreign investors, entrepreneurs and business advisors looking to enter the region, the scope of diversity exponentially increases the legwork and due diligence needed to be done. This also is followed by a higher learning curve and consequentially higher increased learning costs. According to Zhang, organizations are adopting a wait-and-see attitude where the best possible way in which to “engage the [region] better and to use money wisely is to identify the correct local partners.”
In this case, a lack of qualified local partners might be the crucial barrier to entry that is preventing organizations from entering the region. Inez Stefanie, from the Indonesia branch of Endeavor Global , a non-profit that supports high-impact entrepreneurs in emerging economies, states that in the region, “it is difficult finding qualified [social enterprises].” Indonesia, unlike most countries in Southeast Asia, is ahead of curve, with the creation of its first Socially Responsible Index in 2009 and entrance of major impact catalyzing organizations such as Endeavor Global. However, even in its current position, there are certain factors constricting the development of a local nurturing business environment.
A culture in transition
Over two decades ago in Indonesia, the best possible profession for an individual was a civil servant. A rigid and hierarchal education system that stressed technical abilities along with the guarantee of steady income resulted in a cultural view that a profession of civil servant or those specialized such as doctors or engineers, was far superior to any other.
In the past decade, a cultural shift has occurred. The idea of an entrepreneur as a successful and independent figure in society has spawned a trend that has pushed more and more people into pursuing the lifestyle. Influenced by high-profile entrepreneurs spewed across media outlets, Stefanie states that the shift in attitude mirrors the U.S. technological entrepreneurship boom of the late 90’s. People in Indonesia are now pursuing entrepreneurship, “not out of passion, but because it’s what the neighbors are doing.” Much like a fashion trend, an attempt at entrepreneurship is also an attempt at gaining societal and cultural acceptance from one’s peers.
However, the education system in Indonesia has not changed to reflect the cultural shift toward entrepreneurship. Schools still emphasize memorization and disregard creativity, which according to Utomo Dananjaya, an education expert at Paramadina University in Jakarta, inhibits the flow of ideas and leading to a knowledge gap in aspiring entrepreneurs.
With this knowledge gap and entrepreneurship viewed as a trend, sustainability and consequently longevity of the practice are not top-of-mind concepts. According to Stefanie, “Entrepreneurs are being sporadic, testing the waters in terms of business… In Indonesia today, there are only a few ventures that truly reflect what sustainable social entrepreneurship is.” As sustainability is a key component of what constitutes a qualified partner, it is clear why impact organizations from North America and Europe are having difficulty.
Yet, the burden cannot be solely placed on the entrepreneur. Government regulations within the country are making it extremely difficult for individuals to start ventures. In fact, Indonesia ranks 166 out of 182 nations when it comes to the ease of starting a new business. Across East and SE Asia , with the exception of Singapore, China and Malaysia, the majority of countries are on the bottom half of the list, with seven countries unranked.
With business environments that are still learning to encourage entrepreneurship and a lack of adequate local support, foundations, accelerators, entrepreneurs and funders from Europe and North America just might have a reason to be hesitant in entering the market. Yet the basic needs of the population, and the disparity in health, education and poverty levels make the growth of social enterprises even more critical to the development of the region. Maybe it’s time for funders to examine the $10 trillion worth of untapped assets in the region.