The world is evolving at a rapid pace, with new technological, cultural and societal boundaries being laid to waste by innovative business models. The traditional business cycle seems to be getting shorter, with the rise (and fall) being potentially far quicker than say 20 years ago. And, much like Moore’s Law, I feel this advance in the capabilities of businesses to fulfill customer needs will grow exponentially as businesses come to terms with the cloud, data and mobile/wearable technology and their endless possibilities. In turn, customer expectations will advance, and businesses will ever be playing catch-up with user demands. The sharing economy has been born, developed and surged in recent years, utilizing those aforementioned factors; and in the process fundamentally altering the way people expect to do business around the world. I feel that there are still substantial opportunities for both the sharing economy, and those larger companies that currently feel threatened by it.
Technology has certainly enabled businesses to build platforms that facilitate the sharing of assets already in circulation. Peer-to-peer sharing reduces the costs for the end user, as there is no requirement for an agent to moderate the transaction. Technology has reduced transaction costs, making sharing of assets easier and cheaper than ever before. This has enabled businesses operating in this space to acquire substantial market share quickly and expand operations on a much larger scale than has been previously possible. Airbnb is one such example where it now provides a service in over 30,000 cities globally, and has disrupted the well-established hotel industry with a punchy valuation of $10 billion in just under 6 years of trading. It is my belief that this emergence of a new model of consumption was driven by a desire for greater value, and less reliance on any middleman following the 2008 credit crunch.
Data has enabled businesses to disaggregate individuals’ assets into services. It has also enabled businesses to provide more contextual service offerings from other individuals based on preference, location, purchase history and peers. Sharing sites enable users to become ad hoc providers of a service, and make incremental or continuous income from already owned assets. For the end user or customer this is great, because access is more important than ownership of assets. Rachel Botsman has stated that the peer-to-peer rental market is worth $26 billion. Although there are opportunities for businesses to use this rental model for spare resources and assets, it is predominantly person-to-person rental within which they operate.
It is easy to see how “collaborative consumption” can offer greater levels of value and utility for customers, because owners can make money from underutilized assets and users can gain utility from using an asset they would not have otherwise been able to afford. This is bleeding edge capitalism, and solves the issue of overconsumption and materialism. It is focused on the efficient use of resources, which has environmental (and economic) benefits too.
Trust is inherently built into the mechanisms of these new business models with open, two-way review and referencing systems in place. Technology has enabled the platform providers to validate users, and ensure they are real people; which in turn only increases the trust of users in that platform. David Lee, founder and managing partner at SV Angles (an early investor in Airbnb) states that although a solid payment platform is paramount, the most important aspect of these business models is being able to build a trusting community and enabling users to ‘meet’ one another online before they meet in person.
There are however inevitable regulatory issues with these models, specifically around areas such as insurance, liability and tax. In 2012 the California Public Utilities Commission issued $20,000 worth of fines against three companies: Uber, Lyft and SideCar for “operating as passenger carriers without the required public liability and property damage insurance”. Frustrated incumbents will use outdated regulations to restrict, as best they can, the rise of such businesses. In many states in the USA, such companies are unable to operate and are fighting many legal battles.
Room sharing businesses are also causing a stir, and have run into issues around the zoning regulations and other rules governing temporary rentals in which the property owner is not present. Owners have served some renters notice because the renter was seen to be sub-letting the room on Airbnb. Interestingly it has recently appointed David Hantman, previously the head of government relations at Yahoo, as its head of public policy to tackle this regulatory issue.
Progressive businesses will always encounter fractious times. Inevitably regulatory bodies or governments will play catch up, mediating between the wishes of the end-consumers (which can be represented as the actions and purchase patterns of those customers supporting new business models) and the established businesses fighting to stay in the market, and keep its once loyal customer base.
Interestingly, the larger companies that face disruption are moving into the space through investment into these upstart rivals. GM Ventures invested $13 million into RelayRides in 2011. This has not only offered a vote of confidence to the sharing model, but it has highlighted how old and new business can work together to offer additional value to both the new and old business alike. In this instance, RelayRides was granted access to GM’s OnStar navigation system. Now OnStar equipped cars can now be locked and unlocked from an app, removing the need for individuals to meet and hand over the keys.
I have always felt that the sharing economy lacked any real coherent definition, and that it in actual fact was made up of many various value-adding models. And as with any great surge of capitalism it has been hacked, rebuilt and rolled out across many other markets and industries with a variety of results. The one thing that has seemed to remain fairly constant was that these models focused on the sharing of assets; it was about access and not ownership. Now I believe there is another step change in the sharing economy, and we (Aidan Rushby, Tony Edwards and myself) have built a company based on these beliefs.
Movebubble uses technology to disrupt an old, archaic industry, that of the private residential property lettings market. It does not enable people to share assets in a manner as that described above; instead it facilitates collaboration on key tasks centered on the long-term property rental process. Users are able to work together through technology to reduce the waste of a particular resource; time spent on a task. Through guided collaboration of tasks, aptly timed to reduce delays and confusion, via any device users are able to increase productivity on the move, ultimately reducing the time spent on such tasks. And as the old adage goes, “time is money”.
Such platforms will reduce waste, as user groups work together to achieve common goals, which in the case of Movebubble is a safe and secure rental tenancy agreement. Is the next step in the evolution of the sharing economy the emergence of platforms enabling users to reduce time spent on tasks, and to collaborate faster, remotely? Is this the rise of the Collaborative Customer?
In order for these Customer Collaborative Platforms (CCP) to work, users need to know that other users are validated, real and ultimately trustworthy. This is one thing that is held in common with the sharing economy. CCP’s must build a trusting community that is exclusive and not available to those who are not a part of it. The reciprocal nature of the review system requires that only those involved with transactions with another user are able to offer reviews and feedback. Not only do users need to trust the users of the platform, but they must also trust the platform itself. Data privacy is paramount, and CCP businesses must continue to invest in its security. It can take many years to build up trust in a brand, and unfortunately only a moment to destroy it. Executives of such businesses must work tirelessly to uphold and reinforce the messages that are central to such organizations: openness, honesty and transparency. Trust is the marketing currency of the future, with a vast number of Internet users still concerned about online privacy protection.
Consumers are primarily concerned with Environmental Control, i.e. the ability of the user to control the actions of the vendor (this could manifest as worries over supplying credit card information online) and the secondary use of that information (which is typically a worry that vendors will sell private information to 3rd parties). Although an older study, the 1997 Georgia Tech Graphics, Visualization and Usability Centers’ GVU 7th User Survey showed a whopping 87% of web users think they should have complete control over the demographic information websites capture, and over 71% feel there should be new laws to protect their privacy online. 63% of those reporting that they decline to provide information to websites have done so because they do not trust those collecting the data.
So that these businesses are able to ensure that customers can collaborate quickly and effectively these CCPs will tread the peripheries of public and legal interpretations of privacy. Such companies will need to pre-empt competitor actions with appropriate responses to calls for additional regulation on this subject. However, more importantly these CCPs will need to deliver an explicit social contract with the user, executed in the context of a cooperative relationship built on trust.
Any technology that can equip customers with the ability to undercut the current status quo through collaboration will ultimately win, as mainstream market adoption occurs via word of mouth (or word of mouse!). So get ready, as the rise of the collaborative customer is finally here.
Well, Google certainly know how to develop game changers. Last April Google released a video showing off its new project, Google Glasses. It was pretty cool, but it did only really seem to be a phone screen for your eyes. But Google have just launched a new video, and i think have rebranded the concept as Google Glass.
The new video, as you expect does look great, tugging on the heartstrings with ideas of sharing and family. But lets really talk… This as a fundamental shift in how we are going to view, access and use information. It won’t be long until this is the form of contact lenses, and therefore seamlessly integrated into the Neo-Humanoid of the future. Kevin Kelly founding executive editor of Wired magazine and a former editor/publisher of the Whole Earth Catalog certainly thinks that this transgression to instant access is inevitable. And as he says,
“if you dont like it go and live in the woods”.
Make sure you check out his site here, as he is a true hero of mine.
Its odd as i totally agree with Kevin Kelly, this is inevitable. We are going to move to an information access age, where technology, education, and sharing are something the whole world is involved in. But is there a dark side to this aswel? In order for the Google Glass Project to make your day better than yesterday, it has to record your vision. Mmm. What if there is a crime, and the police need access to your field of the vision for the day. Do we all become walking CCTV cameras? Well, yes we do. But i suppose we need to stop being so individualistic and selfish, and think about the idea of forced evolution. Although i abhor the concept of collectivism as a means to socially and economically evolve (i am a true liberal and believer in Hayek) i think that the dissemination of information to the masses is only good for freedom, trade and human development. This growth of the single brain, synthetic telepathy and instant access to all of human knowledge is going to happen to one way or another. And, so long as the governments do not own this, and it is run privately through the markets then we are, as consumers, still in charge. Who knows, but its certainly going to be exciting. There is an old Chinese insult, that translates to
“May you live in interesting times”
Well… that we do.
Here is the new video about Google Glass
Here is the original video posted about Google Glasses
Does crony capitalism promote economic growth? Ensure that your answer demonstrates a sound understanding of the literature and is illustrated by specific examples drawn from today’s political and economic situation of any country or countries of your choice.
This paper discusses Crony Capitalism (cronyism) and illustrates many outcomes from this form of economic governance. It compares the efficiencies and inefficiencies of cronyism, implies a difference between corruption and cronyism, and that cultural heritage influences economic practice.
Economic growth is seen as a long-term increasing capacity of a nation-state to supply increasingly diverse economic goods to its population. This is based on advanced technology and the advancement of institutional and ideological organisations (Kuznets, 1973). It is influenced by increases in productivity through technology and innovation, economies of scale, and growing populations (Ayres, 1998 and Ayres & Warr, date unknown).
Cronyism in its lightest form can be described as collusion between key market players, but can also describe the cosy, symbiotic relationships between big business and the state in Southeast Asia (White, 2004). Kang (2003) refers to successful cronyism as ‘grudging relationships’ between government and business elites, creating mutually hostage situations. It materialises through favouritism toward business groups with respect to legal permits, government grants, tax breaks, and access to capital loans. Morck et al (2011) describe it as “elite-capture”, where “business-families” attain sufficient control over an economy’s financial sector.
The neoclassical argument states any government intervention removes the market from equilibrium resulting in a less efficient economy. However, in instances where mutually hostage parties occur, cronyism can reduce transaction costs and minimise deadweight losses (Kang, 2003) therefore increasing productivity. South Korea is a high performance economy, and has only a few key actors (the state and Chaebol) in mutually hostage situations. The result is stability, as neither one side nor the other can dominate. Granovetter (1985) further argues that more stable personal relationships between economic actors and the ensuing trust, is more important in discouraging opportunism than formal institutions. Immutable stable laws and trading environments can lead to durable agreements that are a prerequisite of economic growth, and Kang (2003) infers it is more agreeable for foreign investment.
In contrast both the Philippines and Indonesia have not provided economic growth through cronyism. In the Philippines too many actors result in a lack of cohesion, increasing transaction costs and decreasing its economic performance. Kang (2003) refers to this as a “pendulum of corruption” between business and state. In the case of Indonesia, cronyism was centred on Suharto. Initially stable, Suharto’s regime experienced sustained and impressive growth and foreign investment surged into Indonesia. However, Suharto’s stifling self-interested regime controlled almost 60% equity in all domestic investment by 1980 (Kang, 2003). The business sector was never able to become independently powerful outside of Suharto, hence no mutual hostages, resulting in high levels of corruption and increased transaction costs.
Figure 1: This graph shows the levels of high technology exports plotted against time of Indonesia, Philippines and South Korea. Data was taken from data.worldbank.org.
Figure 1 illustrates varying levels of technological export of 3 crony-economies, and that different versions of cronyism can result in different levels of technological advancement. The less corrupt the form of cronyism, the higher the level of technological advancement, which is a key indicator of economic growth (Kuznets, 1973).
Hill (1995) pontificates that the key to minimising the resource costs is maximising the productivity of resource inputs, requiring both cooperation and investments in specialisation. Hill argues that if a government gets it ‘approximately’ right then confidence among economic players regarding property rights and contracts reduces transaction costs thereby increasing economic growth and specialisation. He further discusses how the cultural norms within a society can act as a large behavioural constraint and will determine how individuals interact in everyday situations.
Figure 2: This figure shows GDP per capita in US$ plotted against time of Japan, United Kingdom, South Korea, Indonesia and the Philippines. Data was taken from data.worldbank.org.
Figure 2 shows the relationship between GDP per capita (which can be taken as a factor of productivity) of various countries. Japan’s surge in productivity from 1975-1995 perhaps indicates how ‘Japan Inc’ got it ‘approximately right’ through this period with larger gains than the UK. However, this graph implies that cronyism was not effective for the Philippines and Indonesia from 1970 to present day.
In Japan MITI served as an architect for industrial policy, and coordinated efforts with the Bank of Japan and other agencies to promote economic growth. The central government facilitated and spearheaded Japan’s economic expansion and brought about a radical transformation of industrialisation (Johnson, 1982). MITI relied upon personal relationship building over expensive formal institutions, and would exclude transgressors from informal associations between government and business leaders (Murakami and Rohlen, 1992). Hill (1995) hypothesises that the economic growth seen by Japan until 1990 was not only due to cronyism but also to the societal factors prevalent in Japan at the time, based upon the Tokugawa Value System of cooperation. This collective ideal resulted in a competitive advantage of Japanese firms over Western firms and reduced transaction costs and risks of hold up, therefore promoting investment in specialisation. Japan should not be mistaken for a command economy but perhaps a ‘developmental government’ as coined by Johnson (1982).
Figure 3: This figure plots the GDP growth (annual %) of various countries; Japan, United Kingdom, United States, Indonesia, South Korea and the Philippines. Data was taken from data.worldbank.org.
Figure 3 highlights differences in annual % growth rates of GDP, and shows crony-economies have higher growth rates than typically ‘laissez-faire’ countries such as the UK and USA. It is worth noting that the more developed Japan has a lower growth rate than other crony-economies, perhaps indicating cronyism does not promote economic growth in today’s global markets. In contrast Keegan (1984) argues that ‘Japan Inc.’ actually increased its competiveness in global markets through joint public and private goals.
Morck et al, (2011) talks of “big push” industrialisation and implies that large family controlled businesses use “tunnelling” to coordinate investment as a central planner might. However he goes onto to assert that ‘elite-capture’ correlates with less efficient capital allocation, and economies with large family-banks are prone to ‘boom and bust’. He presents empirical evidence showing family controlled banking systems decrease both real per capita GDP growth and TFP growth.
Kang (2004) argues that cronyism develops in economies where legal and political institutions are not developed, and transaction costs of regulating contracts are excessive. In this instance it is cheaper to revert to cronyism.
In conclusion minimising transaction costs is a key component to economic growth and that in the right circumstances cronyism can offer this, as seen in Japan and South Korea. Corruption is more prevalent in regions with less established legal frameworks and cronyism fails to deliver sustained economic growth. Cronyism is also closely linked with family-banking systems, which result in inequality and increased barriers to entry thus decreasing the competitive nature of the economy. My interpretation of the data is that crony capitalism can, in circumstances promote economic growth, where collaborative ideals are upheld such as in Japan, and when few economic players exist, but that growth is not long-term. I also conclude that once economies move into today’s global markets and must become internationally competitive cronyism does not promote economic growth.
GDP – Growth Domestic Product
MITI – The Ministry of International Trade and Industry
TFP – Total Factor Productivity
Ayres, R.U. (1998) Turning Point: an End to the Growth Paradigm. London: Earthscan Publications [online]., pp. 192-195.
Ayres, R.U. and Warr, B. (?) Two Paradigms of Production and Growth. [online]. Source incomplete.
Granovetter, M. (1985) Economic Action and Social Structure: The Problem of Embeddedness. The American Journal of Sociology [online]. 91, pp. 481-510.
Hill, C.W.L. (1995) National Structures, Transaction Cost Economising and Competitive Advantage: The Case of Japan. Organization Science [online]. 6 (1)
Johnson, C. (1982) MITI and the Japanese Miracle: The Growth of Industrial Policy. Stanford, Ca: Stanford University Press.
Kang, D. (2003) Transaction Costs and Crony Capitalism in East Asia. Ph.d. Comparative Politics [online]. 35 (4), pp. 439-458.
Kuznets, S. (1973) Modern Economic Growth: Findings and Reflections. The American Economic Review [online]. 63 (3), pp. 247-258.
Murakami, Y. and Rohlen, T.P. (1992) Social Exchange Aspects of the Japanese Political Economy: Culture, Efficiency, and Change. The Political Economy of Japan. Cultural and Social Dynamics, Stanford University Press [online].
Morck, R., Yavuz, D. and Yeung, B. (2011) Banking system control, capital allocation, and economy performance. Journal of Financial Economics 100[online]., pp. 264-283.
White, N.J. (2004) The Beginnings of Crony Capitalism: Business, Politics and Economic Development in Malaysia, c 1955-70. Cambridge University Press, Modern Asian Studies [online]. 38 (2), pp. 389-417.