Understanding Context & Trust - Video 6

Summary

In this insightful discussion, the focus is on addressing institutional voids in emerging markets. The common thread among successful entrepreneurs globally is the prioritization of trust cultivation within their ecosystems. The example of Jack Ma and Alibaba is highlighted, illustrating how trust is central to entrepreneurial success, especially in developing countries. Ma's innovative approach to building trust through escrow mechanisms and mimicking traditional bargaining practices online showcases the importance of trust in creating thriving businesses, even in challenging environments.

Takeaways

• 🌏 The speaker discusses the importance of addressing 'institutional voids' in emerging markets, emphasizing the need for entrepreneurs to build trust and mechanisms for problem-solving in the absence of established systems.
• 🛫 The speaker's intellectual journey has involved traveling to various countries, studying how different entrepreneurs have tackled institutional voids, with a focus on cultivating trust as a common thread among successful efforts.
• 💡 The defining characteristic of an emerging market is the lack of established mechanisms for information flow, problem-solving, and credible recourse, which entrepreneurs must build themselves.
• 🌱 Trust is identified as the central activity and organizing principle for entrepreneurship in emerging markets, with the speaker's book titled 'Trust: The Creating Foundation for Entrepreneurship' highlighting its importance.
• 📚 Historical references are made to the significance of trust in commerce, dating back to the works of Adam Smith and even earlier, showing that trust networks have been crucial for trade and societal interactions.
• 📈 The example of Jack Ma and Alibaba is highlighted to illustrate how trust was cultivated in e-commerce, with the creation of an escrow mechanism to ensure transactions were secure and trustworthy.
• 🛍 The importance of mimicking traditional bargaining practices online to instill trust in buyers is discussed, showing how Alibaba adapted to cultural practices to build trust in their platform.
• 🔄 The script mentions the iterative process of Alibaba's attempts to develop in rural China, emphasizing the difficulty and the need for continuous experimentation and learning.
• 🚫 The challenges faced by Alibaba in rural China, despite their success in urban areas, underscore that building trust and filling institutional voids is an ongoing and complex process.
• 💡 The speaker suggests that the cultivation of trust should be an explicit objective for entrepreneurs working collectively to address institutional voids, as it can smooth the process of entrepreneurship in emerging contexts.
• 🌟 The success of Alibaba, transforming from a startup into a trillion-dollar company, is attributed to the central thesis of prioritizing trust, demonstrating the power of a simple yet profound idea.

Q & A

What is the common thread among individuals who successfully solve institutional voids in various contexts?

The common thread among individuals who successfully address institutional voids is the prioritization of trust cultivation across the entire ecosystem.

What does the term 'emerging market' signify in the context of institutional voids?

An emerging market signifies a market that is in the process of developing, where mechanisms for problem-solving, information flows, and credible recourse for adjudication are either absent or underdeveloped.

How does the concept of trust relate to entrepreneurship in emerging markets?

Trust is central to entrepreneurship in emerging markets as it forms the foundation for creating institutions that fill voids, allowing entrepreneurs to operate effectively in the absence of established mechanisms.

What role did trust play in the success of Alibaba's e-commerce platform?

Trust played a crucial role in Alibaba's success by enabling the creation of an escrow mechanism that reassured both buyers and sellers, facilitating transactions in an environment where trust was initially lacking.

How did Jack Ma's background as an English teacher influence his approach to entrepreneurship?

Jack Ma's background as an English teacher exposed him to the emerging internet opportunities, which he then leveraged to create Alibaba, emphasizing the importance of trust in e-commerce as a core aspect of his business strategy.

What is the significance of the escrow mechanism in building trust for online transactions?

The escrow mechanism is significant in building trust for online transactions as it ensures that the seller does not receive payment until the buyer confirms receipt of the goods, thus mitigating the risk of fraud.

How did Alibaba mimic traditional bargaining practices to build trust with customers?

Alibaba allowed for negotiation in the online buying process, mimicking the traditional bargaining practices found in wet markets, which reassured customers and made the online shopping experience more familiar and trustworthy.

What is the historical context of the escrow mechanism used by Alibaba?

The escrow mechanism has historical roots dating back to the Italians over 1500 years ago. Alibaba modernized this concept to suit the context of China, creating a system that facilitated trust in online transactions.

How did Alibaba's escrow mechanism inadvertently lead to the creation of one of the world's biggest mutual funds?

The escrow mechanism led to the creation of one of the world's biggest mutual funds because a large amount of money was held in escrow, which was then utilized to generate further financial opportunities.

What challenges did Alibaba face when trying to develop its platform in rural China?

Alibaba faced significant challenges in rural China, including multiple iterations and experiments to adapt to the local market and foster trust among rural consumers, highlighting the difficulty of replicating success in different environments.

What lesson can be learned from Alibaba's attempts to develop in rural China?

The lesson from Alibaba's attempts in rural China is that building trust and filling institutional voids is not easy and requires continuous effort, experimentation, and learning from each attempt.

Outlines

00:00

🌏 Global Entrepreneurship and Institutional Voids

The speaker discusses the common thread among individuals who successfully navigate and solve institutional voids in various global contexts. The central theme is the cultivation of trust across ecosystems as a key to entrepreneurial success. The speaker highlights the importance of trust in emerging markets, where traditional mechanisms for problem-solving and information flow are often absent, and emphasizes the need for entrepreneurs to build trust within their ventures. Examples from Chile, India, China, and Africa are mentioned, showcasing the universality of this principle.

05:01

🛍️ Trust as the Bedrock of E-commerce: The Alibaba Story

This paragraph delves into the story of Jack Ma, an English teacher turned entrepreneur, who founded Alibaba. It underscores the critical role of trust in e-commerce, especially in developing countries where skepticism towards online transactions is high. Ma's insight was that trust is the most important factor for e-commerce, and everything else is secondary. The creation of an escrow mechanism by Alibaba to ensure trust between buyers and sellers is highlighted as a significant innovation. The paragraph also touches on the cultural aspect of trust-building, such as mimicking the bargaining process found in traditional markets to reassure customers online.

10:04

🚧 The Challenges of Scaling Trust in Rural China

The speaker elaborates on the challenges Alibaba faced in scaling its trust-based model to rural China. Despite the company's success in urban areas, the rural market presented unique difficulties. The speaker discusses the iterative process Alibaba underwent to establish trust in these areas, emphasizing the need for continuous experimentation and learning. The paragraph illustrates that building trust is an ongoing process, even for established companies, and that success is not guaranteed but requires persistent effort and adaptation.

Keywords

💡Institutional Voids

Institutional voids refer to the absence or inefficiency of formal institutions in a market or society, which can hinder economic and social development. In the video's context, it is the lack of mechanisms such as information flows and credible recourse for adjudication that entrepreneurs must overcome. The concept is central to the theme of the video, as it discusses how individuals address these voids in emerging markets to foster entrepreneurship and growth.

💡Trust

Trust is the foundational element for any transaction or relationship, especially in the absence of strong institutional support. The video emphasizes that trust is the key to solving institutional voids, as it allows for the creation of new systems and relationships that can replace or supplement the missing institutions. Jack Ma's example illustrates this, where trust is built within the ecosystem to facilitate online transactions.

💡Entrepreneurial Journey

The entrepreneurial journey is the process of starting and growing a business, often characterized by challenges and innovation. The video discusses the unique journey of entrepreneurs in emerging markets, who must navigate and fill institutional voids. This concept is integral to understanding the video's narrative, as it highlights the struggles and strategies of individuals like Jack Ma and the Alibaba founding team.

💡Emerging Markets

Emerging markets are economies that are in the process of rapid growth and development but are not yet fully developed. The video uses this term to describe the context in which entrepreneurs operate, where they must build the necessary institutional frameworks while pursuing their business goals. The concept is central to the video's theme, as it sets the stage for the discussion on institutional voids and entrepreneurship.

💡E-commerce

E-commerce refers to the buying and selling of goods or services using the internet, and other digital systems. In the video, e-commerce is highlighted as a significant area where trust is crucial for success, especially in developing countries where traditional trust mechanisms may be lacking. The development of Alibaba and its trust-building mechanisms exemplify the importance of e-commerce in overcoming institutional voids.

💡Escrow

Escrow is a financial arrangement where a third party holds and regulates the payment of funds until certain conditions are met. In the context of the video, Alibaba used an escrow mechanism to build trust between buyers and sellers, ensuring that transactions were secure and reliable. This concept is a practical example of how trust can be institutionalized in the absence of traditional systems.

💡Cultivation of Trust

The cultivation of trust refers to the deliberate efforts made to build and maintain trust within a community or ecosystem. The video emphasizes that successful entrepreneurs in emerging markets must prioritize this cultivation, as it is essential for the development of new institutions and the success of their ventures. The cultivation of trust is a central theme in the video, illustrating how it can be a driving force for economic development.

💡Rural China

Rural China represents the less developed and less connected areas of the country, which often face greater institutional voids. The video discusses the challenges and efforts of Alibaba in extending its services to rural China, highlighting the difficulties of fostering trust and establishing e-commerce in these areas. This concept is used to illustrate the complexities of addressing institutional voids even within a single country.

💡Experimentation

Experimentation in the video refers to the process of trying new approaches and learning from the outcomes, which is essential for entrepreneurs dealing with institutional voids. The script mentions that Alibaba has gone through multiple iterations in its attempts to develop rural Taobao, learning from each attempt. This concept is highlighted to emphasize the iterative nature of solving complex problems in emerging markets.

💡Alibaba

Alibaba is a Chinese multinational conglomerate specializing in e-commerce, retail, Internet, and technology. The video uses Alibaba as a prime example of a company that has successfully navigated and addressed institutional voids, particularly in the area of e-commerce. The company's strategies, such as the escrow mechanism and adapting to local bargaining practices, are highlighted as key to building trust and facilitating online transactions.

💡Trust Networks

Trust networks are informal systems of trust that facilitate transactions and cooperation in the absence of formal institutions. The video references historical examples, such as Buddhist monks facilitating trade between India and China, to illustrate the longstanding importance of trust networks. In the context of the video, trust networks are a key concept that underpins the discussion on how entrepreneurs can build trust in emerging markets.

Highlights

The common thread among people solving institutional voids is prioritizing the cultivation of trust across the ecosystem.

Defining characteristic of an emerging market is the absence of mechanisms for problem-solving, information flows, and credible recourse.

Entrepreneurs in developing countries must build the necessary fabric for their ventures while addressing institutional voids.

Trust is a central activity and the organizing principle for entrepreneurship, as highlighted in the book 'Trust: The Creating Foundation for Entrepreneurship'.

Adam Smith emphasized that markets cannot exist without fairness, altruism, and trust in his book 'The Theory of Moral Sentiments'.

Trust networks implemented by Buddhist monks facilitated commerce between India and China in the 12th and 14th centuries.

Religious traditions often have trust at their core, facilitating social interaction.

Jack Ma, the founder of Alibaba, emphasized that trust is the most important aspect of e-commerce, with everything else being a detail.

In developing countries, e-commerce is not just an extra but the primary means of commerce, making trust even more critical.

Alibaba created an escrow mechanism to build trust between buyers and sellers, a modern adaptation of an ancient concept.

The escrow mechanism became a significant mutual fund due to the large amount of money held in it, leading to the creation of Ant Financial.

Alibaba mimicked the traditional bargaining process of wet markets in China to build trust in their online platform.

Verification through trusted third parties was used to enhance credibility for businesses on Alibaba's platform.

The importance of treating business experiments as learning opportunities, with many attempts leading to failure before success.

Alibaba's efforts in rural China demonstrate the ongoing challenges and iterations required to foster trust and fill institutional voids.

The central thesis of prioritizing trust has led to the creation of a trillion-dollar company in just 20 years.

The simplicity of the idea that trust is central to entrepreneurship, as exemplified by the success of Alibaba.

Transcripts

the U one major part of your

intellectual Journey has been to sort of

talk about contacts and institutional

voids um and you've studied examples

from around the world remarkable

examples from around the world thanks to

HBS yeah exactly we were such a

fortunate place for you to be able to

Jet around the whole world from Chile to

India to China to Africa everywhere they

should stop paying us yeah yeah exactly

we should pay them

um and and the the so the question I

have for you is like what's the common

thread that people that solve

institutional voids in all these vared

contexts in all these varied settings in

all these vared ways of s of s them

what's the common threat among all of

them so I think that's a awesome

question and a tough question to answer

so I've been pondering this

obviously um over the last several years

just trying to think what's what's

what's common across let's let's define

it of course you know people go about

the entrepreneurial Journeys and most

people don't make it Beyond a certain

point and they have good efforts but

they're not enormously impactful let's

just stay as a class of efforts from

which we can learn the most those who

really scale their efforts to

affecting tens of millions of people I

would say the my candidate um um uh item

for what all those people have made

explicit in their uh in their Journeys

as change agents is to prioritize the

cultivation of trust mhm across the

whole ecosystem okay so remember the the

defining characteristic for me for an

Emerging Market is a market that is

emerging it hasn't emerged yes and what

that means is that the mechanisms needed

for solving problems the information

flows and the credible recourse for

adjudication and so on are missing yeah

and the central idea is that the wouldbe

entrepreneur the DTI the cola Masha um

have to build that yes that entire

fabric while they want to be an

agricultural entrepreneur or a heart

surgeon yes and at one level you would

say well that's kind of unfair you're

making it really tough on the and my

response is I'm not making it tough it

is what the reality is it is that is why

these are developing countries

developing context

uh but it's better than not doing

anything it's better than waiting for

the government to solve your problem

which is going to take a lot longer if

ever um but what these uh entrepreneurs

have realized is that um if we make it

explicit in our objective function that

people who are working with me in

collectively addressing these

institutional

voids um that they trust each other and

they trust me yes then the whole

exercise is so much smoother and what I

thought we could do is go through a few

examples that illustrate how this has

been built up different ways in which

that people get a visceral sense for it

yeah so trust to you is the core Central

activity uh and the organizing principle

so a book that I wrote has the title

trust the creating the foundation for

entrepreneurship got it in some ways I

think the title says it great says it

all so trust is as old as the hills what

does that mean old as the hills I've

never heard of that term older older

than even you okay older than even you

uh with your bald head I some hair Baler

than mine so it must be said so okay so

Adam Smith very famously in theory of

the moral sentiment So Adam Smith you

know is known as quote unquote father of

modern economics he also a philosopher

moral philosopher and in his book in

1759 he writes the centerpiece of the

book is that markets cannot exist

without fairness altruism and Trust yeah

so it's a starting point and one of our

colleagues who a really uh amazing

historian sofas reinard yes has gone

beyond Adam Smith and written about uh

Italian moral philosophers and people

even predating that and another friend

of mine Tans sen who is a pressed NYU

has written about how uh the thing that

really made commerce between India and

China uh tend 12 14 centuries ago

happened was trust networks that were

implemented by the Buddhist monks as

they took uh Buddhist scriptures from

India to China got it so it's old older

than you older than me yeah but in fact

you know as you're talking about that I

mean I mean Many religious Traditions

have trust at the court right like it's

the way yeah exactly and that's that's

the way in which uh people can socially

interact yeah so this is an old idea

some at some level I'm just revising and

recovering and incrementally

contextualizing it if you will so the

first example uh even though he's fallen

out of favor with the with the Chinese

party lately yes is the iconic teacher

turned entrepreneur Jack ma Jack ma back

going back to the point that you made

earlier these guys when they start their

entrepreneurial Journeys like K Masha

doing agriculture or

DTI uh you know doing heart surgery they

don't really know most of the stuff that

they need to know to solve the problem

so Jack English teacher you know

famously speaking in English to tourists

in hjo yes and uh realizing that wow you

know uh there's all all this stuff

there's something called online that's

emerging over there the internet the

internet and how do I get you know

Chinese people to appreciate the

opportunities and as I recall vaguely

the the state own Enterprises are not

interested in this at all and so he goes

and creates along with 15 or 16 other

people uh who are have the status as the

founding team of Alibaba yeah creates

this this company that becomes an online

Behemoth but what I wanted to focus on

was some things that uh Jack famously

said so I attended I used to attend

these World economic Forum meetings in

Davos and at one of the meetings I

remember he was there and the thing that

he said that I quoted in my book was for

e-commerce the most important thing is

trust everything else is a detail so

everything that you do every concrete

thing that you do is about cultivation

of trust so that in his mind the the

skeptical chines buyer yes for whom

putting money into the internet and

waiting for something to show up is an

Act of Faith yes right and Faith was not

something that you had in a rural

developing country quite so easily where

scam artists are running around uh all

over the place right so another quote

that I'd like to say is uh in the US

e-commerce is what I call the dessert

it's mhm it's a it's an extra over what

you do but in developing countries I

China e-commerce is the only thing

that's going on there right so trust is

really Central to all this but let's

talk a little bit about how

he very tangible Monday morning reality

details of how do you actually persuade

a skeptical would be buyer of something

online to transact through Alibaba

platform in fact the problem is on both

sides right the buyer the buyer buyer

doesn't trust the seller that the seller

is actually going to give me the goods

or in fact we'll have good Goods the

seller is like am I going to get paid if

I ship the goods or am I going to get

paid so trust is at the core right y

that's exactly right so one of the and

and in fact on that issue the Insight

which seems to us to be second nature

now because we have so many blockchain

type solutions for all these things at

Noam but in those days which is you know

less than two decades ago um the idea

was an escro mechanism does it which is

I buy something from you you ship the

goods but you don't get the money uh

until I receive them and you are sure

that I pay you because I put the money

in escrow to a third party to a third

party which is Alibaba so Alibaba had to

create the escrow mechanism to reassure

the buy and the sell size to transaction

and escro was invented by the Italians

you know 1500 years ago right and so so

they took something very

old modernize it to the context of China

absolutely right absolutely right and

since then of course has been

implemented in so many different so many

different ways different places that es

that escro mechanism by the way became

one of the world's biggest mutual funds

in and off itself because there was so

much money sitting in it uh and that's

the that's the basis for ant Financial

which then ended up uh trying to go

public and getting shot down and now

again we'll we'll

talker so one mechanism that he created

but the point that I want us to focus on

K for a second is that the core was Ma's

insight and his team's insight that

there's no trust

yes then the question is okay there's no

point lamenting the absence of trust

what do we do to create trust yes answer

is you can do things you do this right

yes uh another thing that they did was

they went to the local market you were

talking about fish markets in Karachi

it's not that different from wet markets

in China you go to the wet markets and

you see and the Chinese famously buy

live uh live food um and it's in a wet

Market it's wet all the time and the way

you buy it is similar the way you buy it

in India or the Arab world is you go and

you have this theater of bargaining

right you you say I want that and the

person says it's worth this much and you

threaten you pretend to walk away and

then you come back and there's this

haggling that goes on and then you

settle on a price yes and these guys had

the had the really interesting uh

Insight was the act of doing that

haggling reassures them I pushed back on

the scam artist and I got him or her to

lower the price yes and so they mimic

that in the uh in in the online buying

process there was allow negotiation to

have negotiation back and forth and so

on and that seemed to reassure people um

and you could go on and on you know if

you could you could if you wanted to

have as as a platform evolved if you

wanted to have a storefront on on

Alibaba yes you could go to another

trusted third party and

then get some uh cred like a credibility

enance verification somebody would come

and show up and you're a real Enterprise

something like that and you would get a

trespass yes right and there many other

things that it did but really the basic

point is pretty straightforward is that

the entrepreneur realizes that trust is

Central that trust is what allows you to

create these institutions that are

filling the voids that allows us to go

aside and it's the Primacy of trust that

I that I would focus on yeah yeah and we

know what's cool is that I mean that

Central thesis creates this trillion

dollar giant I mean in 20 years I mean

just unbelievable that's right unbel at

the end of the day it's all very simple

right so d shar's uh you know has saved

more lives than any individual I know on

the face of the Earth and it comes from

a simple idea uh it comes from

compassion and scale economies and

that's it and the rest is just putting

into place amazing it's all easy yeah

what are you guys waiting

for okay um Let me let me just elaborate

this alibab example a little bit um uh

working with some of our Junior faculty

uh in in your in your area technology

and operations management uh we spent

some time in rural China right looking

at uh Tau which is one of the Alibaba

sites um rural taba in particular and

the point I wanted to make here is that

um uh we'll Show a slide showing uh

alibaba's various attempts to develop

rural Tabo compared to some of the

competitors become a very competitive

market as you know with pindo and JD and

many more after that um and really the

spirit of this is that in rural China

even though they had such great

success fostering trust and creating the

ecosystem and filling the institutional

voids so to speak uh to be successful

entrepreneurs their ability to to make

this work in Dr China has been extremely

difficult yeah right to this day I think

they've gone through three four or five

depending on how you count iterations of

this and every one of

them you know they they're varying

things that they're learning from each

experiment uh and I think it's still

work in progress as best as I can tell

so the the the the lesson that I take

away from that is it's not easy yes and

all the examples we've factiously been

saying or I've been saying fous this is

easy this is easy we should be able to

do it that's easier said than done and

as a lot of effort required to lot of

experimentation n out of 10 things will

fail and you've got to treat each as an

experiment from which you learn

something and then apply to the next one

yeah um so that's the first example of

Alibaba and uh successful company trying

to make it work