Diaspora Entrepreneurship Leads to ‘Win-Win’ Scenarios

One of the most interesting, though predictable, empirical regularities in the new software exporting nations’ (for example, India, Pakistan, etc.) quest for prominence is the importance of diaspora entrepreneurship. The stories of the instrumental role played by successful non-resident Indians (NRIs) in the relatively short history of the Indian software and IT enabled services (IteS) industry is well documented in literature.

Tale has it that Vinod Khosla — a former co-founder of Sun Microsystems and one of the leading venture capitalists in the Silicon Valley, and an Indian American by background — spent a lot of time traveling back and forth between the United States and India in the early 1990s to jumpstart what we now term as the IT revolution in India.

Khosla and those like him made possible the enormous creation of wealth in both India and the United States by doing what they did.

Defining Characteristic

A recent study by Pakistan Software Export Board clearly establishes the important role of expatriate entrepreneurship in the development of the software industry in Pakistan, in particular, and developing countries, in general.

The study elevates the involvement of the diaspora in the conception and execution of a business idea to one of the defining characteristics of a set of generic software business models that in turn derive the strategic landscape and competitive drivers of a new venture.

The study suggests that much more than any other factor, whether the founder or the founding team of the company is based in Pakistan or the target market (for example, the United States) does matter to what sort of challenges it faces and whether it can successfully execute upon the idea.

The study found a clear, positive correlation between ventures that had foreign-based founders (generally, expatriate Pakistanis) and their success and growth over the last year. The study involved surveys and interviews with CEOs/directors of about 60 software companies in Pakistan and finds corroborating qualitative evidence to support the above finding.

What is it about diaspora/expatriate entrepreneurship that makes it work the way it does? The study provides several clues on that question.

First, an expatriate connection helps ease the challenges of understanding and targeting a foreign market. For companies attempting to compete in the innovation-intensive U.S./European markets, it is important to understand the customers’ context and continue to innovate at the cutting edge.

In Good Position

An expatriate founder (or founding team) already residing in the target market is in a much better position to get those innovative insights than one residing 10,000 miles away. It’s not that the latter has not been attempted but, statistically speaking, it has a much lesser chance of success. The reason is because many in the developing countries do not even have the right kinds of life-experiences to allow them “dream” innovative ideas and applications for their ideas.

Second, an expatriate connection helps bridge the cultural differences between the customer and the marketeer to a level that considerably eases the selling process. A founder who has never stepped onto the United States or Europe is at a great disadvantage against one who has a cultural understanding, pre-established networks and connections there.

Even minor things — such as starting a conversation, addressing a person, understanding cultural jokes and appropriately responding to them — that create a coziness in a business conversation don’t come so easily to those who haven’t had a cultural experience of living in ones market.

Third, an expatriate founder — or founding team — generally brings much more than just cultural awareness, connections and new ideas to the table. He or she is often an invaluable source for capital and the much needed due diligence for an idea.

Expatriate founders are generally better off financially than a wholly domestic founding team and bring capital (either their own savings or from angel and venture networks abroad) to the table. This can be the much needed lifeblood for the venture in a developing country environment with ill-developed venture capital markets.

Along with this capital also comes the due-diligence of the owners of the capital, namely, the U.S. angels and venture investors, as has been the case with the numerous diaspora-owned ventures that have been created over the last few years.

Win-Win Scenario

The result of the confluence of the these factors is a much better chance of success for the proposed venture and a win-win scenario for all involved. One can cite several instances where diaspora-led entrepreneurship has led to outcomes that have not only created valuable jobs and employment in the developing country but also tremendously benefited the end-consumer in the developed country.

One example is Etilize — a Southern California based provider of electronic cataloging systems — that operates a 200-plus person facility in Karachi, Pakistan. Not very unlike other ventures, Etilize was first conceived for a different purpose but, over time, evolved into a provider of electronic catalogs and knowledge databases with clients like Amazon.com, Best Buys, Wal-mart, OfficeMax, and other major U.S. retailers.

What is relevant here is that during its re-incarnation following the dot-com bubble-burst, Etilize realized that it could not raise enough capital to execute a labor-intensive database development operation in the United States, thus forcing it to look offshore for support. It was thus an idea that could not have happened without an offshoring component attached to it, thus depriving the U.S. consumer of the very important — now a part of our every day life — feature of having to search online for the latest digital camera or a rare piece of electronic equipment in several ways before ordering it from the comfort of his or her home.

Etilize now plans to move into intelligent catalogs that would make it even easier to search what consumers are looking for based on their pre-disclosed preferences and purchases.

Growing Trend

It is precisely these kinds of labor intensive ventures that wouldn’t have been possible without an offshore element of the strategy that create a win-win situation for both the developed and the developing countries involved. The expatriate founders, like Azhar Hameed and Aamir Baig of Etilize, are the real heroes who make it happen for all of us.

There are signs that diaspora entrepreneurship of the kind described above might be growing with time, albeit in different shapes and forms.

One model of diaspora entrepreneurship is the “straddling expatriate” who lives in the United States or Europe (the developed “market”) but operates a company whose development hub is in a developing country ( for example, Pakistan).

The Resource Group (TRG), which is often cited in business literature, provides call-center services to tens of its clients in the U.S. through its thousand-odd agents in Karachi, Lahore and Islamabad, Pakistan. Zia Chishti, the founder and the brains behind this innovative call-centers business model, is a Pakistani-American expatriate who straddles the two worlds and makes all this possible through his deep understanding of, and connections in, both Pakistan and the United States.

The second model of diaspora entrepreneurship is the “returning expatriate” who, after spending several years abroad, has now returned to his native country — at least partially, if not fully — and now, by helping to develop a foundation for innovation and employment in his native country, is helping to create a more globalized world order.

One example of such a venture is Systems Integration, Innovation and Intelligence (SI3) in Karachi, which was founded by Amer Hashmi — an ex-IBM Global Services executive last year. In an interview in Karachi, Amer highlighted the “domestic-first, export-later” policy of SI3. During the years following the dot-com bust, Amer came across the vast opportunity that exists for system integration services in Pakistan and moved back to the country to capitalize on it.

Stages of Development

Amer explained: “All Pakistani software houses that I looked at during my pre-assessment phase were doing low-end software development or BPO type work. None was looking at the real opportunity, which was system integration and high-end services. Pakistani companies (for example, in the financial and telecom sectors) are going through a major renewal and modernization at the front end, but they are still working with obsolete legacy systems at the back-end that do not provide the opportunity for customer innovation that they would need to compete in the post-WTO order. I positioned SI3 to help them modernize their IT and data management systems.”

If SI3 and those like it were to succeed, it would contribute to putting Pakistan on a path to greater economic competitiveness. When that happens, we would have created a more equitable, just, and secure world than today’s.

In many ways, countries and markets undergo stages of development before they are ripe for major investment and reach the kind of inflexion points that, many believe, Pakistan is seeing now. There is a sense of urgency in these expatriates’ ambitions never seen before in the history of Pakistan. “None of this would have been possible 10 years ago — but now it is here and happening,” says Dr. Aamir Matin, the managing director of Pakistan Software Export Board (PSEB).

Minimizing Risks

As demonstrated in the examples of India and Pakistan, diaspora-driven entrepreneurship represents a safe way to enter a new market like Pakistan or some of the other countries of South East Asia, South Asia, Eastern Europe and the Middle East.

It minimizes risks for foreign companies seeking to operate there. It ties a lot of the reputational capital and network capital of these diaspora founders with the venture capital of U.S. investors, thus considerably enhancing the chances of success. And, when it succeeds, it provides a win-win scenario for all parties involved and the rest of the world.