How Small Countries Out-Perform (Spoiler: It's A Lot Like Startups)

Any time economists, politicians and businessmen talk about emerging markets, the conversation seems to drift invariably to China like the Death Star pulling in the Millennium Falcon. And it’s not only words; China frequently does the same tractor-pull with foreign investment, high-paying multinational jobs and talent. So how can a tiny country in the emerging world possibly compete?

This is one of my favorite topics, having done reporting trips to Israel, Rwanda, Colombia and Chile in the last year – and getting ready to do one to Singapore in October and hopefully Kenya early next year. The topic was also one of the better panels I attended at The World Economic Forum’s “Summer Davos” a few days ago. Appropriately enough it was for a small audience, while most people flocked to a panel about China. It’s also appropriate that I’m writing about it on the plane from huge China, headed back to tiny San Francisco—a city of well under a million that nevertheless houses the bulk of the hottest Web 2.0 companies.

It’s easy to look at the emerging world right now and get carried away with jaw-dropping demographics. By 2050 the United States will be the only G7 nation that is still one of the seven largest economies in the world. Our new peers, if Goldman Sachs and other researchers are right, will be China, India, Russia, Brazil, Mexico and Indonesia. That’s a stunning transition in fortunes and between now and then each country will be exploding with growth in its own way and that growth isn’t always easy for Western companies to exploit.

So if you are an investor or entrepreneur, why even waste your time trying to build something in a smaller country? Isn’t that like walking past a supermodel to hit on your little sister’s friends? I’ll give you two reasons: Israel and Singapore. These are two countries that had little in terms of natural resources and have far out-performed their larger neighbors thanks to a culture of entrepreneurship and playing to their natural advantages. In the late 1990s, Israel was home to more Nasdaq-traded companies than any other country and while returns have fallen off since, it still gets loads of venture cash– 30-times Europe on a per capita basis. Similarly tiny Singapore has just 2% of the population of its giant neighbor Indonesia but its GDP is 35% of Indonesia’s– despite Indonesia’s abundant natural resources. Less staggering, but still pretty impressive have been the economies of Iceland and Finland, which were both represented on the panel.

Here are some keys to small country success that most of the panelists agreed on. And a lot of ambassadors and statesmen were there taking notes: There are more small states than ever before, with one-quarter of the United Nations having a population smaller than the Chinese city the conference was held in. And everyone wants a culture of entrepreneurship. Rather than sending yet another president or delegation to the Valley, you should listen to these guys’ advice:

  • You have two road maps: Carving out a niche based on unique natural resources (what Iceland did with geothermal energy and other assets) or making yourself into a central hub for something (what Israel did for security tech innovation.) Said someone from Singapore on the panel “Our only asset is human capital.” You could say the same with Israel.
  • Don’t turn a blind eye to limitations; turn disadvantages into advantages. I hear a lot of countries trying to spin conversations away from their limitations instead of just owning them. Israel, for instance, indirectly benefited from its instability, in that most of the innovation in the late 1990s spun out of the army. And Israel was ideal to be an early beta country for Shai Agassi’s network of battery charging and switching stations Better Place because of the travel embargo placed on the country by its hostile neighbors. Israel is essentially an island. Similarly, Singapore’s strategy is to be an Asian guinea pig—a controlled spot to do market testing or prototyping for everything from new products to new energy and water systems for bigger emerging giants.
  • Think symbiotic relationships. The biggest reason Israel so outperformed when it came to startup returns was the country did an excellent job aligning itself with Silicon Valley. 15 years later, nearly every small country is seeking to do the same thing with China. Almost every small economy has done well, has a big brother that’s made huge use of its natural resources and human capital. The President of Iceland Olafur Regnar Grimsson, who was on the panel, said his size has been an advantage in doing deals with the global giants because it’s not a threat and there are no political dustups. “They know they can invite us into the house, even invite us into the bedroom, and know we’re still never going to take over the house.” That’s an interesting way of putting it…
  • They’re paranoid. No matter how well each country has done, they are paranoid it’ll get ripped away at any minute. Each of these countries has only had success over the last 50 years or less and they’re still in touch with how bad things used to be. And there’s the curse of success: One huge international giant, like Nokia in Finland, can have a disproportionate effect on the economy as it swings up and down with the market.
  • Unlike the US, they not only welcome but require government support. What works best isn’t erecting some incubator but favorable tax policy, labor laws that allow for rapid company formation and failure and incentives for foreign investors. Grimsson from Iceland said his country’s smartest move fifty years ago was setting up long term student loans for any citizen to go to college anywhere in the world.
  • You have to have a stomach for volatility. Iceland was brought to the brink of financial collapse and has only now clawed its way back, similarly Singapore’s GDP was down 8% last year but is up 18% in the most recent quarter. No emerging markets are for the weak-stomached but especially small, countries basing an economy on hit-or-miss innovation or risky public bets.

Notice that a lot of the advantages above sound similar to the generally held reasons that young tech startups outperform large, slowing moving public companies. Which lead me to think: Is it the medium-sized countries that have neither the agility and focus nor the market heft and near-endless resources the ones who really suffer as the global economic landscape gets transformed over the next 40 years?