Imagine a country where the vast majority of the population lives in rural areas, more than half go hungry, just 10% have attended high school, and the average lifespan is 45 years.
Countries such as Malawi and Somalia may come to mind, but that country is the United States of America, in the mid-1800s to early 1900s. Less than two centuries later, the US is virtually unrecognizable. How did the United States climb out of poverty and become the world’s wealthiest nation?
In our research studying the economic trajectory of countries over the past several centuries, we discovered that America’s rags-to-riches story actually followed the same predictable path as other now-prosperous countries—namely, it fostered a culture of innovation. And not just any type of innovation: market-creating innovation.
Market-creating innovations transform complex and expensive products into simple and affordable ones, enabling more people to benefit from them. In contrast with other types of innovation, the markets they create unleash a domino effect of sustainable economic development, lifting thousands, if not millions, out of poverty in the process.
Throughout the 19th century and into the 20th market-creating innovation in America was pervasive. In 1851, for instance, Isaac M. Singer introduced his highly efficient illustrious sewing machine, which made sewing simple and affordable. The machine reduced the amount of time it took for the average person to sew a piece of clothing from one day to one hour, and freed up hours upon hours for hard-working women who were no longer tethered to their needle and thread. A clothing industry was born thereafter, and it resulted in vibrant economic activity. When Singer died, his company had directly created tens of thousands of jobs, and enabled millions in related industries.
Decades later, Kodak’s George Eastman figured out a way to make photography—which had formerly been available exclusively to the wealthy—simple and affordable. His Brownie camera sold for just one dollar ($27 in today’s dollars), and enabled millions of Americans and people around the world to enjoy photography. As a result, Eastman directly created more than 120,000 jobs and the subsequent markets his innovation enabled created thousands of others.
Perhaps most illustrative of the impact market-creating innovation has on an economy is Henry Ford’s Model T. In the early 1900s cars weren’t affordable to the vast majority of Americans, so Henry Ford created his simple, albeit less luxurious, Model T. In prioritizing affordability and simplicity (other cars during that time required a certain level of expertise to be driven), the car transformed nonconsumers into consumers. And just like that, a new market was created.
Apart from the tens of thousands of jobs Ford created in his organization, the market he created spurred significant investment in American infrastructure by providing a tax base to support construction of roads. Eventually, as more people gained access to convenient transportation, investments in other things, such as restaurants, schools, and suburbs skyrocketed. America was one step closer to transforming its economy to the economic powerhouse we know today. This example, like countless others, speaks to the impact market-creating innovations have on a country’s development.
Unfortunately, innovation is often perceived as something that can only happen after a country has developed. This line of thinking is at the root of an ineffective development system that funnels billions of dollars into poor countries in an attempt to help them “develop.” Much of this funding goes toward conventional development projects such as building schools and water wells, improving public administration bureaucracy, or building institutions. Some of these efforts may pay off in the short run; communities gain access to clean water (at least until the wells break down) and more children attend school. But they don’t create the lasting change poor countries need in order to sustainably prosper. A better path to development would be to go the way of America, South Korea, Japan, and countless others that have become prosperous, thanks to the pioneering efforts of market-creating innovators.
With a radical shift in the conventional approach to innovation and development, today’s impoverished countries can also become gleaming examples of opportunity and prosperity.