How FedEx made Tennessee a hub of global commerce


Feb 20, 2020

Earlier this month I traveled to Nashville, Tennessee, to speak at a conference for socially-minded entrepreneurs. I explained that, in our research at the Christensen Institute, we’ve discovered that a specific type of innovation—market-creating innovation—is a core engine for causing prosperity to take root in a region. This type of innovation transforms complicated and expensive products into ones that are simple and affordable such that many more people who weren’t historically able to buy and use them now can. As these new consumers form new markets, companies have to create more jobs in order to serve them, and a virtuous cycle of growth ensues.

It usually isn’t difficult for a prosperous economy to trace its roots back to market-creating innovations. The United States, for example, was by many measures as impoverished in the 19th century as many poor countries are today. But market-creating innovators like Isaac Singer, Henry Ford, George Eastman, and countless others democratized access to products and services that pulled many, many consumers into the markets they created, kicking off a domino effect for growth.

Prosperity starts with an idea

As we discussed some of these innovators in the workshop I led in Nashville, it occurred to me that we need not look very far to find a local example of one that helped Tennessee become a central hub for the commerce of the entire nation: Federal Express. 

The idea for an integrated express shipping service for time sensitive cargo first entered the mind of Frederick W. Smith in 1965 while working on an assignment for an economics class at Yale University. He believed an integrated airfreighting network devoted entirely to express shipping could deliver cargo quickly and efficiently. Smith’s professor was less enthusiastic about the idea and gave him a C on the assignment. Still, he felt that he was onto something big. 

One of the reasons people initially doubted the viability of the idea behind FedEx was that they thought it would be competing with the Postal Service, which was undoubtedly a cheaper option. But they had the categories wrong. Smith envisioned solving a different problem altogether—reliably delivering time-sensitive mail—something the postal service didn’t have the capability to solve. In fact, FedEx didn’t aim to be a more expensive competitor to post offices, but rather a simple, affordable alternative to competitors like courier services and passenger airlines. 

Before Smith founded FedEx in 1971, if someone needed to ship something quickly, such as medication or a last-minute birthday card, the only available option for doing so was via passenger flights. These were designed to be convenient for travelers, but were very inefficient for shipping mail; airlines mostly scheduled flights during daytime and didn’t have any warehouses or delivery services for mail when it reached its destination, slowing down the shipping process and making delivery to final recipients unpredictable. The system effectively made reliable express shipping impossible, and often the only way to guarantee overnight delivery was to hire an expensive courier to sit on a plane and deliver a parcel by hand.  

These hurdles made express delivery a costly, complicated, and time-consuming endeavor, so the vast majority of people chose to go without a solution. We call these people nonconsumers—people who forgo a product or service from which they would otherwise benefit because it is too expensive, complicated, or inaccessible. When it came to solving the problem of last-minute shipping, FedEx would essentially compete with either poor workarounds or nothing at all. 

Delivering prosperity

As can be seen from FedEx’s enormous success today, Smith’s hunch was correct. Still, building a brand new market wasn’t easy. In order to serve the rapidly growing population of customers, Smith had to build his own logistics network with planes, warehouses, stores, and delivery vehicles. He had to find, hire, and train hundreds of thousands of people to operate this new network, and he had to fund the venture with his family’s money and maxed-out credit cards until investors began to see the potential of the new market he had created. 

His investment paid off, and in the years since, FedEx’s impact has been widespread and profound, with the company becoming a deeply entrenched part of the modern economy. It has grown to become the world’s largest transportation company, operating in 220 countries, employing more than 490,000 people, and processing more than 15 million shipments every day. Just this morning as I wrote this blog, I saw three FedEx trucks pass by my window before lunchtime.

Importantly, while FedEx has made life and business easier for a lot of people across the globe, it has also had a profound local impact. Shortly after founding FedEx, Smith moved its headquarters to Memphis, Tennessee, where it has underpinned the local economy. Beyond being the city’s largest employer, directly employing more than 30,000 people, FedEx has also invested heavily in the infrastructure of the Memphis International Airport, the world’s busiest cargo airport. The airport accounts for one in three local jobs in the greater Memphis area and pulls more than $28 billion into the region’s economy every year. As Jeff Wallace, an economist who led a recent study on the economy of Memphis put it, “If you were to remove Memphis International Airport and FedEx from our economy, we’d be in a world of hurt.”

FedEx’s impact on prosperity in Tennessee and beyond has been enormous. However, through studying more than a hundred market-creating innovators like Fred Smith, we’ve learned that his experience, while perhaps unusually large in scale, is not an anomaly. In the act of creating new markets, innovators set off a series of events that pull prosperity, in the form of profits, jobs, and improved business culture and infrastructure, into the region where they occur.

That day in Nashville as I watched the light bulbs go on when people grasped the power in the idea of market-creating innovations, I couldn’t help feeling optimistic about the future of Tennessee and beyond. As Fred Smith’s story illustrates, when capable people arm themselves with the right ideas, they can make prosperity a reality.

Lincoln Wilcox is a research associate at the Christensen Institute, where he researches ways in which individuals, businesses, governments, and nonprofits can leverage innovation to create prosperity in low-income countries and communities.