Investing to create greater shared prosperity

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Sep 6, 2019

If an impact investor traveled back in time to South Korea in the 1960s looking for companies poised to have a positive social influence, she probably would not have thought twice about a budget three-wheeled automobile manufacturer called Kia Motors. At this time, the war-torn country was home to millions of people living in desperate poverty, but Kia’s mission wasn’t aligned with any social causes of the day, nor did it donate a percentage of its profits to charity. Because it sold cheap products to low-income customers, it might not have looked like an attractive financial investment either. 

However, Kia motors went on to become a giant of the global automobile industry. What’s more, it became an engine that helped power South Korea out of poverty and transformed it into the prosperous country it is today, improving the lives of millions.

Investing with a conscience 

Socially-conscious investing is a relatively new phenomenon; the term “impact investing” was coined only in 2007. Yet despite its youth, the industry is growing quickly, and socially-concerned investments now make up one out of every four dollars of professionally managed assets. 

The result of this increasing demand for ethically-minded companies has assured that more and more firms make an effort to positively impact their communities. While this is undoubtedly a good thing for society, it’s not always easy for investors and consumers to determine which companies are worthy of their support. First, it remains difficult to truly measure the impact a given company actually makes. Furthermore, not all companies that provide valuable social impact look alike, and some with important but less obvious impacts—for example, fighting crime by creating jobs—are easily overlooked. In order for investors to increase the impact of their investments, it’s vital they understand what types of companies do the most to create prosperity and raise the quality of life for people in a society.

Finding success a wheel at a time

To illustrate, let’s look at Kia’s evolution to becoming a global powerhouse. In its early days following the Second World War, the company built itself around an opportunity it saw to help Koreans move around more easily. Even though Korea’s market for automobiles was minuscule at the time, executives at Kia recognized that there were tens of millions of nonconsumers in the region—people who would benefit from a transportation solution, but for whom the conventional options, like regular cars, were too expensive, complicated, and inaccessible. In 1952, it started selling bicycles, and ten years later it released its first three-wheeled automobile. These products proved extremely popular, and the company grew quickly. It eventually began selling cars in 1974.

For those who could have seen its potential early on, Kia Motors would have been an excellent financial investment. What began as a humble bicycle manufacturing company now pulls in $50 billion in revenue annually. Because Kia created a new market out of the millions who couldn’t afford more expensive cars, it avoided competition with incumbent automobile powerhouses like Ford or General Motors. Its goal was not to compete with larger auto manufacturers to make the best cars, but rather simply to provide an affordable transportation option for the millions of Koreans for whom traditional cars were too expensive. This gave the company time to iterate and adapt its products to suit the needs of its customers, and it helped Kia develop a strong brand as the first mover in the new market it created. 

Significantly, Kia provided South Korea with enormous positive social returns as well. The increasing prevalence of its cars pushed the government to build roads and create institutions to regulate the driving industry. In addition to making people safer, this also built a strong foundation for a growing economy with transportation needs. What’s more, the government was able to use the billions of dollars of taxes the company generated to help pay for it. Kia has also directly employed hundreds of thousands of people over the years, in addition to many more who have found work in related industries that developed alongside the rise of automobiles in the country, such as tourism, restaurants, and hospitality. And it has created demand for education and provided training for employees. Kia’s impact on increasing the quality of life for a population of people who lived in poverty only a few decades before cannot be overstated.

The Kias of tomorrow

All of this came as a result of Kia discovering an unmet need and thereby creating a new market for transportation products in South Korea. In our research, we refer to this as a market-creating innovation. Kia was not South Korea’s only market-creating innovator following WWII; companies like Hyundai, Samsung, and LG followed the same pattern of creating simple, affordable products that democratized access to transportation and technology solutions that had previously been out of reach of the average South Korean. 

We’ve found this pattern holds true across continents and throughout history: whenever innovators transform previously expensive, complicated, and inaccessible products into ones that are simple and affordable, they create a brand new market and set off a domino effect of development, leading to prosperity among populations of people that often didn’t enjoy it before. 

Today’s socially-conscious investors consider many important environmental and social factors in their investment decisions. But as Kia’s story demonstrates, such investors would also do well to keep an eye out for market-creating innovations, which offer another powerful avenue toward making a positive impact. In doing so, they will discover the Kias of tomorrow—companies with a unique potential to succeed financially while also unleashing prosperity across the globe.

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