Rise of the Micro-Multinational
* Report: The Rise of the Micro-Multinational: How Freelancers and Technology-Savvy Start-Ups Are Driving Growth, Jobs and Innovation. By Ann Mettler and Anthony D. Williams. Lisbon Council Policy Brief, 2013.
- 1 Summary
- 2 Excerpt
- 2.1 From the Introduction
- 2.2 Labor Trends
- 2.3 How Micro-Manufacturing is Revolutionizing Production
- 2.4 New Models of Social Protection
- 2.5 Six Business Platforms that are Revolutionizing the Start-Up Companies and Service Providers
"This policy brief is divided into four parts.
Part one ... is intended to introduce the concept of micro-multinationals and explain why we believe their dramatic arrival on the economic scene is but the first shot in a wider, rapidly unfolding revolution.
Part two will look in greater depth at the changing economic landscape and the forces driving micro-multinationals to the forefront of modern economic developments.
Part three will discuss the changes that micro-multinationals are themselves making on the world around us, and part four will look at the implications for policymakers and make eight recommendations."
From the Introduction
Ann Mettler and Anthony D. Williams:
"As crisis engulfs the world’s leading economies, there is great concern about job creation and energizing growth rates.
The sudden arrival of subdued, Japanese-style growth prospects for North America, Europe and the rest of the developed world – combined with years of sluggish employment figures – have given increasing urgency to the task of finding effective responses. But so far, nothing seems to have worked. That is not surprising, as traditional levers of policy intervention tend to be designed around the interests of economic incumbents – existing market players – rather than the newcomers that are today’s key engine of growth and jobs. Consider this: All net job growth in the United States between 1980 and 2005 came from firms less than five years old.
And, interestingly, in each year between 1997 and 2008, more than 2.5 million people simply created their own job by becoming entrepreneurs (and also created more than one million additional paid employment positions each year).
In other words, 65% of all jobs created in the US in that time were jobs that entrepreneurs created for themselves, making freelancing an increasingly important source of employment and a significant, albeit often overlooked, cornerstone of modern economic activity. In Europe, the numbers are similar. Some 32.6 million people are classified as self-employed, which accounts for more than 15% of total employment.
The vast majority of Europe’s self-employed, some 23 million, are freelancers, meaning they work for or in one-person companies. And while the crisis has had a negative impact on the overall employment situation in Europe, a European Commission study recently found that self-employed entrepreneurs were much more resilient to the economic downturn than dependent workers and employees.
At the forefront of this seismic shift in the way jobs are created and economic value added is a new type of company, the micro-multinational. Traditionally, these small, self-starting, service-driven companies would have been described as small- and medium-sized enterprises, or SMEs, but thanks to the Internet, the emergence of new business platforms and the increased openness of the global economy, these companies can enter markets with a minimum of bureaucracy and overhead.
Add to that their unparalleled ability to respond promptly to changing market developments, a collaborative DNA that often translates into superior innovation performance and the lack of the institutional inertia and legacy relationships plaguing larger organizations, and one begins to see the transformative and paradigm-changing potential.
Take Local Motors, a radically new kind of car company founded in Chandler, Arizona by Jay Rogers, a former US Marine with a mission to reinvent the auto industry.
Rogers doesn’t employ a design team and he doesn’t do much in-house R&D. Instead, he has an online community of 12,000 freelance designers from 121 countries that participate in contests and collectively design next generation cars.
Unlike its larger rivals, there are no massive three million square foot manufacturing facilities and no shiny global headquarters to house tens of thousands of office workers. Instead, he makes cars using a network of micro-factories, each one producing custom-built off-road vehicles designed for that particular region.
And the results have been spectacular: So far, he has designed and produced around 50 off-road vehicles (that’s the company’s niche) and plans to produce and sell 1500 more at roughly $75,000 [around €55,000] each. He employs around 15 full-time staff.
Examples like Local Motors may be on the extreme side – after all, not every micro-multinational is organizing freelancers on a project basis to take on bloated 20th century industrial behemoths such as the car industry. But it is a good example of the basic economics driving micro-multinationals to the forefront of today’s economy. Put simply, in the past you had to be large to gain global reach; today, this is no longer the case. Typically, a company like Local Motors can conceive and design a car in 14 months – not the three- to five-year development time it can still take Detroit and some European carmakers. And customers don’t need to schmooze with slick salesmen or visit expensive showrooms to choose their vehicles. Instead, many Local Motors customers take part in designing their own cars online, customizing production to get their perfect vehicle, and cutting out an expensive distribution network that drives up the price and slows down delivery. True enthusiasts can even visit the Local Motors factory and take part in building their car themselves.
But the truly transformational development is this: In the 19th and 20th century, firms needed to get big to attain the scale necessary to develop global distribution networks, to tap into global talent pools and to bring in the large revenue that drives profits and creates jobs. As the world enters the 21st century, this formula has been stood on its head. Today, many large companies are hampered by their size – bogged down in bureaucracy and overstaffing that makes them painfully slow to take decisions and often blinds them to important new opportunities emerging in today’s markets. This, in turn, leaves them singularly unprepared to take advantage of the radical new opportunities on offer, and facing the world with a cost structure that makes it difficult for them to compete with leaner, new enterprises like Local Motors. The result is that large companies are under increasing pressure to deliver more with less – a fact which may well account for the jobless economic recovery we have seen in 2010 and 2011, and could well be an indication that big companies, no matter how much economic stimulus is applied, are never going to deliver the jobs that politicians are counting on them to provide.
But it also means that entrepreneurs, freelancers and the self-employed are in a position unlike ever before to become the engine of jobs, growth, innovation and future prosperity – and to deliver on their dreams. Put simply, technology puts them in the driver’s seat, allowing them to scale up and deliver products without having to build the huge infrastructure and bureaucracy that 20th century enterprises relied upon. The difference over time is a revolution in the way economic value is created, with smaller companies now able through technology to gain the scale that only larger ones could previously aspire to. Under these circumstances, the speed, agility and responsiveness that their small size permits becomes a major asset, rather than a liability.
And it is no surprise that, more and more, big companies are starting to depend on the ability of smaller companies to help them meet deadlines, deliver top-of-the-line work and effectively embrace fast-changing market conditions to which their own sclerotic management structures are not capable of responding quickly enough.
This has important implications for the labor market, too. Policymakers must understand and embrace the fact that jobs are being created not by yesterday’s economic heroes, but by tomorrow’s emerging champions – and focus their policy on stimulating the creation of more globally-focused SMEs and creating a social system that facilitates and supports work in this area, as we will argue in part four of this policy brief. Undoubtedly, it is a good news story – unless you choose to view it from the nostalgic lens of yesterday’s economy. There has never been a better time to be an entrepreneur, to write your own job description, to create a profession for yourself and to find your own way forward in a highly diversified modern economy that puts so much power at the mere click of a keyboard. And that is exactly what more and more people are doing."
1. Most jobs are created by young companies and start-ups. OECD research shows that when firms with similar characteristics in terms of country, industry, firm size and age are compared, age explains a substantially larger share of the overall variation in job creation and total job reallocation than size.
In other words, job creation declines with firm age. It is thus not surprising that, as the figures cited at the outset of this policy brief show, firms less than five years old accounted for all net job growth from 1980-2005, and business start-ups account for almost 20% of gross job creation in any given year, despite the fact that they account for only 3% of overall employment in the US.
2.Today technology makes it possible for small companies to gain the reach and traction of big companies at very low cost. Nothing has empowered and enabled small- and medium-sized companies more than technology. A recent study found that at least one-third of SMEs make extensive use of web technologies, and those that do have benefited tremendously, using new Internet-based services to perform the functions that entire departments once performed for large corporations.
Against this backdrop, it makes sense that SMEs that heavily use web technologies grow and export twice as much as others.
They also create twice the number of jobs. A strong presence on the Internet not only benefits the companies in question but also the economy at large. In the United Kingdom, for example, 71% of SMEs use the Internet with medium or high intensity and the Internet contributes about 5.4% to British GDP. In Russia, on the other hand, only about 41% of SMEs have medium or high Internet usage and the Internet only contributes 0.8% to Russian GDP.
3. New platforms and online business services are making it easier for small companies to focus on areas where they add value. In the past, entrepreneurs had to build most of their business infrastructure from scratch, adding tremendously to their costs and workload. Today, micro-multinationals have the same capabilities at their fingertips as their macro-counterparts because they can purchase most necessary back office services at minimal cost online. And they also enjoy a symbiotic relationship with a vast secondary market for global business services.
From globally accessible cloud computing services to mobile-to-mobile international phone connections and online sales and advertising platforms, the possibilities to connect, outsource and streamline are endless. From their first day on the job, micro-multinationals can access international markets – once the exclusive domain of corporate giants – via readily accessible platforms and services provided by companies like Google Inc., Salesforce.com, Skype, Facebook, Amazon.com, eBay Inc., FedEx Corp. and many others.
In addition to improving company performance, these platforms are also increasingly important in finding new clients and matching talent pools with job opportunities. Entrepreneurs can access all of these business services at a fraction of the cost of building and managing them internally. “You can bootstrap a company much more easily,” says Kim Polese, CEO of SpikeSource, an open-source software services start-up that has flourished in this new environment. Ms. Polese estimates that her company’s expenses for hardware, software, and network bandwidth are as little as one-tenth of what they would have cost five years ago.
4. Internationalization – the key to success for almost all contemporary businesses, large and small – is easier to achieve via the Internet. To this day, and despite the on-going talk of globalization, internationalization is still not sufficiently recognized as a key driver of company growth, success and profitability, perhaps because of the inherently domestic focus of policy making and policymakers. However, financiers and venture capitalists know that successful internationalization – and the effort to use the Internet to tap immediately into a global customer base of seven billion potential consumers – can make all the difference, which is why they now encourage the start-ups they fund to implement global strategies from day one to gain access to larger markets and reduce costs. According to a USA Today survey of venture capital-backed startups created since 1999, nearly 40% have employees outside the US.
And 60% of companies with fewer than 500 employees have budgeted one to five million dollars on outsourcing this year.
In an analysis by the London-based Centre for Economic Policy Research, researchers found that companies that are “regionally minded” are four times less likely to innovate than their globally connected counterparts.
In terms of product development, the addition of just one new international relationship improved a firm’s odds of successfully introducing new ideas by 26%.
5.Today’s workforce has changing priorities. Micro-multinationals like Local Motors may be enabled by technology, but they are inspired by people’s passions and by their desire to master their own economic destiny. Indeed, countless research studies have shown that growing numbers of talented and creative people wish to develop their careers in a more flexible manner and pursue livelihoods outside the confines of traditional bureaucracies.
The 2010 Freelancer Survey, for instance, cites among the top five reasons to decide to freelance, the desire to have more flexibility, more creative control over projects, to be able to work from home, to make more money and to grow a business.
These “free agents” defy the typical image of the security-craving, risk-averse employee who strives for a lifelong job with a safe employer, ideally the government or a large, established corporation. Freelancing is particularly important in economies with a large creative industry. In the United Kingdom, for instance, freelance numbers increased by 15-20% between 1998 and 2008 and generated an estimated £222 billion [€254 billion or $346 billion] in sales in 2006, or approximately 8% of total private sector turnover.
The shift towards free agency is well documented in the work of scholars and commentators such as Richard Florida, Daniel Pink and Robert Reich. 19
Collectively, they suggest that
modern economies have entered a new era of work, one where most workers are untethered from large institutions and where conventional institutional bureaucracies cease to be the dominant organizational form for business, government and society. Or in the words of Andrei Cherny, senior fellow at the Center for American Progress: “In this economy, each worker is, in effect, their own small business – responsible for guiding their own career and economic future.”
The shift towards free agency has picked up since the recession, but the transition has also been aided by booming marketplaces for freelance talent through such web-based service providers as Elance and oDesk.
In July 2011, some 250,000 companies paid 1.3 million registered freelancers on oDesk, a web portal which bills itself “the marketplace for online work teams,” for over 1.8 million hours of work, up from half that amount a year earlier. The “talent-as-a-service” model is both attractive to employers who can get access to valuable skills on demand, and to freelancers, who can build reputations as reliable service providers and earn money from the comforts of their homes.
Of course, not all free agency can be attributed to rising entrepreneurial zeal or the desire for greater career flexibility. For a significant segment of the labor market, free agency is not so much a career choice as it is a reality imposed by a sclerotic, two-tier labor market that has forced many into taking employment matters into their own hands.
6. Experienced and highly skilled individuals are setting out in record numbers to work for themselves. During the last decade, until 2008, the total number of self-employed was steadily increasing. In Europe, there were 32.6 million self-employed in 2008 compared with 30.6 million in 2000.
In the US, there were 15.8 million self-employed in 2008 compared with 14.6 million in 2000.
Following the crisis in 2008, the numbers of self-employed declined slightly. However, people employed in the self-employment sector showed greater resilience to the unfavorable economic conditions, at least in Europe. In 2009, the number of self-employed fell by only 1% compared to a 2% drop in the number of dependent workers.
Also, and contrary to conventional wisdom, self-employed Europeans are not youngsters. On the contrary they tend to fall within a higher age group with almost 40% over the age of 50.
The same holds true in the US, where the highest rate of entrepreneurial activity belongs to the 55-64 age group over the past decade. The lowest level of entrepreneurship is recorded by the 20-34-years-old age bracket.
Interestingly, many of the self-employed choose not to employ other people and instead remain one-person operations. Of the more than 32 million self-employed people in Europe, 23 million were freelancers.
On the upside, these freelancers represent a potentially significant pool of latent job creators that could be activated if equipped with the training, mentorship, resources and incentives they need to grow their businesses. Collectively, these developments are reshaping our economies in fundamental and lasting ways. But our political institutions have been slow to adapt.
Precious financial resources have been poured into propping up yesterday’s industries and political capital has been spent on maintaining the power of economic incumbents, while Internet-empowered start-ups like the micro-multinationals described in these pages have been largely ignored, even though they are among the only kind of companies creating market-driven jobs these days. The result has been, not surprisingly, subdued economic growth and a distinctly stagnant job market.
Knowing what does not work, it is now time to shift gears and finally to use the crisis as a once-in-a-generation opportunity to lay the foundation for a “New Work Order” in which the future is seen not as a challenge we can’t meet but as an opportunity that we should make available to all.
How Micro-Manufacturing is Revolutionizing Production
"Until recently, only large companies had the manufacturing muscle to bring physical goods to the mass market. But thanks to contract manufacturing in China and affordable 3D printing, yesterday’s factory is evolving into a global community of custom design and personal fabrication services that open up the world of physical product manufacturing to just about anyone with some ingenuity and a good idea.
Today, a clever inventor or product designer can set assembly lines in China into motion with nothing more than some keystrokes on their laptop. A few days later, a prototype will be at their door, and once it all checks out, they can push a few more buttons and be in full production, making hundreds, thousands, or more. The era of the virtual micro-factory is here and for the first time entrepreneurs can design and sell products to a global market without a physical plant or even inventory. In fact, with new services such as Ponoko, based out of New Zealand, micro-multinationals can arrange to have their products manufactured and delivered direct to customers virtually anywhere in the world. Upload a design to the website, select the materials and Ponoko does everything else. Entrepreneurs who are just getting started can even post their products to Ponoko’s marketplace. Says Chief Strategy Officer Derek Elley: “It’s a bit like low-cost global manufacturing and peer-to-peer commerce straight from your living room.”
Ponoko and other micro-manufacturers have benefited tremendously from an extraordinary shift in the business practices of Chinese factories. During the economic slowdown, manufacturers seeking new customers became increasingly flexible, web-centric and open to custom work where the volumes are lower but the margins higher. A search on Alibaba.com, the largest aggregator of China’s manufacturers, products, and capabilities, pulls up a long list of suppliers that will manufacture product designs in batches as small as a single unit. Alibaba’s Instant Messaging service even translates between Chinese and English in real time, so customers can communicate with suppliers using their native language. Since its founding in 1999, Alibaba has become a $12 billion [€8.9 billion] company with 45 million registered users worldwide.
The upshot of micro-manufacturing platforms like Ponoko and Alibaba is that creators can now turn their ideas into tangible offerings with less risk, lower costs, instant scalability and less complexity – and without the need for large, highly-trained and highly-paid workforces on their own payroll. In turn, consumers get lower prices for individualized products, and perhaps most importantly the decentralized manufacturing model promises to reduce the environmental impact tied to production – mostly through the elimination of intermediaries, material efficiency and reduced need for transportation.
Making low-volume, high-value and customized components is all very well, but could 3D printing and micro-manufacturing really compete with mass-production techniques that have been honed for over a century? Established techniques are unlikely to be swept away, but micro-factories already make everything from cars to bike components to bespoke furniture in any design you can imagine. Amsterdam-based Freedom of Creation, renowned for its lighting designs, has 3D-printed fixtures gracing the interiors of luxury hotels around the world. Canada-based Weatherhaven, which supplies portable shelters, digitally explores and validates its custom designs without having to build physical prototypes.
This saves the company up to $100,000 [€73,953] per shelter. Even the medical profession foresees a time when more sophisticated 3D printing will produce replacement organs or drug therapies. And yet, these developments are just beginning. Micro-manufacturing’s most revolutionary developments will manifest when 3D printers reach price points attractive to ordinary households. MakerBot’s Thing-o-Matic (the company’s most affordable 3D printer) comes close already. Literally a factory for your desktop, this laser printer-sized appliance retails for $1299 [€960] and can print just about any 3D shape into plastic (five years ago, you couldn’t get anything like this for less than $125,000 or €92,441).
From custom chess sets to decorative lampshades, MakerBot enthusiasts seem to have endless imaginations when it comes to dreaming up new uses. Users who like to tinker can share their custom modifications with like-minded “makers” who congregate on Thingiverse.com, a collaboration and discussion platform where users swap product designs by the thousands.
True, these makers may be in the vanguard – for now. But momentum is building quickly. Terry Wohlers, who produces an annual in-depth study of the advances in additive manufacturing technologies, estimates 3D printing will grow to become a $5.2 billion [€3.85 billion] industry by 2020, up from $1.3 billion [€961 million] in 2010. Meanwhile the most recent Maker Faire in San Francisco — an event that caters to a growing population of makers and their fans — attracted more than 100,000 engineers, programmers, tinkerers, hackers, builders and general-interest do-it-yourselfers. And with local “hackerspaces” and Maker Faires now booming in urban centers around the world, it’s only a matter of time before the technology matures to a point where the mainstream market follows.
When that happens, manufacturing-intensive industries will confront the same dramatic upheavals as those faced by publishers and media empires in the wake of the digital revolution. In time, 3D printing capabilities will make remixing and sharing atoms as easy as manipulating and disseminating bits. Tinkerers might even swap product designs over the Internet and print out a physical product in the convenience of their living rooms. As science fiction author and blogger Cory Doctorow writes in Makers, his new book on the subject: “The days of companies with names like ‘General Electric’ and ‘General Mills’ and ‘General Motors’ are over. The money on the table is like krill: a billion little entrepreneurial opportunities that can be discovered and exploited by smart, creative people.
New Models of Social Protection
Most contemporary social protection systems were designed for a very different economic reality, essentially the post-WWII industrial era, with its mostly male workforce, employed in steady, often for life, jobs in big corporations, incremental innovation and an underlying demography that made pay-as-you-go pension systems seem like a sustainable proposition. We of course now know that the job for life is not only an illusion but for many people who aspire to have more flexibility and control over their careers also an undesirable trap.
Innovation is disruptive and a formerly upright demographic pyramid has been turned upside down in a matter of two to three generations, undermining the long-term viability of public pensions and with it eroding the public trust that is so crucial in sustaining them. Few people are more likely to fall through the cracks of the existing social protection systems than the self-employed and freelancers. On both sides of the Atlantic, people in these employment segments have a higher risk of poverty and are more likely to lack basic social protection, such as maternity leave, despite the fact that they put in significantly more working time than others. In addition, self-employed and freelancers are imminently more exposed to economic upheavals, meaning that they are often the first to feel firsthand the effects of a downturn. What does this mean concretely? In Europe, for example, 18% of self-employed people are classified as poor versus 6% of employees, even though the self-employed tend to work on average almost 44.4 hours a week (and 49.7 hours for employers), compared to 36.8 hours a week for employees.
In the United States, on the other hand, in this latest recession 81% of freelancers were at some point either unemployed or underemployed (without qualifying for unemployment benefits), 40% did not get paid by deadbeat clients and 39% cut back or eliminated their health coverage.
It may sound paradoxical but as more people realize that they can no longer count on the state or employers to provide for economic security, it is more and more likely that even greater numbers of individuals will opt for selfemployment and freelancing because despite the vulnerabilities, it is still one of the best ways to take employment matters into their own hands.
The economic and societal impact of micro-multinationals is clearly felt yet poorly understood. They are changing the division of labor between large and small organizations, between developed and emerging economies and are leading the way on innovation; they defy conventional wisdom and turn the old policy mantra that “big is good” on its head. Being a small organization is no longer a liability but an important asset, a comparative advantage vis-à-vis bigger players. Yet, many of the entrepreneurs and freelancers spearheading such ventures face a disproportionate amount of risk and vulnerability, feeling left behind as social systems designed for a different economic age have gone unreformed and are unable to meet their needs. Grasping these new realities is, granted, a quantum leap for most policymakers, but drawing the right lessons now could go a long way towards restoring growth and kick-starting employment in our battered economies.
Six Business Platforms that are Revolutionizing the Start-Up Companies and Service Providers
"It’s impossible to fully appreciate the rise of micro-multinationals without understanding how the Internet makes contracting for business services increasingly cost effective. Today, everything from market research to back-office support to contract manufacturing is available on tap. And most, if not all of it, can be managed over the web. Suddenly, the small can become very large very quickly with superefficient business models that allow entrepreneurs to design, develop and deliver their products and services around the world with a fraction of the resources that would have been required just a decade ago."
Start-ups can’t breathe without a steady supply of oxygen in the form of investment capital. In the past, entrepreneurs could turn to their friends and family, their bankers, and/or seek a venture capitalist. Now with new collaborative venture funding platforms such as Y Combinator, TechStars and Vencorps, entrepreneurs can not only seek out short-term funding from a global online community; they can also find like-minded collaborators, get access to resources, seek out mentoring and connections, and even win new customers.
- Y Combinator
Unlike previous generations, today’s entrepreneurs can buy, off the shelf, practically any computing and communication function they need to run a company, from storage to word processing to free video chat services. Users of Amazon’s cloud computing services, for example, pay 10 cents an hour to harness its nearly unlimited computing capacity, allowing anyone to leverage the size and reach of the world’s greatest e-commerce engine – from the computer geek testing a new algorithm from her dorm room to a Mumbai-based start-up that wants to roll-out a new call center service without spending all its capital on computers.
- Google Apps
- Amazon Cloud
Professional services marketplaces
Business process outsourcing is no longer just for big multinationals looking to shed costs. For entrepreneurs, marketplaces like Elance and Guru.com provide flexible, on-demand access to talented people and business capabilities for much less than it would cost to hire or build internally. Business owners can browse detailed work samples and customer ratings for thousands of vendors in service categories ranging from accounting to web design. Elance provides built-in software to track works in progress and handle billing, payment, and tax records, while Guru.com allows buyers to put funds in escrow until work is received.
- Brickwork India
- Mechanical Turk
Until recently, only large companies had the manufacturing muscle to bring physical goods to the mass market. But as the machinery of factory production become available to individuals, anyone with a good idea and some ingenuity can design and sell goods globally without a physical plant or even inventory. Thanks to contract manufacturing in China and affordable 3D printing, virtual micro-factories now make everything from bike components to bespoke furniture in any design you can imagine. In the near future, tinkerers might even swap product designs over the Internet and print out a physical product in the convenience of their living rooms.
- MakerBot Industries
The growing value of intellectual property, combined with the connectivity provided by the web, is fuelling the creation of new online marketplaces to facilitate patent licensing and IP transfer across firms, industries and regions. For micro-multinationals, these marketplaces for innovation have tremendous competitive and economic advantages. Firms without deep R&D capabilities can license leading-edge technologies for much less than it would cost to develop in-house. Firms that are strong innovators, on the other hand, can increase their return on R&D by licensing inventions to innovation-hungry companies.
In the past, large vendors, distributors and product manufacturers dominated retail outlets to consumers. Opportunities to sell products to the masses were limited by the product placement fees demanded by powerful retailers. Today, e-commerce platforms such as eBay, Amazon, Etsy and Apple’s AppStore have opened up the world of retail to a global network of smaller producers and a long tail of niche products and services. Savvy retailers can use the power of social media to engage with niche audiences or expand their reach into overseas markets using online advertising platform like Google Adwords.
- Google Adwords
- Amazon AppStore