Creative destruction: In business, death is a part of life

By Nonso Obikili, Contributor   |   21 February 2017   |   3:00 am  

Economic growth is all about businesses increasing productivity, that is, businesses getting better and better at doing things. Be it increasing the yield per hectare in agriculture, or the products created per worker in manufacturing, or even the number of haircuts per hour. Increasing productivity is all about businesses making the right decisions on what to spend on, what to produce, how to produce, how to treat customers, and a whole range of other things.

However, not all businesses are equal. Some businesses do things a certain way, while others act differently. Some businesses decide to treat customers politely while others do not. Some choose to run their services on time, while others do not. Some choose to take unnecessary risks while others do not.Or maybe a business was doing perfectly well until some other business came in with a better product, or better service. For a variety of reasons, some businesses can end up in positions where people don’t want their products or services anymore. Business end up on their death bed.

The question, is what should be done to businesses that are about to die? Creative destruction is the idea that the process of productivity growth involves new businesses and new ideas replacing old businesses and old ideas. It is the idea that if new businesses are to thrive, some old businesses have be destroyed in the process. Attempts to prevent old businesses from dying just lead to a less than best scenario.Take for example, a scenario where a company invents a new technology that implies that people wanting to take photographs no longer require film. Maybe the company invents an all-digital process.

The consequence of this innovation is that companies who previously used to produce cameras that use film will naturally struggle and eventually be on their death bed. Are these companies dying a problem? Of course not. The industry is probably better off with cheaper cameras and more adoption due to the innovation. In that context, keeping the old camera technology companies alive is a waste of resources. They either need to transition to new technology or die.

Or another example, where an airline is so badly run it has a reputation for being perpetually late and therefore unreliable. If the horrible service provision leads to passengers eventually abandoning that airline, should it be kept alive at all costs? On the one hand if the airline shuts down some economic activity and jobs will be lost. On the other hand, the airline leaving the industry will allow other airlines, with better organization expand to fill up the gaps. In the first instance, you end with a better run more reliable aviation industry. In the second you remain stuck with airlines who maintain their unreliable services, to the detriment of the industry.The idea of new businesses replacing old businesses, new technology replacing old technology, and new ideas replacing old ideas is at the core of productivity growth in many developing and developed countries. It is for this reason that many countries have bankruptcy laws for businesses, forcing businesses on their deathbeds to either restructure and re-emerge better, or die and exit without causing any major headaches. Of course, there are instances where rescues are required.

The banking sector, for instance, which runs on trust is prone to periods of panic which can create temporary problems. Failure of some types of businesses can also result in systemic risks for the economy. So there will always be cases where some type of intervention is necessary. For the most parts though, businesses are usually allowed to die.However, in Nigeria, we seem to be opposed to the idea of businesses dying, especially if they are big enough to be noticed. Every other week there is some intervention fund being launched to keep some moribund industries alive. The classic example of this behaviour is in the non-stop intervention for the textile industry. Since at least the 1950s the Nigerian textile industry has been on its deathbed, in need of some form of protection or intervention.

Almost every government since independence has launched some type of special intervention program to revive the textile industries. All the interventions have failed.More recently we have had interventions by AMCON keeping banks and even airlines alive. The story of the banks which were bailed out in 2009 is there for all to read. Most of the distressed banks from that episode have survived in some form, but seem to always be in perpetual danger.Arik air is the latest in a string of businesses taken over, or rescued, by AMCON. Driven again by the idea that businesses can’t be allowed to die.As a wise man once said, “Before you can usher in the new, you first have to get rid of the old”. If we are trying to build an economy that works, that can create jobs, and that can drive Nigeria into the future, we will have to let some old ideas, and some old businesses die.

Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa and tweets @nonso2. The opinions expressed in this article are the author’s and do not reflect the views of his employers.

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