Do you know that the British East India Company in the eighteenth century ranked well above the twentieth as a global power?
Further ahead, in 2003, John Talton, in his reporting on Walmart, pointed out that the annual income of Walmart is well above the gross domestic product (GDP) of most sovereign states. With sales of $256.3 billion in 2003, Walmart would have ranked twentieth, just above Austria.
This isn’t just trivia.
A factor common between the East India Company and Walmart is the economic policy in which both businesses flourished. East India Company expanded its operations globally by successfully enforcing free trade in the colonised countries. But while colonisation brought along some of the most exploitative after-effects, we will focus on the broader overarching theme of why it survived:
In simple terms, free trade is a policy that promotes the unrestricted flow of goods and services across borders without any barriers such as tariffs, quotas, or subsidies. This means that countries that adopt free trade policies allow imports and exports to be traded without any restrictions or interference from the government.
And there are definite upsides to operating in a free trade economic environment.
- Free trade policies promote international competition, which can lead to greater efficiency and innovation as businesses work to produce goods and services more effectively and at lower costs. This can ultimately result in lower prices for consumers, as companies are able to pass on cost savings to their customers.
- Free trade policies can increase the variety of goods and services available to consumers, as businesses are able to access global markets and offer a wider range of products. This can lead to increased consumer choice and better-quality products as companies strive to differentiate themselves in a more competitive marketplace.
- Free trade policies can help promote economic growth and job creation, as businesses can access larger markets and benefit from increased efficiencies and lower costs. This can lead to greater investment in new technologies and innovation, which can create new job opportunities and industries.
And historically speaking, the imposition of free trade policies has been profitable for businesses.
For instance, in the early 1600s, the British East India Company and the Dutch Verenigde Oostindische Compagnie (VOC) both quickly expanded and established major footholds on the Indian subcontinent acquiring cotton textiles to trade with the inhabitants of the Spice Islands for nutmeg, cloves, cinnamon, and pepper.
A paper discussing the conditions conducive to the phenomenal growth of these early traders explains —
“The dominance of economic superpowers like the British East India Company and the VOC was due to their development in a world where nation-states were weak and free trade was the norm, creating a global economic order of liberalism.”
Like the British East India Company, Walmart, too, expanded globally by partnering with local stores in countries such as Britain (Asda) and Canada, which was possible because of the free flow of trade and lower restrictions within countries.
However, a few other countries resisted free trade by adopting strict protectionist trade policies.
Let’s understand what a protectionist policy entails.
Protectionism refers to government policies that restrict international trade with the aim of nurturing the growth of domestic industries.
One relevant example to unpack the implications of a protectionist trade policy is India.
For several decades after independence in 1947, India adopted a protectionist economic policy that focused on import substitution. It was a strategy under trade policy that abolished the import of foreign products and encouraged production in the domestic market. The idea was to protect domestic industries from competition and build local production capabilities. However, this policy led to inefficiencies, low productivity, and a lack of competitiveness in global markets over time.
One of the key limitations of this policy was that it created a sheltered market that insulated domestic industries from global competition. This made them complacent and resistant to change, which ultimately hurt their competitiveness in the long run.
It also led to a lack of innovation and investment in new technologies, as domestic firms had little incentive to invest in research and development. It made industries complacent because the inefficiencies were masked by a lack of exposure to how industries were competing globally.
Additionally, the protectionist policy resulted in lower awareness of global best practices, which hindered the growth of Indian industries. Domestic firms were not exposed to the latest technologies, management practices, or product designs that were being developed in other parts of the world. As a result, they fell behind their global competitors in terms of quality, efficiency, and innovation.
Subsequently, in the 1990s, India began to open up its economy to global competition and adopt more market-oriented (free trade) policies. This led to a surge in foreign investment, increased competition, and a more dynamic economy. While some short-term challenges and adjustments were required, moving toward a more open and competitive economy ultimately led to greater economic growth, job creation, and competitiveness for Indian businesses in global markets.
In fact, globally, companies as old as Ford and General Motors (GM) also needed the return of free trade policies to flourish.
When these companies first expanded to Europe, protectionist trade policies largely dominated the world. This implied that both had to set up manufacturing plants in the country locally they decided to expand in. While this was helpful in the short term because they could cater to local tastes and significantly reduce costs of operation, it wasn't enough.
And the nature of their products was such that they had to expand internationally to become profitable.
Both companies' investments in production facilities within highly protected economies only bore results after the Bretton Wood Agreement of 1944, which brought back liberal (free trade) policies.
With me so far?
Okay, here's what I think.
I sense that there is a parallel to be drawn between economic trade policies and the venture funding environment.
Countries employ protectionist trade policies as a way to encourage new industries to develop without encountering too much competition globally. In their nascent stage, every industry goes through its own form of development where different stakeholders consolidate and formalize supply chains, distribution funnels, etc.
Under the protection, they get subsidies, tax holidays, and special considerations to become competent.
Venture funding, in a way, performs a similar function with respect to a startup. A startup at an early stage gets a chance to develop its product, expand its team, and spend on marketing by virtue of having funds to perform these activities.
And I think that just the way protectionism, when adopted for the long term, has significant downsides for industry growth in a country (India), excessively venture-funded startups could be negligent in working on the strength of their product.
Before you attack me for drawing this controversial parallel, let me provide further clarity.
There are some differences between protectionist trade policies and venture-funded startups too.
Protectionist trade policies are often criticized for limiting competition and potentially distorting market forces, whereas venture funding for startups is typically seen as a way to promote innovation and increase competition in a more open market.
Additionally, while protectionist trade policies may be aimed at shielding domestic industries from foreign competition, venture funding for startups often has a more global focus, with investors looking to fund innovative ideas and products that can compete on a global scale.
So, while there may be some similarities, the context in which protectionist trade policies are employed and the context in which venture funding occurs is different.
The purpose of both, however, is to nurture stronger industries and businesses.
The moment the protectionist trade policy is withdrawn, it exposes the strengths (and weaknesses) of the industry.
In the case of startups, a similar event occurs when venture funding is withdrawn or reduced. It reveals the strength of the startup and its product.
The bitter pill to swallow here as I write this (owning a funded startup) is that, eventually, the market catches on.
Protectionist trade policies that enable industries, and availability of funding that help startups grow, while necessary at a certain starting point, are temporary cushions.
Countries protecting certain industries are eventually pushed to reconsider and open up their trade barriers because the free flow of goods and global competition nurture stronger industries by introducing much-needed competition for local producers — competition that incentivizes them to constantly keep improving their products.
And just like countries, funded startups need to think more deeply about ways to reach a certain level of self-reliance that arises from the product’s strength in the market it caters to.
You must now be wondering…
Should startups stop raising funds?
Not at all. That is not the answer.
Certain ideas must be protected and funded until they find their footing. But being aware of the implications that any form of protection promises can wake us up to realities in a competitive market.
The other extreme conclusion here would be to falsely think that bootstrapping a business and becoming competent in a free market will guarantee survival. But this assertion could be just as uncertain.
So, while I am drawing a parallel between protectionist trade and venture funding, I am not prescribing the opposite (free trade and bootstrapping) as the antidote. Protectionist policies and free trade policies are not antithetical to each other. Both policies are adopted in the context of what stage a nation is at.
Theoretically, bootstrapping does help arrive at a product’s authentic strength faster in the way free trade strengthens local industries. But the bit to think deeply about is the transition from a protectionist (venture-funded) stage to a more free-trade (product-led and profit-led) mode of business growth.
It might sound too obvious to pay heed to, but I dread that most of us don’t have a plan of action to maneuver this transition.
I'd like to end this essay describing why some songbirds kick their chicks out before they can fly. I think it serves as a good analogy.
“In the nest, young birds have it easy: free food is delivered straight to their open mouths, fueling their growth.
But the bigger and louder they get, and the more time that passes, the greater the risk that a predator will discover the nest.
To avoid losing their entire brood, songbird parents try to hustle their adolescents along, eventually forcing them from the nest. Some species will even go so far as to stop feeding their chicks in the nest, instead using food to lure them out — sometimes even before they can fly.”
Mollycoddling makes weak children.
Research cited from the book The Geostrategy of Global Business: Wal‐Mart and Its Historical Forbears by Peter J. Hugill