Battlepanda: Swarm entrepreneurship


Always trying to figure things out with the minimum of bullshit and the maximum of belligerence.

Monday, March 26, 2007

Swarm entrepreneurship

I can attest to Taoyuan Night's observation about the frenzied copycat entrepreneurship that often goes on here in Taiwan.

What happens is this:

Day 1: Person A has a genius idea - selling ice cream for people’s pet dogs to eat.
Day 5: Persons B,C,D… notice that A has been making a tidy sum of money, selling ice cream for dogs.
Day 6: 20 new dog-ice-cream stores open up a few metres away, using cheap borrowed money.
Day 10: Persons A,B,C,D go out of business…. [tumbleweed].

It really does happen this quickly. You wouldn’t believe it. I’ve seen businesses last less than 5 horrifically unprofitable days. They open up, try to grab some of the hot money by copying someone else’s idea on the same street, then close down again right away if they can’t. Usually, a stream of people trying their luck at this game results in the painful destruction of the original, innovative business.

The most famous example of this is the Portuguese custard tart fever of 1998 (Link to Chinese page). Truly, for a few short heady summer months, it was like the dutch tulip craze writ pastry. People queued around the block and (probably because they needed to justify the queuing) bought the fatty little pies by the dozens. The price of eggs went through the roof. Naturally the number of stores selling nothing but custard tarts started opening up at exponential rates. Until that magical point where supply overtook demand and the queues were suddenly gone. Without the queues, it's as if people finally realized that portuguese custard tarts are really just the greasier, heavier cousin of the traditional custard tarts we've known and loved all along and demand evaporated.

There must be a few lone survivors here and there, but I don't know of them. Once the fever receded, portuguese custard tarts took their rightful place as a minor player in the Taiwanese baked goods market.

It's sadder when it happens with live animals:

"It's over for red poodles," dog breeder and proprietor of the Master Dog salon Lin Chiu-li (林秋麗) said.

Even in the fickle pet market, the rise and decline of the red poodle was remarkable for its swiftness. Called "teddy dogs" because of the puffy hairstyle they are usually given, red poodles became fashionable when Taiwanese supermodel Lin Chi-ling's (林志玲) red poodle, "Coffee" started appearing in commercials and fashion shows alongside its owner. [snip]

"Puppy mill" operators flout the rules of dog breeding when they try to churn out as many puppies as possible -- as cheaply as possible -- before a breed becomes passe, she said. [snip]

By the middle of last year, red poodle fever had already started to recede, she said.

Taoyuan Night have an interesting theory for how the "swarm of bees" (meaning a crowd mindlessly moving in the same direction) phenomenon came to be -- Taiwan's low low interest rates: "There has to be some risk - some higher cost for borrowed money - to deter stupid amounts of profitless copycat competition. Otherwise, a good business idea has no chance of surviving, and entrepreneurship is punished rather than rewarded." Of course there has got to be more to it than that since Japan has even lower interest rates and you don't see the same kind of crazed, unstructured entrepreneurship there. Besides, a rise in the interest rate will punish all entrepreneurship, not just copycat ones. In fact, it could concievably have the perverse effect of suppressing original ventures more than copycat ventures because it is risky to innovate, which is why there are so many copycat ventures in the first place.

So I don't know what the answer is for Taiwan's "swarm of bees" phenomenon. But it's an interesting case study from the economics point of view. As in econ 101, continual entry into the market drives profit down to zero. But many factors that are not accounted for in Econ 101 also comes into play -- start-up costs, distorted risk perception, "brand" dilution...