Innovation by Copy and Paste

Crypto SEZs, Southwest Airlines, and Some Thoughts on "Governance Innovation" by Mimicry

Photo by Bermix Studio on Unsplash

A Crypto Zone Rises in South Carolina

Catawba Corporations, a consortium that represents the Catawba Native American tribe, has passed legislation to establish the “Green Earth Zone” (GEZ). The GEZ seeks to become a new jurisdiction for “digital asset management, fintech and cryptocurrencies.” The zone, boasts CEO Ronnie Beck, will “generate millions of dollars” and “enhance the quality of life for tribal citizens for decades to come.”

Visit the site of Catawba Corporations and you’ll see a surprising range of businesses: from landscaping and wastewater engineering to “Declassification Services” and “Armed Security in a Variety of Situations Worldwide.”

But what’s the core business of Catawba?

I’d argue that it’s selling “sovereignty-lite.” At least half of Catawba’s companies are joint-ventures. No doubt partner firms enjoy benefits due to Catawba’s unique legal status as a tribe.

Catawba advertises the U.S. Small Business Administration’s Tribal 8(a) program: a government initiative for special procurement deals. Catawba has a unique legal asset — a lite version of sovereignty — and they’re monetizing it. Good for them.

But Catawba’s new zone made me revisit one of the core ideas of the Special-Economic-Zone-focused branch of Startup Cities: that “governance innovation” incubated by SEZs will spread to new areas.

We’ll innovate in a zone like the GEZ. And then the market for governance will copy these innovations.

The Argument from Mimicry

The argument for governance innovation via SEZ goes like this:

1. Existing governments are captured by special interests, bureaucratic inertia, and irrational politics. These are like legacy firms in a “market for governance.”

2. It’s hard to fix legacy firms. Plus, elites who benefit from the status quo will oppose change.

3. An SEZ is like a startup, able to pioneer governance innovation in a small area.

4. An SEZ does not threaten the whole existing system. This makes it less objectionable to special interests.

5. An SEZ can “divide and conquer” elites. Changes to the existing system threaten the privileges of political elites. But some elites will gain more from the SEZ. So a subset will ally with the zone.

6. Just as innovation propagates through the market, it will propagate through governance. The best policies and practices of SEZs will be copied by the host nation, other nations, and other SEZs.

I think of the last step as the argument from mimicry.

Someone does something weird and new. It works. Others copy it. This makes a case for SEZs and for frontier experiments in governance. (Effective Altruism has a nice summary of this argument as “Charter Cities as Models to Emulate”).

On the surface, this analogy from markets makes sense. Innovations propagate in traditional markets as competitors copy them. Indeed, some mimicry is the last step in the core evolutionary algorithm of markets: variation (do something new); selection (the new thing works); replication (firms copy the new thing).

There’s no denying that mimicry happens in SEZs, too. For example, we see mimicry of Estonia’s eGovernance initiative in Palau (great writeup here), Próspera, and now in the Catawba GEZ (see section on eCorporations).

Estonia’s “hey let’s put it all online and let people buy digital access to this jurisdiction” seems to be a durable innovation that other ones copy.

But how far can we take mimicry?

I worry that the governments-as-firms analogy is used too loosely in the Startup Cities space. How easy is it, really, to mimic “governance innovation”?

Yes, business firms mimic. But even in traditional markets it’s hard to mimic well. Is copying and pasting governance as “easy” as mimicking in traditional markets? Easier? I doubt it.

Let me explain.

Southwest Airlines and Constraints on Copy and Paste

A classic example of corporate mimicry comes from Southwest Airlines. Lawyer Herb Kelleher broke an airline cartel and pioneered a maniacal focus on low-price. Now Europe has its Ryanair, Japan has its Peach, and Taiwan has its Scoot — mimicry of Southwest’s core innovations.

Southwest is clearly mimic-able... but is it infinitely so? Would mimicry of Southwest work everywhere? I doubt it. We probably won’t see a Southwest clone in Congo anytime soon.

Successful clones of Southwest focus on middle-income (or higher) markets with cities. There’s a commonality in their market context: Southwest flies people between urban hubs across U.S. states, Ryanair flies people between urban hubs across EU countries, and Peach and Scoot fly people between urban hubs across Southeast Asia.

Photo by Kyle brown on Unsplash

And even this mimicry wasn’t easy!

American firms serving similar markets struggled to mimic Southwest.

While Southwest boomed, beleaguered Continental Airlines wanted a piece of the action. So they mimicked. They launched Continental Lite (definitely a name unveiled by an overpaid, 90’s corporate marketing firm…).

Continental Lite focused on shorter routes. It offered low cost, no-frills service. Continental had a big advantage: it already had low labor costs from union busting. Yet Continental Lite was a disaster. When Gordon Bethune led Continental’s turnaround, he killed Continental Lite. (Aside: I recommend his book From Worst to First!)

What happened?

Despite mimicking the features of Southwest, the underlying product wasn’t really the same. Why? Because the market context and underlying competencies of Continental weren’t the same. A thousand little details, from Southwest’s fleet, to Kelleher’s irreverent culture, to the market’s perception of Continental, made Continental Lite a superficial copy.

What if governance is less like a standardized industrial product and more like a highly contextual service offering? This means that the argument from mimicry, while sort of true, may prove disappointing. We might end up with Continental Lite: The SEZ.

E-Governance and the “Hong Kong for Everywhere”

The argument from mimicry seems to assume that copy-and-paste is a clean and rational process. I mean this in the nicest way possible, but I think this happens because the Startup Cities space has so many economists, lawyers, and consultants. When life revolves around clean explanations on paper, it seems easier to copy-and-paste than it is.

If you tell a smart founder or technologist, “Why don’t we just copy fundamental-innovation-of-other-company? That’d be easy and cool!” they will throw you out of the meeting. Copying and pasting a strategy on paper is much easier than operationalizing that strategy.

And core innovations, the kind that remake a market, often reflect the assets and competence of the innovators.

When people retell the most famous story of disruptive innovation — the invention of the digital camera within Kodak — there’s a pesky detail that’s rarely emphasized: inventor Steven Sasson was an engineer inside a wildly-successful photography company! Kodak failed to adapt. But it’s hard to believe that being the world’s top photography company had nothing to do with inventing the next wave of photography.

What about SEZs? Well, the prominent example of Estonia’s eGov, copied by Catawba and many more, illustrates this point.

I’ve spoken with an early member of Estonia’s eGov team (whose name I won’t mention unless they say it’s cool in the comments). They described how Estonia’s eGov emerged from existing assets and context.

Estonia. Photo by Leo Roomets on Unsplash

Estonia was building digital services for their own people. They had the usual challenges of post-Soviet life. Then someone had the bright idea of opening up these services to the world.

And consider the context. Estonia is a middle-income country. It has the vibes of a Nordic techno-democracy, where things work well. It’s the home of well-known startups. It’s in the EU. Estonia’s innovators layered technology on top of what was already becoming a strong and dynamic jurisdiction.

This is a story of innovation that flows from existing assets, not innovation mimicked. And how well can other jurisdictions, without Estonia’s context and assets, copy it?

Is the Catawba Native American reservation offering a comparable asset? Maybe. Is Honduras? Perhaps if the ZEDEs remain stable and prosperous for some years. I hope all these projects succeed and bloom into fantastic businesses. But we shouldn’t assume that we can just copy-and-paste Estonia everywhere.

If you spend any time in the Startup Cities space, you’ll hear a lot about the Dubai International Financial Center and Shenzhen as paragons of “best practices.” But I’d genuinely love to learn from the SEZ experts in the audience: where have these two models been successfully copied?

Analysts pattern match against Hong Kong when they say “We’re going to make a Hong Kong in [Sub-Saharan Africa, Latin America, the Caribbean, the South Pacific, Antarctica]!”

Does this mean you’ll also have a brutal Civil War that drives millions to emigrate to this new Hong Kong? Will you have competing currencies (and bank runs) as Hong Kong did? Decades of sweatshop-style manufacturing? Aggressive government ownership of land and housing? A British colonial administrator with near-religious devotion to free markets?

Copy and paste is compelling. And there’s no denying that SEZs can learn from each other. But I wonder whether it might be better for Startup Cities to focus less on copy and paste and more on product thinking 101: look first at what is to design what might be.

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Shout out to Joe McKinney for the tip on Catawba’s GEZ, where he is now CEO.

Thanks for reading and don’t forget: Startup Should Build Cities!