Emerging markets are innovators too

2 October 2014

SHANGHAI/BOSTON: Western multinational businesses have long seen emerging economies as markets that can be exploited but have been slow to see them as sources of innovation.

In a blog post for the Harvard Business review, Vijay Govindarajan, a professor at Dartmouth College, highlighted the recent success of the Indian Space Research Organisation in putting a satellite in orbit around Mars at a fraction of the cost it takes NASA.

He acknowledged that labour costs in India were less than those in the US, but argued that "the magic is in breakthrough design". India's scientists and engineers might be paid less but they were still world class, he said, and used to working within constraints.

He quoted Terri Bresenham, CEO of GE Healthcare India, who said "If necessity is the mother of innovation, constraint is the mother of frugal innovation". That had led, for example, to an Indian business delivering open heart surgery at 20% of the cost of equivalent procedures in the US but at an equally high quality level.

Shaun Rein, managing director of China Market Research, a strategic market intelligence firm, came at the subject from a different angle in an interview with Sourcing Journal, but made a broadly similar point.

Thirty years ago it had made sense for Chinese companies to rely on technology transfer, he argued, in the same way that the US had done in the late 19th century and that Japan and South Korea had done during their growth phases in the post-war period.

That was no longer the case, however, as rising wages and rents had squeezed margins. "As a result," he said, "Chinese firms have had to focus on innovation and moving up the value chain in order to survive. The search for profits, and a maturing industrial base, have forced innovation."

Speaking ahead of the publication of his book 'The End of Copycat China: the Rise of Creativity, Innovation and Individualism in Asia', Rein said that he did not expect China would lose its overall manufacturing dominance any time soon, thanks to its superior infrastructure.

He added that the world would have to get used to innovative Chinese brands, like Tencent and Xiaomi, which were making their presence felt across southeast Asia. "Sooner than people realise they will make great inroads into the US and Europe," he asserted.

Data sourced from Harvard Business review, Sourcing Journal; additional content by Warc staff