Reverse innovation, emerging market and global strategy v3

REVERSE INNOVATION, EMERGING MARKET AND GLOBAL STRATEGY

Course: Technology ManagementA Paper review Tuesday, 13 November 2012

Paper by : Vijay Govindarajan and Ravi RamamurtiGlobal Strategy Journal 1: 191–205 (2011)

Agenda

• Introduction

• Innovation

• Internationalization processes• DMNEs strategy and management• FDI spillovers• Critical review & conclusion

Sandra

Sonia

Nia

What is the paper about?

Reverse innovation: 1. Adapted in poor countries

2. Trickle up in rich countries

• What kinds of innovation emerging economies are likely to spawn

• Why such innovations might diffuse to rich countries

• What competitive advantages local and foreign firms enjoy in this process

• How it affects the global strategy and organization of established MNE1s

1

2

3

4

Notes: 1. Multi-national enterprise 2. Foreign Direct Investment

Poordeveloping countries

Rich Countries Traditional

viewReverse innovation

Innovation

Internationalization

MNE management

FDI spillovers

Questions Research agenda

Traditionally, innovation is assumed to be originated in rich countries

• One of the pillars of multinational firms (Bartlett & Goshall, 1989)

• In Int’l Business Literature: Often equated with technological innovation

(Caves, 2007) Assumed to be originated in developed countries

where MNEs are located

Innovation

Traditional View (Vernon,

1966)

Traditional View (Vernon,

1979)

• USA as a technological leader and source of : Product innovation target high-income

customers Process innovation substitute capital labor

• USA’s MNEs spread it to EU, Japan and also developing countries

• Europe and Japan closed their income and technological gaps by 1970s

• Vernon argued : “Innovations would now diffuse horizontally among developed countries and downward to developing countries ”

Recently locus of innovation is changing

2007 2012

34.3% 31.1%

25.9% 24.1%

13.5% 11.2%9.5% 14.2%

2.00% 2.9%

Shares of global R&D’s spending1USA EU Japan China India

Source: 1. Roland Berger Global Topic 8 Billion report

China India Russia Brazil

112 94 68 66

1652

465115 121

# of patents registered in USA by countries of origin1

2000 2010

Reverse innovation – a nascent phenomenon which future is still a question mark

• Emerging countries no longer just borrow innovation from the developed countries • Instances of reverse innovation appears to be rare but it might change in the future• Key drivers: rise of emerging countries and flattening world

In 2004, 90% of DMNE’s foreign R&D is in TRIAD region

11.5% 17.1%

Some reverse innovations have found its way to the west

“The emerging world, long a source of cheap labor, now rivals the rich countries for business innovation. This innovations also will change not just emerging markets but

the rest of the world as well.” (The Economist, 2010)

Reverse innovations: • Seems to be

deeper than it seems

• May diffuse internationally in the future

Paper’s framework:• = Where its first

adapted ?• ≠ Where its

originated ?

Reverse innovation has some historical parallel but exhibit new differences (1)

Example of

historical parallel

How firms in industrially backward countries catching up: start with low end product and work their way up (i.e. Japan and Korea post-war)

(Tsurumi, 1976; Amsden, 1992)

• Innovations as response on opportunities and constraints of biz environment

• In really poor developing countries and often join efforts with local entrepreneurial firms

• Innovated outside their home-country (still TRIAD)

• Opportunities and constraints in poor country is systematically different than rich countries

• Adapted products for other TRIAD market Japan’s PPP1 was 81% of USA (1985)

• Adapted for mass market of poor countries China’s and India’s PPP were

15% and 7% of USA respectively (2009)

Past Current

Differences

Notes: 1. Purchasing power parity

• Japan and Korean firms export cheaper and better cars to US, disrupting auto industry

• But not an ultra low-cost products (i.e. $2.5K car or $50 computer)

• Western MNEs unable to enter an compete due to tariff, non-tariff and FDI barriers

• DMNEs able to participate in innovation process of emerging countries as its less-barrier

• Globalization did not exist at current’s extend

• Flattened world with gateways to internationalization (Friedman, 2005; Williamson and Zeng, 2009)

Reverse innovation is a new phenomenon with familiar and new features

Reverse innovation has some historical parallel but exhibit new differences (2)

Past Current

Differences

Four research agenda

Innovations Internationalization processes

DMNEs strategy and management FDI Spillovers

1 2

3 4

• Trickle down from rich to poor countries

• Start with lead users

• Trickle down from poor to rich countries

• Start with laggards users

• What kind of innovation spawns in emerging countries?

• Why occur just now?

• Why would innovation trickle up?

• MNEs originate in rich countries and spread globally Based on

proprietary technology / brands

• MNEs also originate in emerging countries then spread globally Leverage home-

based innovations

• What are the competitive advantages of EM Firms?

• How to facilitate internationalization?

• How do EMNEs and DMNEs compete in different stage of reverse innovation?

Innovations

Internationalization

Topic Mainstream view Reverse innovation’s aspects

Questions

Reverse innovation exhibit aspects that does not fit existing mainstream view (1)

Reverse innovation exhibit aspects that does not fit existing mainstream view (2)

• Develop product platforms in TRIAD market

• Develop new product platform in EMs for EMs

• How does reverse innovation affect “Glocalization” of DMNEs?

• Local firms in EMs capture spillover from DMNEs that invest in EMs

• DMNEs capture spillover from local firms when they invest in EMs (bi-directional learning)

• Who learns from whom and why?

DMNE strategy and

management

FDI Spillov

ers

• Global product mandates to subsidiaries in other TRIAD market

• Global mandates for some products to subsidiaries in EMs

• Can Glocalization and Reverse Innovation is pursued at same time?

Topic Mainstream view Reverse innovation’s aspects

Questions

What kind of innovations spawn in EMs ?

What makes innovations in EMs different than in

rich countries?

Large income per capita gap (rich vs

poor countries)

Conditions of which product is

used

Affordability innovation

• Price• Performance

Suit local conditions

• Sturdy to harsh condition• Portable, easy to operate

Innovation in biz model

• S&D • Financing scheme (Khanna & Palepu,

2005)

What mass market in EMs required?

Fundamental rethinking of biz model for success in emerging market is needed (Ramamurti and Singh, 2009)

Innovations

Why reverse innovation occur just now andnot earlier?

Demand and supply of local innovation have only just come together in EMs

Innovations

• Accelerating growth of EMs (2/3 of World’s GDP)

• Slowing down in developed countries (Eurozone and USA crisis)

Demand side

• Local firms can draw local and global resources to innovate in their home-country (Williamson & Zeng, 2009; Ramamurti, 2009) i.e. Bharti Airtel have access to int’l capital, suppliers & technology

• DMNEs has more incentive to innovate + fear of competition from local firms

Supply side

Why innovations can trickle up from poor to rich countries?

Three stages of reverse innovation

5 Reasons why it can trickle up to rich countries

Innovations

1. Adoption of innovation in EMs

2. Transfer to other EMs

3. Transfer selectively to developed countries

Perplexing due to large distance between rich & poor countries (Ghemawat, 2001)

• e.g. Microfinance is favorable in developed nations

There are poor people in rich

countries

• Price elasticity and experience curve

Ultra low cost products for EMs

may expand overall market demand

• e.g. portability, sturdiness, easy of use GE ECG

New features can create market

segment in rich countries

• e.g. GE portable widen to radiology applications

Technology of “good-enough”

products for Ems may improve over

time to satisfy high-end customers

• e.g. wireless bankingEms may leapfrog to latest technology

What are the competitive advantages of EM firms?

• EMNEs may act as “global first mover” (Ramamurti and Singh, 2009).

• However, in the future, more DMNEs may trigger stage 1 themselves to pre-empt local

firms from getting a head start with reverse innovation

Competitive advantages of EM firms

Internationalization

- • Rely too much on

home country advantages (Rugman, 2009)

• Possess only ordinary resources and few intangible ownership benefit (Madhok, 2010)

+• Deep understanding

of local needs • Strength in ultra-low

cost design and manufacturing

• Strength in S&D at home market

Internationalization process

How do EMNEs and DMNEs compete in each stage of reverse innovation ?

• Zero-based innovation for a foreign market

• Give subsidiary access to firm‘s global technology

1. Win in key EMs

2. Win in other EMs

3. Win in rich

countries

• Manage transfer to other EMs

• Positioning reverse innovation vs existing offers

• Manage risk of cannibalization

• Wide technology reservoirs within firm

• Familiarity with several EMs

• Deep pocket

• Preexisting distribution and brand recognition

• Strong presence, brand, customer relationship, and S&D in rich countries market

• Customer relationship• low cost solutions• Clean slate approach• Strong commitment to

local market • Access to local

resources & capability

• Product pricing• Features suit EMs

• Unconstrained by prior investment or cannibalization risk

• Rising margins in moving upscale

• No internal resistance for expansion

DMNE’s challenges DMNE’s advantages EMNE’s advantages

Notes: EMNE = Emerging Market MNEs; DMNE = Developed Market MNEs Legend: Strong Weak Equal

Internationalization

How does reverse innovation affect “glocalization?”

Global strategy of DMNEs -“Glocalization”

3 Potential Traps for DMNEs to master reverse innovation

Economies of

global scale

Local adaptatio

n

• In reverse innovation, it seems that national responsiveness is more important to compete in mass market of EMs

• Difficult to understand needs and opportunities for biz model innovations in EMs

Familiarity trap

• Organization is more likely to exploit competencies that they excel at (March, 1991)

• MNEs core competency is to support premium products

Competency trap

• Organizational inertia (Tripsas & Gavetti, 2001)

• Rather invest in “well-known success formula”

Complacency trap

DMNE strategy and management

Can “glocalization” and reverse innovationdone together?

• Full biz unit with their own P&L, responsibility and dedicated local resources in all value chain Design new offerings from blank page

rather than adapt global products (Govindarajan & Trimble, 2005b)

• Judged based on performance criteria other than rigid, short-term financial measures (Govindarajan & Trimble, 2010)

• Likely to connect and leverage company’s global resource base (Ambos, Asakawa & Ambos, 2010) Global technology and resources give a

significant edge over local competitors (Govindarajan & Trimble, 2005)

GE Portable Ultrasound Global Revenues

DMNE strategy and management

FY 2008 US$ 278 Mn

FY 2002US$ 4 Mn

Ultrasound price in 2009:Portable = US$ 15-100 K

Conventional = US$ 100 – 350 K

Key success : LGT formula

Who learns from whom and why?

FDI Spillovers

Teachers

DMNEs

EMNEs

Where does the learning occur?

Emerging market

Developed country

Traditional spillover

EMNEs learnt from FDI in developed countries

Reverse innovation

DMNEs learnt from EMNEs in

developed countries

Reverse spillovers: learning by DMNEs in EMs about• New biz model, management practice, suppliers & customers• Technology from local competitors

Reasons of reverse spillover: imminent threat of disruptive competition from local firms

•Help upgrade local competitors, suppliers and customers

+

•Crowding out local firms •Suppressing local technology

-

Spillover impact from DMNEs to local firms

Constraints in spillover

Traditional : Technology absorption

Reverse innovation : organizational constraints

FDI Spillovers

Differences in product needs at emerging market vs rich countries are driven by 5 gaps

5 substantial needs gaps on poor vs rich countries

Performance gaps ultra low cost + descent performance

Infrastructure gaps portability, electricity, network

Sustainability gaps green consumptions

Regulatory gaps incomplete in EM, sometimes make it more favorable for

innovations

Preferences gaps need adapt to local tastes / preferences

Source: Ivey Business Journal

To conclude..

Drivers that promote innovation in poor countries: Faster growth in emerging economies “Flattening” of the world economy

Reverse innovation start to find its way to other emerging market and the western countries Led by local firms (EMNEs) Reinforced by foreign firms (DMNEs)

Innovation in emerging economy has the following character Lower cost Features suitable to local use (i.e. portability)

Sometimes EMs produce innovations in new businesses, leapfrogging to frontier technologies wireless or mobile banking

DMNEs response through embracing reverse innovation themselves and allow subsidiaries in Ems to purse local innovation rethinking organizational arrangement needed

Future research area

1. How is the true extent of reverse innovation and its potential

2. How “distances” gap creates pressure for local innovation in emerging market?

3. How distance gap inhibits their diffusion to developed countries?

4. Under which, laggards is more beneficial than lead user as a source of new product ideas?

5. Are some industries more likely to benefit from reverse innovation?

6. Finding the optimal strategy for DMNE to manage process of “Self-disruption”

Appendix

Further study to understand true extent of reverse innovation is needed

• Flows of reverse innovation probably are still miniscule – need further study to understand true extent of reverse innovation and its potential

• This paper claimed that innovation activity in emerging countries is : • Much greater than ever • Grow rapidly • Its outcome may find their way to

the rest of the world, incl. developed economies

Reverse innovation’s true potential need further study

What kind of innovations that emerging countries likely to spawn?

Not involve technological breakthrough of a kind that drive innovation in developed countries

Involve novel and innovative combinations of existing knowledge and technologies to address pressing local problems

Use new process and business model

Firms leading this innovations could be: Local firms or foreign MNEs operating in emerging markets

Innovation may draw on talent, technology and ideas from many parts of the world i.e. GE’s Ultrasound and ECG

Nature of innovations in emerging countries

Reverse innovation do have some historical parallel

• How firms in industrially backward countries catching up, typically start with low end product and work their way up (i.e. Japan and Korea post-war) – (Tsurumi, 1976; Amsden, 1992)

• Some studies in the past: how location affects innovation (Porter, 1990; Nelson,

1993) why firms innovate outside the home country

(Kuemmerle, 1997) how and why innovations diffuse across countries

(Vernon, 1966, 1979) how firms adapt products designed for one country for

sale in other countries (Yip, 1989) How MNEs manage the tension between global

standardization and national responsiveness (Prahalad and Doz, 1987; Bartlett and Goshall, 1989)

Daihatsu Coero