A surprising takeaway from the World Economic Forum: Innovation is as likely to start in developing countries as in richer ones
Posted on Harvard Business Review: February 4, 2011 8:40 AM
I was a panelist on a session on Reverse Innovation during the recently concluded World Economic Forum at Davos. The session attracted over 125 CEOs and senior executives. The conventional wisdom is that innovations originate in rich countries and the resulting products are sold horizontally in other developed countries and then sent downhill to developing countries. After all, aren't developed nations such as the U.S. and Germany the richest and most technologically advanced nations in the world? The U.S. and Germany, for instance, have well over 300 Nobel Prize winners in science and technology whereas India and China have a combined total of less than 10. Doesn't it, therefore, stand to reason that developed countries will be the first to adopt the next wave of innovations? Won't the developing world adopts those innovations only when they have "caught up" economically? No. Not really.
We may be at the cusp of a new era in which breakthrough innovations happen first in developing countries and those innovations are then taken to other developing countries and subsequently flow uphill to developed countries. This is what we call reverse innovation. A reverse innovation, very simply, is any innovation likely to be adopted first in a developing world. The icing on the globalization cake is that such innovations are scalable not only across other emerging markets, but more importantly, they can be scaled up for the developed world.
Reflecting on the Davos session, I've three teaching moments.
Reverse innovation is an important strategic priority. The stakes are enormous. Today, rich countries and poor countries account for roughly equal shares of the global economy. But for years, growth has been far more robust in poor countries. Now that most rich countries are in a slow-growth recovery, following a truly awful recession, the growth gap looks more like a growth chasm. Emerging economies are expected to account for as much as two-thirds of future growth in world GDP.
Emerging market competitors provide the strongest impetus for reverse innovation. If established global corporations do not innovate in poor countries, new competitors will seize the opportunity. They will take the lead in innovation—not just in the poor world, but throughout the world. They will develop into formidable rivals. Already, there is a new generation of global corporations rising from the developing world, including Tata, Mahindra, Lenovo, and Haier. The emerging giants can make life miserable for Western multinationals. In the IT services industry, for instance, Indian firms (Infosys, Tata consulting services, and WIPRO) have pioneered the concept of "global delivery model"—serve clients in the developed world from distant India, where talented software engineers earn substantially lower wages—thereby challenging IBM and Accenture to rethink their business models. Brazil's Embraer is giving Canada's Bombardier a run for its money in regional jets. Mexico's Cemex has innovated in the cement industry to humble Holcium of Switzerland and LaFarge of France. China's Huawei is challenging global telecommunications companies like Siemens, Ericsson, Alcatel-Lucent, and Cisco.
Organization is the biggest barrier to success at reverse innovation. Western multinationals have most of their resources and decision making power in rich countries. To succeed in reverse innovations, multinationals need to shift their center of gravity—in terms of resources and power—to emerging markets. These are uncomfortable decisions, without which multinationals will not be able to unleash new opportunities in poor countries.