Globalization and the convergence of information and communication technologies have dramatically boosted the power and speed with which businesses, organizations, and individuals can access, process, and adapt information. This has given rise to the knowledge economy, where markets can trade what has long been untradable: workers' education and skills. In the new dynamic, efficiencies in productivity growth are less important. Instead, growth is driven by the capacity of economies to create knowledge and innovate.
Three new innovation models are emerging. One is process innovation: wiring everyone to the same network and leveraging the cost, talent, and volume of an integrated global economy. Another is creating pint-sized products and services sold cheaply to masses of poor people. A third is innovating through local partnerships and networks to get around external hurdles, whether bad roads in India or bad government policy on IP in China. You see all three models in India. Boston Consulting Group put out a list of 100 emerging global companies; 21 of them were in India.
Initially, cost advantages attracted global companies to the emerging markets of China and India. China's Pearl River Delta quickly became a hub of low-cost manufacturing, and the country's manufacturing sector grew annually at 11.4% from 1993 to 2003. After economic reforms in 1991, India's large pool of low-cost, technically trained talent made possible that nation's growth as a global provider of IT services.
But today multinationals are beginning to leverage the skills of Indian and Chinese knowledge workers to innovate, and they are building strong R&D capabilities in these markets.
Innovation in China and India, however, has not grown on a truly global, commercially significant scale. Indian companies have yet to come up with significant innovations in entire product lines. Chinese outfits have launched clever but imitative products, and China's R&D capabilities lag those of Taiwan and South Korea.
China and India rank 49th and 50th in the world respectively in terms of productivity growth. Their economies face major challenges to improved innovation. They lack end-to-end logistics, effective infrastructure, and strong regulatory systems. By understanding such weaknesses, corporations can devise alternate strategies and business models to transform the two countries into growth markets.
India has poor infrastructure, low literacy levels for many people, and labor inflexibilities. So high-volume manufacturing has not taken off yet in a big way. Yet businesses are using technology and communication networks to build virtual, interconnected innovation ecosystems to overcome the gaps. A network can tap multiple sources of innovation, including entrepreneurs, research labs, and students and faculty in educational institutions, such as the Indian Institutes of Technology (IITS).
Unearthing specific consumer needs in emerging economies can also aid innovation. HP Labs in India identified power outages as a key factor limiting the access and utility of computers in rural areas, so it designed a community PC that can run on car batteries.
There's huge innovation in creating a high-volume, low-price business. CavinKare, an Indian company, began selling shampoos in the 1990s in cheap, single-serve sachets to make them accessible to the nation's rural poor. This business model was replicated by Unilever (UL ) and Procter & Gamble (PG ).
India absorbs about 4 million to 5 million mobile phones a month, and its mobile rates are about 1 cents a minute, the lowest in the world. Clearly companies have innovated: They figured out how to stay profitable even selling telecom services at a penny a minute. They're reaching consumers who are essentially not part of the formal financial system. If you can deliver to such people products or services in small units at a low price, the market is suddenly open to a much larger base.
In the end, innovation capability depends on economic flexibility. The U.S., with its entrepreneurial culture, relaxed labor markets, and free capital flows, continues to be the most innovative economy in the world. India and China need such an environment to bridge the growth and productivity gap between emerging markets and the developed world and to truly transform themselves into innovative, energetic economies.
By Nandan M. Nilekani