American Business' Future Lies Far From Home

There are promising signs that the U.S. economy is on the mend. Over the long term, however, the economy's strength depends on its ability to innovate. Fortunately, most business leaders know this. They are shifting their energies from managing the present—surviving the financial and economic meltdowns—to creating the future.

But we worry that too few U.S. business leaders have recognized that the future is far from home. Indeed, many of the innovations that propel global economic growth over the next few decades will originate in the developing world.

That's a radical shift. For several decades corporations headquartered in the U.S. have focused their innovation energies on solving problems in their own backyards and then exported their offerings around the globe, perhaps customizing products a bit to fit local conditions. It has worked well, and this pattern of innovation will remain important. But U.S.-based corporations will miss out on giant opportunities unless they become equally skilled at reverse innovation—solving problems in low-GDP-per-capita nations like China and India and then bringing those innovations home.

different development paths

The need for reverse innovation is, admittedly, counterintuitive. After all, isn't the U.S. still one of the richest and most technologically advanced nations in the world? And if so, doesn't it stand to reason that the U.S. will be the first to adopt the next wave of innovations? Won't the developing world adopt those innovations only when they have "caught up" economically?

No—and here's why: Developing nations do not look ever more like the U.S. as they develop. They do not follow the same path of economic development as the U.S. did. In fact, they can easily jump ahead. How? There are three basic storylines, and they begin when:

Developing nations take advantage of modern technology. On the basis of GDP per capita, India today is where the U.S. was in the late 19th century. But India is in an enviable position by comparison. It will not solve its problems with 19th century science and technology; it will do so with 21st century science and technology. India and other developing nations are eager to adopt new technologies that deliver decent performance at an ultra-low cost—a 50% solution at a 5% price. Rich countries may not find such technological breakthroughs attractive today—for them, nothing less than a 90% solution will suffice—but new technologies rather predictably get better each year and eventually become attractive in the rich world.

Developing nations build infrastructure from the ground up. China and India are unlikely to duplicate the infrastructures of the rich world. They are more likely to build backbones for communications, energy, and transportation that fit today's realities, such as unpredictable oil prices and ubiquitous wireless technologies. Meanwhile, the evolution of related industries in the rich world will be constrained by choices made decades ago. New infrastructure will not be installed until old infrastructure needs to be replaced. This gives low-GDP-per-capita countries the opportunity to jump ahead.

Developing nations tackle sustainability challenges. There are far more people on the planet today than there were a century ago, when today's rich countries were poor. As a result, developing nations will be forced to solve sustainability problems much earlier in their development trajectory. They will tackle many of the globe's sustainability problems long before the rich world finally acts.

Because of these possibilities, the developing world can no longer be viewed as just a high-growth market for existing products or just a destination for offshoring to reduce costs. These countries must also be viewed as the global economy's pressure cooker for innovation.

Too many American multinationals are failing to engage them on this level. Some have set up research-and-development centers in places such as China and India, but they have done so only to take advantage of the opportunities to hire talented scientists and engineers and save on costs. So they have kept these distant facilities focused on rich-world problems and under the direct control of headquarters.

That approach must stop. If U.S.-based multinationals do not innovate to solve problems far from home, new competitors, especially those rooted in the developing world, will seize those opportunities. They will take the lead in innovation—and not just in their own countries but worldwide. And if they do, the U.S. will pull out of the Great Recession only to find itself in the Great Stagnation.

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