1 - A Framework for Innovation in Emerging Markets

Summary

This chapter outlines the elements of an innovation framework for emerging markets. It discusses the institutional context and drivers, types, and outcomes of innovation as the basis for the book’s overall structure. Throughout, it describes the distinctive aspects of innovation in emerging markets, the relevance of institutional environments, the impact of innovation on social development, and the “catch-up” dynamics in the transition from copycats to leaders.

1.1 Innovation: The Sine Qua Non of Growth and Development

Innovation is the key to productivity gains and sustained economic growth. It has expanded beyond its roots as a key concept in economics in the 1980s and become a household term. Nations, companies, and leaders now routinely make headlines as “innovative,” but robust definitions of innovation are less well known. In this chapter, we seek to lay out a holistic framework for thinking about innovation and its key components in the context of emerging markets.

Our understanding of innovation stems from the seminal work of J. A. Schumpeter in the 1930s, one of the first scholars to emphasize the concept, stressing its role in economic development not only through the creation of new products and processes, but also through new markets, new sources of supply for raw materials and semifinished products, and new industry structures (Schumpeter 1934, 1939, 1942). Though the concept of innovation has evolved, and various researchers have advanced new definitions since Schumpeter, his work remains foundational in the field.

In 2005, the Organisation for Economic Co-operation and Development (OECD) defined innovation as:

The implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organization method in business practices, workplace organization or external relations.

(OECD/Eurostat, 2005, p. 46)

The latest revision of the Oslo Manual in 2018 broadens the definition:

An innovation is a new or improved product or process (or combination thereof) that differs significantly from the unit’s previous products or processes and that has been made available to potential users (product) or brought into use by the unit (process).

(OECD/Eurostat, 2018, p. 68)

In the new definition, the term unit refers to “the actor responsible for Innovations and refers to any institutional unit in any sector, including households and their individual members” (OECD/Eurostat, 2018, p. 20). We adhere to the same definition in this book.

While the academic literature on innovation has most frequently examined research and development (R&D) expenditures, patent applications, and intellectual property (Amann & Cantwell, 2012), since the mid-1990s other forms such as process innovation (Pisano, 1996), service innovation (Gallouj & Weinstein, 1997), business model innovation (Chesbrough, 2007), and management innovation (Birkinshaw, Hamel, & Mol, 2008) have merited attention. This was the result of a more inclusive understanding of the term – a trend reflected in the Oslo Manual, which further expanded its definition to include the social sphere.

This broader perspective on innovation is especially useful in the context of emerging markets, where innovation in and beyond products and processes often spurred emerging markets to catch up with developed countries in specific domains such as mobile technology (Chapter 5), electric vehicles, solar panels, facial recognition, and beyond.

1.1.1 The National System of Innovation (NSI)

The concept of the National System of Innovation (NSI) has been central to the study of innovation and economic growth and development since the late 1980s (Edquist, 2005). The NSI-based approach rests on the premise that innovation and technological development are the result of a complex set of relationships among stakeholders in the system, including enterprises, universities, public and private firms, and government (or private) research institutes. The expression originally referred to “the network of institutions in the public and private sectors whose activities and interactions initiate, import, and diffuse new technologies” (Freeman, 1987, p. 1). A more general NSI definition includes “all important economic, social, political, organizational, institutional and other factors that influence the development, diffusion and use of innovations” (Edquist 1997, p. 14).

One key contribution of the NSI concept is that innovation is now viewed not simply as a linear process, but rather as an interactive one engaging a wide array of stakeholders. In other words, to improve innovation performance, policies must go beyond R&D expenditures to consider areas such as taxes, finance, competition, intellectual property, and much more.

NSI discussions have traditionally focused on advanced countries, mainly the United States and Germany (Lundvall, Joseph, Chaminade, & Vang, 2011), where NSIs are far more developed. In these environments, scientific knowledge is the key criterion for innovation, and formal R&D is seen as the source of innovation, especially in high-tech sectors, with large multinational corporations (MNCs) driving most radical innovation. However, the NSI concept is useful for analyzing innovation in emerging economies. (Johnson, Edquist, & Lundvall, 2003; UNCTAD 2019).

1.1.2 Measuring Innovation Performance

Measuring innovation activities and their impacts has become increasingly important as innovation has garnered more and more attention. The OECD’s efforts are of particular importance: In 1963, it published the Frascati Manual (Proposed Standard Practice for Surveys of Research and Experimental Development), the first manual of its type. The Frascati Manual focuses on the measurement of innovation inputs, such as the resources committed to R&D or number of researchers (OECD/Eurostat, 2015). Several countries also undertook significant work on their own initiatives in the 1970s and 1980s; the US National Science Foundation published the first report on science and technology (S&T) indicators in 1973. Other countries that released science and technology reports around this time included Australia, Canada, France, Denmark, Germany, Japan, and the United Kingdom, among others.

The OECD led the next push to measure innovation through a consistent set of concepts and tools, culminating in 1992 with the first edition of the aforementioned Oslo Manual (OECD, 1992), which took other indicators into account beyond simply assessing R&D. Since its second edition in 1997, the Oslo Manual has been published jointly with the European Commission as the Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data. Subsequent editions have incorporated the progress made in understanding innovation processes, for example, adding services in the third edition in 2005 and new information technologies and their influence on new business models in the fourth edition in 2018. This latter edition also follows a more inclusive approach, including innovation at the household level. The Oslo Manual plays a crucial role in innovation measurement, as it is used by the vast majority of countries that publish innovation indicators.

Recent efforts to establish composite innovation indices that consider a variety of metrics have tried to give a more comprehensive picture of innovation efforts and innovation performance in an economy. These include the Global Innovation Index (GII) published by Cornell University, INSEAD, and WIPO (Dutta, Lanvin, & Wunsch-Vincent, 2019), which emphasizes assessing the climate and infrastructure for innovation in addition to its outcomes. We refer to the GII in Chapter 13 to illustrate innovation performance in emerging economies.

Countries have also sought guidance and assessment of their science, technology, and innovation policies. Since 2006, the OECD has published a biyearly report on science, technology, and innovation; it reviews policies in the OECD countries and beyond (https://stip.oecd.org). In its 2018 edition, the report looks at how the United Nations Sustainable Development Goals (UNSDG) led to new science, technology, and innovation (STI) policies, as well as how digitalization could allow governments to better target, implement, and monitor their policies. The OECD also regularly undertakes science, technology, and innovation policy (STIP) reviews of individual countries.

In what follows, we introduce a framework that builds on the efforts described above and that will structure much of the ensuing chapters.

1.2 An Innovation Framework for Emerging Markets

Drawing on the NSI approach (see above and Chapter 10), case studies (see Table I.1 in the Introduction), and academic literature, we have developed the analytical framework depicted in Figure 1.1. It comprises three broad components.

Figure 1.1 An innovation framework for emerging markets.

Sources: Lourdes Casanova, Anne Miroux, and Fernanda Cahen with the contribution of Rafael Escalona, Lead Researcher, Global Innovation Index (www.globalinnovationindex.org).

First, it shows the main drivers of innovation (Part I) at the institutional and governmental level, at the industry and firm level, and at the social level. These drivers lead to different types of innovations, which are captured in Part II: product innovation, process innovation, business model innovation, organizational innovation, frugal innovation, reverse innovation, and social innovation. While many of these types are also applicable to developed markets, others, such as frugal innovation and reverse innovation, are particularly relevant to emerging markets. Last, in Part III, we consider the innovation outcomes: economic performance at the macro level, competitive advantages at the firm level, and social development.

This framework covers the characteristics of innovation in emerging markets, from the key and encompassing role of the government in state-owned enterprises (SOEs) and private firms, to the role of society to promote inclusive growth in economies with low purchasing power. Together, the framework attempts to define an integrative perspective that captures the leadership of particular emerging markets (EMs) and their emerging market multinationals (EMNCs), which we detail in each chapter.

The picture of innovation in emerging markets is complex, reflecting the wide diversity of emerging countries in gross domestic product (GDP), population, and level of development. Argentina, Brazil, China, Colombia, India, Korea, Nigeria, and some countries in the Balkans – all examined in this book – reflect diverse political and economic contexts.

In the following sections, we map out the literature and provide more detail on the different components of the framework. In our review (see Box 1.1), we found that most studies focused on China, followed by India, and less on Latin America. The least frequently studied regions are Africa and the Middle East.

Box 1.1 Literature review on innovation from emerging markets

We mapped out and organized the literature in two steps.

First, we performed a systematic review. In the Web of Science database, we searched the keywords “emerging market(s),” “innovation,” “R&D,” “low-cost innovation,” “frugal innovation,” “social innovation,” “reverse innovation,” and “business model innovation.” We supplemented our search by manually going through long-established studies of innovation in EMs, journal issues not indexed in Web of Science, and country-specific studies. We disregarded working papers, dissertations, conference articles, and articles not directly related to innovation from EMs. This procedure yielded a final list of 139 articles.

Second, we considered five books: Amann and Cantwell (2012), Williamson, Ramamurti, Fleury, and Fleury (2013), Haar and Ernst (2016), Casanova, Cornelius, and Dutta (2017), and Zhou, Lazonick, and Sun (2016). Although other books related to EMs and EMNCs exist, we focused on those related to innovation.

Using content analysis, we classified the material according to: definition of innovation, geographic focus, research focus, data and method, either empirical (quantitative or qualitative) or theoretical (conceptual), and implications for innovation in emerging markets. This analysis revealed a complex context with studies of varying degrees of quality, types of analyses, and empirical settings.

We now turn to the different elements of the framework; Part I focuses on the drivers and institutional context of innovation, Part II covers the different types of innovation, and Part III analyzes the outcomes.

1.3 Part I: Drivers of Innovation in Emerging Markets

1.3.1 Institutional Contexts and Governments

Within the national system of innovation (see Chapter 3), institutions and local governments lay the groundwork for innovation. They play a key role in investments and promotion of innovation in emerging markets. Likewise, SOEs, more prevalent in emerging markets, champion innovation (see, e.g., State Grid Corporation of China (SGCC) and Argentina’s INVAP in Chapter 4; Wan, Williamson, & Yin, 2019; Wang, Jin, & Banister, 2019).

Efficient policies, regulatory framework, and a good education system are key elements of innovation. In addition to establishing a conducive environment, the government can also act as a direct driver of innovation through advantageous procurement processes and by directing funding for R&D. State involvement in the economy is substantial in many emerging markets, enhancing the government’s direct role in innovation (Finchelstein, 2017). Indeed, technology and R&D-based innovation are often undertaken by SOEs or state-owned research institutions such as the Brazilian corporation Embrapa, which is largely responsible for the country’s agricultural revolution; the state also acts as a strategic investor in public labs and private firms. While the private sector accounts for a large portion of R&D-based innovation in developed countries (as much as 40–60 percent), in emerging markets governments lead research efforts at about the same rate.

China is a prime example of a country where technology and R&D-based innovations are shaped by strong government involvement (as shown by Thun, 2018; Casanova & Miroux, 2020). This is also the case (albeit to a lesser extent) in emerging economies such as India (Krishnan & Prashantham, 2019) and Brazil (Fleury, Fleury, & Borini, 2013; Cuervo-Cazurra, Inkpen, Musacchio, & Ramaswamy, 2014). Today, China and Korea have become world leaders in innovation thanks to industrial policies promoting advancements in science and technology (Casanova & Miroux, 2018; Chapter 3).

1.3.2 Industry- and Firm-Level Drivers

Firms are at the center of the innovation process, but their ability to innovate depends, on the one hand, on industry characteristics (including the intensity of competition and foreign presence) and, on the other, on firm-level R&D investment. The latter investment includes both internal efforts to enhance the skills of their workforce and relationships with other actors in the system, such as supporting institutions, public and private R&D centers, universities, investors, and incubators.

This book highlights EMNCs’ innovation capabilities in a variety of categories to illustrate the transformation of emerging markets from innovation copycats to leaders. Analyzing industry characteristics and capability formation at the firm level is therefore essential to understanding technological upgrading and innovation in emerging markets.

The level of competition within an industry influences its level of innovation, leading scholars who study innovation in EMs to pay particular attention to the relationship between competition, pro-market reform, and innovation. For example, Fleury et al. (2013), in the case of Brazilian companies, and Amann and Cantwell (2012) emphasize the role of pro-market reforms for several EMs. Such reforms stimulated competition, which in turn incentivized local companies to innovate and internationalize to adapt to the new business dynamic.

The presence of subsidiaries of developed-country MNCs in an industry is also often considered a driver of innovation in the host economy because it can foster competition and enhance local capabilities by facilitating access to foreign knowledge or through technology transfers (Narula & Zanfei 2004; UNCTAD 2005; Li, Chen, & Shapiro, 2010; McDermott & Corredoira, 2010; Sartor & Beamish, 2014). Chapter 2 illustrates one instance of this phenomenon, describing the types, industries, and regional structure of China‘s corporate innovation and showing how Chinese companies are increasingly involved in R&D-related activities. At the firm level, drivers include firms’ innovation capabilities, R&D investments, technological knowledge, absorptive capacity, degree of internationalization, corporate governance, and type of ownership. Among these drivers, innovation capability, R&D investments, and technological knowledge are the most frequently examined (Wan, Williamson, & Yin, 2015, Wang, Libaers, & Park, 2017).

We examine the influence of internationalization on innovation in Chapter 7. In order to compete with foreign firms both at home and in the international markets, firms need to enhance their product and process development capabilities (Park, Meglio, Bauer, & Tarba, 2018). Second, international companies learn from competitors in the host country and may form technology alliances and partnerships with local firms and institutions as well as gain access to research centers. Third, the international firm may be able to reduce R&D costs by acquiring inputs from cheaper sources, and finally, when expanding abroad, EMNCs often favor acquisitions, as these provide quick access to a range of assets, including R&D capabilities (Ramamurti, 2012; Kafouros & Wang, 2015). Some studies have also shown how EMNCs specifically enhance product innovation by accessing knowledge from their R&D subsidiaries located in developed countries (Di Minin, Zhang, & Gammeltoft, 2012; Awate, Larsen, & Mudambi, 2015).

As described in Chapter 5 on e-commerce, technology has provided an opportunity for EMNCs to leapfrog and, in the case of mobile payments, has allowed China to lead a rapid expansion into other regions like Latin America or Africa. Digital technologies, Internet connectivity, mobile devices, and data analytics are triggering fast change and innovation in firms in EMs and all over the world (Cahen & Borini, 2020).

1.3.3 Society and Social Demands

In addition to the Schumpeterian approach to innovation, this book also considers society and social needs as important drivers of innovation in EMs. The social side of innovation has become an important and accepted element that transcends technology and product perspectives of innovation and focuses on delivery of value (Prahalad, 2012).

Social demands have driven innovation in, for instance, payment systems (see Box 1.2 on M-Pesa’s engagement in mobile money transfers in Kenya), communications (see América Móvil, Box 1.3), and healthcare (Govindarajan & Ramamurti, 2018). Several examples in this book show how society and social needs can drive innovation in emerging markets (Chapters 11 and 12).

Box 1.2 M-Pesa

M-Pesa was established in 2007 by Vodafone’s Kenyan associate, Safaricom. M-Pesa is Africa‘s largest mobile payment and money service with thirty-seven million customers in over seven countries. M-Pesa offers several products and services, including mobile payments, money transfer services, tax collection, and branchless banking services. M-Pesa allows users to deposit, withdraw, and pay for products via their mobile phones. M-Pesa customers first register for the service via authorized agents such as small phone stores, deposit cash in exchange for “mobile money,” and conduct transactions by entering their PINs.

M-Pesa has an innovative business model that allows customers to manage money on a digital platform and sellers to receive payments via mobile networks. The company has benefited from traditional banks’ difficulty in accessing low-income populations. The company’s innovation was to create a branchless banking model, giving access to financial services to millions of people who did not have access to formal financial systems. The company has reduced robbery, burglary, and corruption, which is common in typical cash-based societies. M-Pesa conducted over 11 billion transactions in 2018, averaging over 500 transactions per second. M-Pesa, initially used in Africa, has expanded to Afghanistan, India, and Eastern Europe.

Sources: The authors, based on www.vodafone.com/what-we-do/services/m-pesa and data from Capital IQ and 2019 Fortune Global 500, accessed November 2019.

Box 1.3 América Móvil

América Móvil, a multinational telecommunications company headquartered in Mexico City, offers numerous telecommunications equipment, products, and services, including fixed and wireless networks, network connection services, data and Internet services, interactive applications, cybersecurity, broadband, IT solutions, and others. América Móvil is the fourth-largest company worldwide in terms of wireless subscribers and the largest company outside China or India, with over 277 million subscribers.

The company offers products and services in over 25 countries with more than 360 million access lines, 241,990 base stations, and 6 satellites. América Móvil primarily distributes products and services via its extensive network of retailers and service centers. The company has 450,000 points of sale and over 2,800 customer service centers. América Móvil has subsidiaries in different geographic regions to expand its customer base. América Móvil acquired Telcel, the largest mobile operator in Mexico; Claro, which operates in Central and South America; and Tracfone, which provides services to customers in the United States.

América Móvil was a pioneer in expanding prepaid mobile telephones all over Latin America, which allowed the rapid expansion of mobile phones in the region. The company then exported this business model to the United States.

Sources: The authors, based on www.americamovil.com and data from Capital IQ and 2019 Fortune Global 500, accessed November 2019.

1.4 Part II: Types of Innovation in Emerging Markets

In Part II of the book, we move to the different types of innovation: product, process, business model, organizational, social, frugal, and reverse, which will be defined in the following sections, providing examples of leadership across them (Chapters 5, 8, 9, 10, 11, and 12). Emerging markets have often been portrayed as focusing on business model, frugal, or reverse innovation, while Western or Japanese multinationals were the “real” innovators, producing innovative products and processes. In multiple cases, EMNCs have leapfrogged their competitors from developed countries, and they are now innovators on their own in such varied industries as facial recognition, electric vehicles, major infrastructure projects, solar panels, mobile payments, logistics, or insurance.

1.4.1 Product and Process Innovation

Product and process innovation are commonly associated with technology-driven and R&D-based innovation. The Oslo Manual defines product innovation as a new product or a significant improvement to an existing one in technical specifications, components and materials, software used, user-friendliness, or other functional features. Process innovation is defined as a new or significantly improved method of production or delivery.

In product and process innovation, EM firms often begin by imitating more sophisticated competitors, then progressively building capabilities, and eventually innovating on their own. The literature reports a number of cases of EMNCs in private and public sectors that have evolved from a copycat stage to become market leaders (Dong & Flowers, 2016). Some EMNCs have been able to leapfrog developed-country firms in the type of services they provide without ever imitating them, especially in IT-based technologies such as mobile payments.

One part of EMNCs’ competitive strategy related to product and process innovation involves accessing knowledge from R&D subsidiaries in developed countries (Awate et al., 2015). The behavior of EMNCs indicates that R&D internationalization is driven predominantly by gaining access to technology, securing R&D skills, and acquiring international brands. Chapter 7 explores this issue, focusing on Chinese R&D internationalization.

Although the highly R&D-intensive pharmaceutical industry is dominated by Western MNCs, Chapter 8 presents the evolution of the pharmaceutical industries in China, India, and Brazil and explains how local companies’ capabilities have evolved. Good examples of product and process innovation are the Chinese insurance firm Ping An (Box 1.4), the cosmetics company Natura from Brazil (Chapter 11), bakery manufacturer Grupo Bimbo (Box 1.5), and the Chinese company Huawei (Chapter 13). In a single decade, each has emerged as a global innovation leader.

Box 1.4 Ping An

Ping An is a Chinese conglomerate that operates in the financial services, healthcare and insurance, automobile, real estate, and smart cities sectors. Ping An offers numerous products and services ranging from life, annuity, healthcare, medical, automobile, and corporate insurance; wealth management, banking, and credit card services for individual and corporate clients; financial leasing, consulting, and IT development services; and production and distribution of chemicals.

The company derives its innovation and business expansion via technology, by incorporating consumer data analytics, artificial intelligence, and research and development in technology within its products and services. Ping An has also established an international presence through diversification efforts including investments in companies in the fintech, healthcare, real estate, and automobile sectors. To date, the company has over 700 million customers across all its segments and subsidiaries, with global networks and contact points in over 150 countries worldwide.

Sources: The authors, based on www.pingan.com and data from Capital IQ and 2019 Fortune Global 500, accessed November 2019.

Box 1.5 Grupo Bimbo

Grupo Bimbo, headquartered in Mexico City, is a Mexican multinational baking products company that offers a variety of products, including fresh and frozen sliced bread, cookies, snacks, rolls/buns, bagels, confectioneries, pastries, prepackaged foods, and more. Grupo Bimbo is the largest baking company in the world. The company owns over 100 brands and produces 13,000 products in 32 countries worldwide. Grupo Bimbo has one of the widest distribution networks, with over 57,000 routes and 3.1 million points of sale. It has 197 production plants located across 14 countries in North, Central, and South America and Europe.

Grupo Bimbo began expanding its portfolio and product distribution in 1984, when the company first exported its products to the United States. In 1989, it opened a plant in Guatemala, expanding its distribution network into Central America. In the following years, Group Bimbo acquired numerous baking companies and chains, including American bakery Mrs. Baird’s, Brazilian bakeries Plus Vita and Pullman, Chinese bakery Panrico, and Spain and Portugal’s Sara Lee, among others.

Bimbo’s innovations have been based on upgrading competencies in production and operations through process innovation, enhancing commercial competencies, and improving marketing and the capacity to manage mergers and acquisitions.

Sources: The authors, based on www.grupobimbo.com and data from Capital IQ and 2019 Fortune Global 500, accessed November 2019.

1.4.2 Business Model Innovation

New business models allow companies to create value by introducing novelty in the way they do business, while improving, adapting, or changing their organizational functions, structures, and process (Chesbrough, 2007). While the business changes, the product can stay the same. Business models need to adjust to local needs and demands during globalization, and firms that fail to adapt have often failed in EMs due to those markets’ volatility. Because of their background in these markets, EMNCs need to be more flexible (see América Móvil in Box 1.3) and may be faster to adapt to local demands when they enter a new market. On the other hand, American companies may feel that they have perfected their business models and turned them into a competitive advantage, leading them to be more rigid in the same situation.

One of the sectors in which emerging market firms have become innovation leaders is e-commerce, and more broadly speaking Internet-related business, thanks to their formidable progress in digital technologies. Firms such as Alibaba, Flipkart, Jumia, and Mercado Libre have developed new payment methods as well as new logistics and modes of delivery to fit the needs of their markets (Chapter 5; M-Pesa in Box 1.2).

1.4.3 Organizational Innovation

Chapter 10 analyzes organizational innovation through the innovations in human resource management of one of the largest IT consulting Indian multinationals, HCL Technologies. Organizational innovation is defined by the Oslo Manual as a new organizational method in business practices, workplace organization, or external relations. Birkinshaw et al. (2008) apply a narrower perspective and define “management innovation” related to the creation and implementation of a management practice, process, structure, or technique that is new, state of the art, and intended to further organization goals. Examples of management innovation include total quality management (TQM), just-in-time production, quality circle, cost accounting, 360-degree feedback, and divisional (M-form) structure. Organizational innovation is often considered a precondition for the efficient implementation of technological innovation (Damanpour & Aravind, 2012).

1.4.4 Frugal Innovation

Frugal innovation provides significant cost benefits compared to existing solutions while responding to resource constraints (Zeschky, Widenmayer, & Gassmann, 2011). Similar terms such as low-cost innovation, bottom of the pyramid innovation, trickle-up innovation, good-enough innovation, and resource-constrained innovation all describe innovations, typically triggered by the realities of emerging markets, that are less demanding in resources. Frugal innovations often have a social dimension.

Frugal innovations can include organizational and business model innovation as well as product innovations. Frugal innovation may leverage frontier science and technology. Indian healthcare organizations, for example, have taken advantage of scale to develop innovations that enable substantial cost reductions without compromising quality. This frugal approach has been replicated in obstetrics and cardiac care in India (Krishnan & Prashantham, 2019). Aravind Eye Care, for example, famously developed a new model for cataract surgeries that enabled one doctor to do twenty-five to thirty surgeries per day instead of only five to six by implementing an “assembly line” type process, using paramedical staff to perform the parts of the process that did not require more sophisticated skills. Other examples are Tata’s Nano, a car that comes without convenience and safety features, but is priced at around $2,200; Haier‘s Mini Magical Child, a washing machine designed for small daily loads, and much cheaper than large traditional washing machines; Tata’s high-tech portable water filter; and Agatsa’s pocket-sized twelve-lead electrocardiogram or no-frills ultrasound machine for use in rural Chinese areas. Chapter 11 in this book examines frugal innovation in Brazilian multinationals, and Box 1.6 highlights Bharti Airtel’s experience.

Box 1.6 Bharti Airtel

Bharti Airtel, India‘s largest telecom company, benefited from partnerships with equipment firms such as Ericsson that invested up front in the network infrastructure. This enabled Bharti Airtel to conserve capital and expand its network rapidly, thereby paving the way for a low-cost model that has resulted in some of the lowest mobile services prices in the world.

The company extended the low-cost logic to other domains such as information technology and even transmission towers. It is a frugal innovation that resulted from a radical rethinking of the firm’s relationships with both customers and suppliers. Bharti Airtel’s approach drastically cut the cost of mobile phone calls in India.

Strategic alliances, contractual arrangements, and collaboration were essential for the company to achieve growth and frugal innovation. For example, by outsourcing IT services to IBM and promising to pay a minimum monthly payment, Bharti tied IBM’s revenue into its own growth, thus incentivizing performance.

Sources: The authors, based on www.airtel.in/ and on “Our frugal future: Lessons from India‘s innovation system.” Available at: https://media.nesta.org.uk/documents/our_frugal_future.pdf, accessed November 2019.

1.4.5 Reverse Innovation

Reverse innovation describes new products or technological processes developed by subsidiaries of MNCs located in EMs, typically to meet local needs, and later adopted at headquarters (usually located in developed countries) or in other subsidiaries in different regions (Govindarajan & Ramamurti, 2011). The literature presents distinct explanations for reverse innovation. In one scenario, the advantages of low-cost innovations can become features suitable not just for emerging countries, but also for developed ones (Zeschky, Winterhalter, & Gassmann, 2014; Wan et al., 2019). Second, there may also be market niches in developed economies with needs similar to those in emerging economies, though typically these niches are too small to be profitable in developed country markets. Third, reverse innovation can create new consumer markets in developed economies (Govindarajan & Trimble, 2012). Chapter 9 analyzes this concept in the context of Brazil.

1.4.6 Social Innovation

Social innovation refers to innovation activities and services that are motivated by the goal of meeting a social need, thereby creating value for the whole society or for a particular community (Mulgan, 2006). Though social innovation can also create value for a company or entrepreneur, its motivation is primarily social change (Cajaiba-Santana, 2014). These innovations are predominantly diffused through organizations whose primary purposes are social, although private and profit-oriented companies may play a role as well (Phills, Deiglmeier, & Miller, 2008).

Chapter 12 examines innovation in places where social demands create opportunities for deep societal transformations. Using Colombia as a case study, the chapter explains how companies operate in territories riddled with conflicts and how they create social innovation in local communities. CEMEX’s Patrimonio Hoy is another example of a firm doing social innovation in Mexico (see Box 1.7).

Box 1.7 CEMEX

CEMEX is a construction materials company that produces, distributes, and sells concrete, clinker, aggregates, and construction products such as asphalt tiles, cement blocks, etc. CEMEX offers solutions for housing, pavement, and commercial development projects. CEMEX’s products include ready-mix concrete, oil-well cement, blended cement, gravel, asphalt, sand, concrete pipes for sewer systems, architectural products, and others.

CEMEX operates in over fifty countries and is the world’s second-largest building materials company. It has 92.6 million tons of installed capacity across plants, terminals, and quarries in Mexico, the United States, Europe, South and Central America, Africa, and Asia. It first expanded internationally in the 1990s with the acquisition of cement companies in Spain and Venezuela.

The company emphasizes innovation and sustainable development by offering consulting services to firms to develop sustainable housing and commercial projects. CEMEX has also helped with financing and constructing homes to reduce homelessness in Mexico and has provided over 150,000 Mexican families with homes. CEMEX’s social innovation is reflected in the “Patrimonio Hoy” project that was originally launched in Mexico and has since expanded to several other low-income communities in Latin American countries. Within this scheme, emigrants in the United States can send their remittances directly to a CEMEX retail shop, and families receive construction materials instead of cash, thereby enabling the emigrant to better control the recipient’s use of the remittance.

Sources: The authors, based on www.cemex.com and data from Capital IQ and 2019 Fortune Global 500, accessed November 2019.

1.5 Part III: Innovation Outcomes in Emerging Markets

In Chapter 13, we examine the third pillar of the framework, the outcomes of innovations: (1) at the country level, in terms of country performance; (2) at the firm, in terms of level of competitive advantages, based on firm-level analyses of innovation capabilities; and (3) in terms of social development that transcends economic growth to encompass social stability, prosperity, and equality.

At the macroeconomic level, a large body of literature has tried to assess the specific impact of innovation on growth and economic development. This book provides case studies of EMNCs and country progress in innovation without attempting to construct broad theories of how innovation can help economic development.

Throughout the book, the firm-level experiences of EMNCs illustrate how innovation has boosted firms, catapulting many of them to leadership positions.

1.6 From Copycats to Leaders

Emerging markets were once seen as merely producers of cheap products; today, many of them are moving up the value chain in terms of efficiency, quality, and increasingly innovation. No longer are they simply copying advanced economies, but leading the way in categories as varied and sophisticated as e-commerce, electric cars, mobile payments, electricity technology, and specific health services. Some emerging market firms are among the largest R&D spenders in the world, creating new high-technology goods and services; Korea‘s Samsung and China‘s Huawei, discussed in Chapter 13, are notable examples. Other firms have introduced new business models or organizational processes that enable them to respond to less-affluent consumer markets than those in developed economies. A number of these successes are based on disruptive innovations that not only impact emerging economies but also influence markets and firms in developed countries. We are witnessing a radical change in the geography of global innovation, with far-reaching economic, social, and political consequences that may not yet be fully understood.

This book does not intend to provide an exhaustive picture of this evolution, but rather takes the reader through a number of experiences at both country and firm levels to illustrate the ongoing changes. The innovation framework introduced in this chapter gives an indication of the mechanisms through which this change has been possible. There are a number of reasons for this approach. For one, innovation capabilities and performance are uneven among emerging economies, and the magnitude of the changes might be lost in an overbroad view. Even if only a few emerging economies are in the lead group of innovative nations, their position challenging incumbents from developed markets represents a paradigm shift in the global landscape. In addition, a number of innovations taking place in the emerging world do not involve large R&D budgets. Both EMNC firm leadership and unique approaches to innovation from other firms demonstrate the extent to which emerging markets have changed the game on innovation.