Reverse innovation, emerging market and global strategy v3
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  • Although DMNEs strive to capture knowledge and innovations around the world (Cantwell & Mudambi, 2005; Kuemmerle, 1997), in 2004 most of their foreign R&D (90%) concentrated in TRIAD regionAs locus of innovation is now changing, possibility of important innovations occurring in developing countries and then trickling up to developed countries is only now getting recognition (Immelt, Govindarajan & Trimbel, 2009; Ramamurti, 2009)
  • To answer this, we may require historical analysis of the national and international environment at different times to discern key driving forces
  • Other critics: detail of how to create a clean slate product design and organizational design was not discussed.

Reverse innovation, emerging market and global strategy v3 Reverse innovation, emerging market and global strategy v3 Presentation Transcript

  • REVERSE INNOVATION, EMERGINGMARKET AND GLOBAL STRATEGY Paper by : Vijay Govindarajan and Ravi Ramamurti Global Strategy Journal 1: 191–205 (2011)Course: Technology ManagementA Paper reviewTuesday, 13 November 2012
  • Agenda Sandra• Introduction• Innovation Sonia• Internationalization processes• DMNEs strategy and management Nia• FDI spillovers• Critical review & conclusion
  • What is the paper about? Questions Research agenda 1 •What kinds of innovation Innovation Rich emerging economies are Coun likely to spawn Reverse tries Traditional view innovation 2 •Why such innovations Internation might diffuse to rich alization countries Poor developing countries 3 •What competitive advantages local and MNE foreign firms enjoy in this management process Reverse innovation: 1. Adapted in poor countries 4 •How it affects the global FDI 2. Trickle up in rich countries strategy and organization spillovers of established MNE1sNotes: 1. Multi-national enterprise 2. Foreign Direct Investment
  • Traditionally, innovation is assumed to be originated inrich countries • One of the pillars of multinational firms (Bartlett & Goshall, 1989) • In Int’l Business Literature: Innovation  Often equated with technological innovation (Caves, 2007)  Assumed to be originated in developed countries where MNEs are located • USA as a technological leader and source of : Traditional  Product innovation  target high-incomeView (Vernon, customers 1966)  Process innovation  substitute capital labor • USA’s MNEs spread it to EU, Japan and also developing countries • Europe and Japan closed their income and Traditional technological gaps by 1970sView (Vernon, • Vernon argued : “Innovations would now diffuse 1979) horizontally among developed countries and downward to developing countries ”
  • Recently locus of innovation is changing 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 Shares of global R&D’s spending1 # of patents registered in USA USA EU Japan China India by countries of origin1 2% 2.9% 9.5% 11.5% 2000 2010 14.2% 17.1% 13.5% 11.2% 1652 25.9% 24.1% 465 34.3% 31.1% 112 94 68 115 66 121 2007 2012 China India Russia BrazilSource: 1. Roland Berger Global Topic 8 Billion report
  • Some reverse innovations have found its way to the west 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 ? “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 innovation has some historical parallel but exhibit new differences (1) Example How firms in industrially backward countries of catching up: start with low end product and work historical their way up (i.e. Japan and Korea post-war) parallel (Tsurumi, 1976; Amsden, 1992) Differences Past Current • Innovations as response on • Opportunities and constraints in opportunities and constraints poor country is systematically of biz environment different than rich countries • Innovated outside their • In really poor developing home-country (still TRIAD) countries and often join efforts with local entrepreneurial firms • Adapted products for other • Adapted for mass market of TRIAD market  Japan’s PPP1 poor countries was 81% of USA (1985)  China’s and India’s PPP were 15% and 7% of USA respectively (2009)Notes: 1. Purchasing power parity
  • Reverse innovation has some historical parallel butexhibit new differences (2) Differences Past Current • Japan and Korean firms • But not an ultra low-cost export cheaper and better products (i.e. $2.5K car or $50 cars to US, disrupting auto computer) industry • Western MNEs unable to • DMNEs able to participate in enter an compete due to innovation process of emerging tariff, non-tariff and FDI countries as its less-barrier barriers • Globalization did not exist • Flattened world with gateways at current’s extend to internationalization (Friedman, 2005; Williamson and Zeng, 2009) Reverse innovation is a new phenomenon with familiar and new features
  • Four research agenda 1 2 Internationalization Innovations processes 3 4 DMNEs strategy and FDI Spillovers management
  • Reverse innovation exhibit aspects that does not fit existing mainstream view (1) Reverse innovation’s Topic Mainstream view Questions aspects • Trickle down from rich • Trickle down from poor • What kind of innovation to poor countries to rich countries spawns in emerging countries?Innova • Start with lead users • Start with laggards tions users • Why occur just now? • Why would innovation trickle up? • MNEs originate in rich • MNEs also originate in • What are the countries and spread emerging countries then competitive advantages globally spread globally of EM Firms?Interna  Based on  Leverage home-tionaliz proprietary based innovations • How to facilitate technology / internationalization? ation brands • How do EMNEs and DMNEs compete in different stage of reverse innovation?
  • Reverse innovation exhibit aspects that does not fitexisting mainstream view (2) Reverse innovation’sTopic Mainstream view Questions aspects • Develop product • Develop new product • How does reverse platforms in TRIAD platform in EMs for EMs innovation affectDMNE market “Glocalization” ofstrateg DMNEs? y and • Global product • Global mandates for • Can Glocalization andmanag mandates to some products to Reverse Innovation isement subsidiaries in other subsidiaries in EMs pursued at same time? TRIAD market • Local firms in EMs • DMNEs capture • Who learns from whom capture spillover from spillover from local and why? FDI DMNEs that invest in firms when they investSpillov EMs in EMs (bi-directional learning) ers
  • InnovationsWhat kind of innovations spawn in EMs ? What makes What mass market in EMs required? innovations in EMs Affordability innovationdifferent than in rich countries? • Price • Performance Large income per Suit local conditions capita gap (rich vs • Sturdy to harsh condition poor countries) • Portable, easy to operate Innovation in biz model Conditions of • S&D which product is used • Financing scheme (Khanna & Palepu, 2005) Fundamental rethinking of biz model for success in emerging market is needed (Ramamurti and Singh, 2009)
  • InnovationsWhy reverse innovation occur just now andnot earlier? Demand and supply of local innovation have only just come together in EMs Demand side • Accelerating growth of EMs (2/3 of World’s GDP) • Slowing down in developed countries (Eurozone and USA crisis) • Local firms can draw local and global resources to Supply side 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
  • InnovationsWhy innovations can trickle up from poorto rich countries?Three stages of reverse 5 Reasons why it can trickle up to rich countries innovation • e.g. Microfinance 1. Adoption of There are poor people in rich is favorable in innovation in EMs countries developed nations Ultra low cost products for EMs • Price elasticity and may expand overall market experience curve demand 2. Transfer to other EMs • e.g. New features can create market portability, sturdin segment in rich countries ess, easy of use  GE ECG 3. Transfer selectively Technology of “good-enough” • e.g. GE portable to developed countries products for Ems may improve over widen to radiology time to satisfy high-end customers applications Perplexing due to large distance between rich & poor Ems may leapfrog to latest • e.g. wireless countries (Ghemawat, 2001) technology banking
  • Internationaliza tionWhat are the competitive advantages of EM firms? Internationalization Competitive advantages of EM firms process - • EMNEs may act as “global first mover” • Rely too much on home country (Ramamurti and advantages (Rugman, 2009) Singh, 2009). • Possess only ordinary resources and few intangible ownership • However, in the benefit (Madhok, 2010) future, more DMNEs may trigger stage 1 themselves  to pre-empt local+ firms from getting a head start with• Deep understanding of local needs reverse• Strength in ultra-low cost design innovation and manufacturing• Strength in S&D at home market
  • Internationaliza How do EMNEs and DMNEs compete tion in each stage of reverse innovation ? DMNE’s challenges DMNE’s advantages EMNE’s advantages • Zero-based • Wide technology • Customer relationship 1. Win in innovation for a reservoirs within • low cost solutions foreign market firm • key EMs Clean slate approach • Give subsidiary • Familiarity with • Strong commitment to access to firm‘s several EMs local market global technology • Deep pocket • Access to local resources & capability 2. Win in • Manage transfer to • Preexisting • Product pricing other EMs other EMs distribution and • Features suit EMs brand recognition • Positioning reverse • Strong • Unconstrained by 3. Win in innovation vs presence, brand, c prior investment or rich existing offers ustomer cannibalization risk countries • Manage risk of relationship, and • Rising margins in cannibalization S&D in rich moving upscale countries market • No internal resistance for expansionLegend: Strong Weak EqualNotes: EMNE = Emerging Market MNEs; DMNE = Developed Market MNEs
  • DMNE strategy and management How does reverse innovation affect “glocalization?”Global strategy of DMNEs - 3 Potential Traps for DMNEs to master reverse “Glocalization” innovation Economies of global scale Familiarity • Difficult to understand needs and opportunities for biz model trap innovations in EMs Localadaptation • Organization is more likely to exploit competencies that they Competency excel at (March, 1991) trap • MNEs core competency is to • In reverse innovation, it seems that national support premium products responsiveness is more important to compete in • Organizational inertia (Tripsas & mass market of EMs Complacency Gavetti, 2001) trap • Rather invest in “well-known success formula”
  • DMNE strategyCan “glocalization” and reverse innovation and managementdone together? GE Portable Ultrasound Global Key success : LGT formula Revenues • Full biz unit with their own P&L, responsibility FY 2002 and dedicated local resources in all value chainUS$ 4 Mn  Design new offerings from blank page rather than adapt global products (Govindarajan & Trimble, 2005b) • Judged based on performance criteria other FY 2008 than rigid, short-term financial measures US$ 278 Mn (Govindarajan & Trimble, 2010) • Likely to connect and leverage company’s global resource base (Ambos, Asakawa & Ambos, 2010)  Global technology and resources give a Ultrasound price in 2009: significant edge over local competitors Portable = US$ 15-100 K (Govindarajan & Trimble, 2005) Conventional = US$ 100 – 350 K
  • FDI Spillovers Who learns from whom and why? Spillover impact from FDI Spillovers DMNEs to local firms Where does the learning occur? • Help upgrade local Emerging market Developed country + competitors, suppliers and customers EMNEs learnt Traditional from FDI in DMNEs spillover developed • Crowding out localTeach countries ers DMNEs learnt - firms • Suppressing local technology Reverse from EMNEs in EMNEs innovation developed countries Constraints in spilloverReverse spillovers: learning by DMNEs in EMs about• New biz model, management practice, suppliers & customers  Traditional : Technology• Technology from local competitors absorption  Reverse innovation :Reasons of reverse spillover: organizational constraintsimminent threat of disruptive competition from local firms
  • Differences in product needs at emerging market vsrich 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 area1. How is the true extent of reverse innovation and its potential2. 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 reverseinnovation is needed Reverse innovation’s true potential need further study • 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
  • What kind of innovations that emerging countrieslikely 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 Nature ofinnovationsin emerging  Use new process and business model countries  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
  • 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) Daihatsu Coero• 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)