Reverse innovation is a new phenomenon where innovations are first adapted in poor, emerging countries and then diffuse to rich countries. The paper examines this phenomenon across four research areas: 1) the types of innovations emerging from developing countries and why they may spread globally, 2) how internationalization processes are changing, 3) how multinational enterprise strategies and management must adapt, and 4) the effects on foreign direct investment spillovers. The rise of emerging markets is challenging traditional views of innovation originating solely in wealthy nations.

1. REVERSE INNOVATION, EMERGING
MARKET AND GLOBAL STRATEGY
Paper by : Vijay Govindarajan and Ravi Ramamurti
Global Strategy Journal 1: 191–205 (2011)
Course: Technology Management
A Paper review
Tuesday, 13 November 2012

2. Agenda
Sandra
• Introduction
• Innovation Sonia
• Internationalization processes
• DMNEs strategy and management Nia
• FDI spillovers
• Critical review & conclusion

3. 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 MNE1s
Notes: 1. Multi-national enterprise 2. Foreign Direct Investment

4. Traditionally, innovation is assumed to be originated in
rich 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-income
View (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 1970s
View (Vernon, • Vernon argued : “Innovations would now diffuse
1979) horizontally among developed countries and
downward to developing countries ”

5. 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 Brazil
Source: 1. Roland Berger Global Topic 8 Billion report

6. 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)

7. 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

8. Reverse innovation has some historical parallel but
exhibit 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

9. Four research agenda
1 2
Internationalization
Innovations
processes
3 4
DMNEs strategy and
FDI Spillovers
management

10. 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?

11. Reverse innovation exhibit aspects that does not fit
existing mainstream view (2)
Reverse innovation’s
Topic Mainstream view Questions
aspects
• Develop product • Develop new product • How does reverse
platforms in TRIAD platform in EMs for EMs innovation affect
DMNE market “Glocalization” of
strateg DMNEs?
y and • Global product • Global mandates for • Can Glocalization and
manag mandates to some products to Reverse Innovation is
ement 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 invest
Spillov EMs in EMs (bi-directional
learning)
ers

12. Innovations
What kind of innovations spawn in EMs ?
What makes What mass market in EMs required?
innovations in EMs
Affordability innovation
different 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)

13. Innovations
Why reverse innovation occur just now and
not 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

14. Innovations
Why innovations can trickle up from poor
to 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

15. Internationaliza
tion
What 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

16. 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 expansion
Legend: Strong Weak Equal
Notes: EMNE = Emerging Market MNEs; DMNE = Developed Market MNEs

17. 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
Local
adaptation • 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”

18. DMNE strategy
Can “glocalization” and reverse innovation and management
done 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 chain
US$ 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

19. 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 local
Teach countries
ers DMNEs learnt - firms
• Suppressing local
technology
Reverse from EMNEs in
EMNEs
innovation developed
countries Constraints in spillover
Reverse 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 constraints
imminent threat of disruptive competition from local firms

20. Differences in product needs at emerging market vs
rich 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

21. 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

22. Future research area
1. How is the true extent of reverse innovation and its potential
2. 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”

23. Appendix

24. Further study to understand true extent of reverse
innovation 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

25. What kind of innovations that emerging countries
likely 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 of
innovations
in 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

26. 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)