Figure 3: How influential are the following aspects of government policy when deciding to invest in a particular market?
Source: Globalization survey 2010
Summary: Rather than innovate centrally, then adapt or de-feature products to suit different price points, companies are increasingly decentralizing the innovation process, setting up multiple innovation hubs in key strategic markets, and relying on external partners as a source of ideas and intellectual property.
At present, companies in our survey conduct a relatively small proportion of their research and development (R&D) in emerging markets, despite the importance of these economies to their growth prospects.
Overall, just 16% of respondents say that more than one-quarter of their R&D expenditure is invested in emerging markets.
Figure 2: What proportion of your company's R&D expenditure is invested in emerging markets currently? (Figure shows proportion of regional respondents for whom more than 25% of R&D is invested in emerging markets)
Source: Globalization survey 2010
But over the next five years, this picture will change.
The proportion of respondents that will conduct more than one-quarter of their R&D in emerging markets will almost triple in Western Europe and more than double in North America.
Overall, around 28% of companies will spend more than one-quarter of their overall R&D investment in emerging markets five years from now.
Just as Western multinationals are ramping up their innovation efforts in countries such as India, so too are emerging market multinationals eyeing similar investments in the West. “In the future, we will set up innovation centers in the US and Europe,” says Kris Gopalakrishnan, President and CEO of Infosys. “Technology allows you equal access and distance is not a problem.”
Figure 3: How influential are
the following aspects of government
policy when deciding to invest in
a particular market?
Around the world, governments provide a range of grants, loans and tax advantages with the express aim of attracting and retaining R&D activities.
In recent years, the vast majority of countries have increased and enhanced their R&D support and are introducing a range of innovative measures to encourage companies to increase their R&D investment at a time when many may be tempted to rein in their expenditure on innovation efforts.
What do companies need to do?
- Realize that R&D can no longer be something practiced at the corporate headquarters and then cascaded into other markets.
Companies need to adopt a more open approach that relies on networks of “hubs” in key strategic markets.
As companies develop more R&D centers around the world, they should ensure that these are linked and that there is fluidity of knowledge and human capital between them. In fact, studies have shown that the dynamics of team diversity stimulate creativity.
Innovation thrives on the “diversity of thought” and debate that emanates from R&D project teams comprised of people from different cultures, backgrounds and work experiences.
Tata Consultancy Services (TCS), for example, runs a Co-Innovation Network, which brings together internal and external innovation partners, including academic institutions, start-ups, venture funds, partners and clients.
This decentralization of R&D, whereby products are developed locally and companies use skills and capabilities from around the world, is slowly becoming more commonplace.
“Large multinationals need to start mapping the different innovations, capabilities and assets that are available to them,” says Navi Radjou, Executive Director of the Centre for India & Global Business at Cambridge Judge Business School, UK. “In the polycentric model, you accept the fact that there are multiple centers of excellence around the world. The key point is to know which center is good at what. Then, depending on the context, you bring them together into a global network.”
- When entering emerging markets, companies need an approach in which experiments are supported and in which failure is not seen as a stigma.
This means behaving more like a venture capital firm — testing ideas and, if they are successful, scaling them up quickly.
Because most companies are built for efficiency, rather than innovation, executives can find this change of mindset difficult.
Innovation in emerging markets often requires new business models, as well as products. Western multinationals, for example, must make the transition from a business model based on higher prices and lower volumes to one based on lower prices and much higher volumes.
“Companies in emerging markets may be adding millions of new customers every year,” says Moazami. “The ability to serve this colossal body of consumers on a high-velocity and low-cost basis requires unprecedented levels of business model innovation.”
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