PIYUSH GOYAL

12107092

Assignment on Reverse Innovation

Student Name Piyush Goyal MMU ID - 12107092

Table of Content

PIYUSH GOYAL

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1.Introduction Innovation is said to be important pillar of multinational enterprises and is anticipated that innovation is originated from developed countries where all the Multinational firms are located. This paper will focus upon Reverse Innovation. In few decades it has been seen that Developing and emerging countries also contributes in innovation, which means its being flowing from developing to developed countries, which is said to be Reverse Innovation. While when innovation is done in developed country like UK and USA and is been spread to developing / emerging countries like India and china then its called trickle down Innovation. Researcher have found that Developed Market Multinational Enterprise (DMNE) are investing their R&D 90% in developed country and 10% in emerging country since late 2004 to capture Knowledge and innovate all around the world which give possibility of innovation at emerging market and then flowing to developed market. Innovation in emerging market will be more recognized then innovation at developed market. Bharti Airtel wireless telephony, Tata Nano and Grameen Bank (Micro Finance) are some examples of trickle up innovation. This paper will able to answer about why innovation travel from developing to developed country now but not before. It will also talk about competitive advantage of firms coming from emerging market over developed market. Later on it will be focusing upon how Emerging Market Multinational Enterprise (EMNE) and DMNE participate in the dispersion process of reverse innovation and how their innovation helps in knowledge development and economic growth.

2.Reverse Innovation

Its been seen that innovation is been flowing from rich country to poor country since last two century. But in last one decade we have seen innovation is flowing from poor country to rich country totally opposite of before. Rich country wants innovation from poor country since there are many people who are being frustrated due to decline in their income level and graduates students are being unemployed. As we can see the use of Grameen bank facility, which was firstly used in Bangladesh, is now used in USA for funding inner poor city in the country and they have 4 branches with over $56 million loan and now are being joined by big bank like Citigroup (Chad OConnor, 2012). Social enterprises are being important in developed countries like

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USA to fight against recession and European Union to cope up with the ongoing Recession (Felicity Carus, 2010)

In emerging country per capita income of the consumers are low so they want the product, which are cheaper and with improved features which creates the possibility of affordability innovation in emerging market. Innovations done by emerging country are not technological but are done as per the demand of the public and for solving their local problem. They innovate through combination of existing knowledge and technology, which is being carried by local firm or any foreign MNE in emerging market. Innovation done is being flowed to developed country and is developed as per their need. Reverse innovation mainly see where the innovation is first adopted and brought into use it doesnt see where it is developed further and brought into use. As we can see in the case of General Electrical ultralow cost ultra sound was firstly innovated in china. Its explain that innovation can also happens in emerging country and then can trickle up to rich countries as well. In Emerging country per capita income of the consumers are low so they want the product which are cheaper and with improved features which crates the possibility of affordability innovation in emerging market.

3.Why Innovation Trickle up from Poor to Rich Country

Industrial backward countries are competing and catching up in emerging market as well as developed market like India and China. There are factors, which have raised higher chances of innovation in emerging countries then prior period. Rise in Gross Domestic Product of the emerging market has been seen in last decade and in present time it is increasing with a great pace and it will share the 2/3 of the world GDP in coming decade. DMNE are targeting emerging market seeing the GDP growth. MNE were not able to enter due to FDI restrictions in prior periods but now globalization and internationalization have opened the way for them and DMNE can participate in innovation process. Bharti Airtels innovation like ultracheap wireless telephony was not possible before liberalization of India, which gave them the technological path for innovation. DMNE targeted people before were of premium segment but their realization about the consumer needs in emerging 5

countries made them to innovate in emerging markets. The creation of Tata Nano was one example, which challenged DMNE about their innovation and technological skill, which added to the local innovation of emerging market.

Innovation has three process stage firstly it is adapted in the emerging country like India and china. Secondly its being shared with other developing and emerging countries and lastly transferring to developed country as well. Innovation can trickle up to rich country if they have a market and product that can meet poor people demand of rich country. Example reduction in the price of the product by 70 to 90 % example general electrical innovation which reduced the price and made it fall by 70 to 80% in USA. New features developed for emerging market can trickle up its innovation to developed country by creating new segments for developed countries. Like portable ECG machine opened a new market for GE to compete.

4.Competitive Advantage of firms from Emerging Market

Reverse innovation says about flow of innovation and technology from emerging to developed country so it has arises many questions like how ownership advantage will be enjoyed by EMNE over DMNE and how will this capabilities will lead them to internationalization process will EMNE exploits its current knowledge by going abroad or they acquire new knowledge (Mathews, 2002; Narula, 2006). Emerging markets firms relays too much on the advantage of their country and moreover they depend on their general knowledge and technological skills. Its been seen that EMNE has great knowledge about the consumption pattern of their country, low cost manufacturing cost and needs of the consumer which will give them competitive advantage over DMNE in knowing people more and having a deep understanding about them. Secondly EMNE enjoys the first mover advantage in their country since due to restriction and barriers in entry of FDI in the country, EMNE enjoys the advantage of utilizing resources and benefits to full. MNES in emerging market have fewer prior investment then DMNE and have a presence of patient capital with them. Tata Nano is one example, which is world cheapest car, was produced in India as per the need of poor and middle class family (Chad OConnor, 2012).

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MNEs from emerging market have pricing pattern and same product, which is well suited to other emerging market consumer as well which gave them the competitive advantage over the DMNEs in other emerging market too. MNEs have high prospect of getting more profit by moving to developed counties later on. MNEs from emerging market dont have any internal resistance to expand their product and market and are well aware and unconstrained about risk and investment of launching product in new market. For Ex we can see the case of telephone service in India 95% people use pay as you go top up since they have less income and now it is been used all over the world peoples in USA are cancelling their AT&T and Virgin contract to cut of their expenses and Law street journal stated that out of four American one has Switched to prepaid plan.

5.How do EMNEs and DMNEs compete in diffusion process of Reverse Innovation?

Reverse innovation is diffused by EMNEs and DMNEs in three stages. First stage will talk about the advantage that EMNEs have over DMNEs. EMNEs have first mover advantage in the emerging market and are well known about the market as paper discussed earlier and have fewer restrictions on the same side DMNEs have challenges like zerobased innovation for the foreign market though they have big pockets and technology with them. EMNEs have large and powerful market and understanding of local surrounding thus they will be patient about their strategies and plan and on the same hand side DMNEs though have larger share in the whole world wont be able to cope up with near surroundings. Thus to be in the market they have to change and adapt the new plans and strategies of the business so that they dont deviated by the local firms and EMNEs.

Second stage says about how EMNEs and DMNEs share innovation in other emerging market. Both the enterprise has equal sharing and presence in emerging market since EMNEs innovate which are well suited and are based as per their needs and requirement and are therefore easy to innovate and share with them. While in the second hand side DMNEs have great presence in the world and have brand recognition all over the world so they also contribute and share much larger market in emerging market. Last but the third stage says about winning in developed country of 7

the world. In this challenges behind DMNEs are placing reverse innovation against existing offers and to manage the threat of cannibalization where they share a large market and presence and have brand recognition in rich country of the world. For example Nestle produced noodles for emerging market, which got boomed in developed country and now nestle has launched its product in Australia and NewZealand which has opened new market for their products.

6.How both EMNEs and DMNEs innovation contribute to knowledge development and economic growth

The last area where Reverse innovation raises questions, which relates to FDI spill over which DMNEs has on emerging market. There spillover effect can be both negative and positive in developing countries. Positive spillover relates to enhancing of local competitor, customers and suppliers. Negative spillover are closing down of local firm and crushing of their local technology. Reverse innovation also helps in transferring of knowledge from DMNEs to EMNEs and vice versa which can be beneficial for both of market. Spillover effect is seen moreover more in emerging market since local suppliers and firms get to know about the technology and new methods of carrying business innovation by exploiting their recourse to full in a sustainable way. DMNEs also remove the local firms, which help in improving the market and increase the competition in market by making it more saturated and clear for business. They also help local firms in knowing about international standards to carry business in developed market as well like Bharti Wal-Mart in India, which removed the small local suppliers and set the equal pricing standards for all the local business. Reverse spillovers is that in which DMNEs learns from customers, suppliers and local firms in emerging market about their new business model, new technology, and management practices. It happens only when DMNEs feels they are being suppressed by the local firm and they are falling behind the market demands, at that time they have to change their technology and business practice and adopt methods use by the local firms or changes their business model and try to know how they sell, produce and design product according to the customers like McDonalds learned from Indian market when they first launched their products they were not successful since they used beef burgers as very less amount of people eat beef in India but later on they

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changed their food product according to Indian culture. Reverse spillover can be also seen when EMNEs invest in developed country to grab intangible assets like brand and technology to be known in world-class clusters (Mathews, 2002; Aulakh, 2007; luo and tung 2007). Reverse innovation and Transfer of Knowledge helps in economic growth of the country in both the country i.e. poor or rich. Rich country forgets to target people who are poor thus Grameen bank facility helps them to finance and fund peoples in poor village. On the other hand side it helps poor country to develop company R&D department and it also helps in increasing the global awareness of the people in poor country by increasing the education level of people. Which itself will contribute in development of the economy and rise in per-capita income of the country.

7.CONCLUSION

Reverse innovation is the present trend, which is been seen since last one decade and will continue to rise since they have higher presence of the consumers. Poor countries contribute more then the rich countries in GDP of the world and will raise more in coming decades. Reverse innovation helps both the country weather its poor or rich in economic Growth of the country since there is presence of poor people in rich countries also and there is presence of rich people in poor countries also as we can see some example like innovation of Grameen bank and Tata Nano. Innovation is being shared in emerging market first and then it trickles up to developed or rich country. EMNEs has large competitive advantage then DMNEs due to their knowledge about the local market and suppliers. Innovation from emerging markets has much more value and recognition. Firstly innovation was not seen due to lack of knowledge and transparency in the business but now its clear and government has become flexible in inviting MNEs to their country, which are carrying innovation activity. Reverse innovation also helps in knowledge transfer between DMNEs and EMNEs. Innovation activity in poor countries are being lad by EMNEs and more of innovation activity are going to be seen in much more poor countries. Innovation is first led my EMNEs and then are followed and taken by developed countries. Reverse innovation will help emerging market to grow and compete with the developed market

http://www.boston.com/business/blogs/global-businesshub/2012/12/reverse_innovat.html

http://www.guardian.co.uk/sustainable-business/reverse-innovation-social-solutionshome

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