"17 percent of Global Innovation is Coming From Emerging Markets"
he year 2007 marked a major turning point for General Electric Corporation (GE). For the very first time, in GE’s more than century-old history, the company earned more from its operations outside of the US, than within. That, as the company revealed, was due to strong growth in emerging markets like India and China.
Instances such as this one are forcing Western multinational companies to rethink their strategy to factor in the rise of emerging markets in their growth plans. As a result we are seeing the emergence of interesting new organizational models in multinational companies. While some are looking at emerging markets for revenue growth primarily, others have shifted greater operational control to emerging market subsidiaries. Yet others like GE have gone a step further and are looking at emerging markets as a source of innovation that has application in Western markets as well (a concept that GE CEO Jeffrey Immelt calls ‘reverse innovation’).
According to Venkatesh Shankar, the Coleman Chair Professor in Marketing at Texas A&M’s Mays Business School, emerging markets already contribute 17% to global innovation, and the figure will rise further. He has been studying how emerging markets are reshaping the innovation architecture of global firms. In this interview, he talks about the changes that are kicking in and the challenges that stand in the way. Excerpts:
Q. Over the last few years, we’ve been seeing of the locus of innovation shifting to emerging economies within many multinational companies, such as GE, Philips and Cisco. Who to your mind is an outstanding example of a company that has done this really well?
A. I don't think there is any company that I would call it an outstanding example. Every company is at a different stage of shifting their innovation architecture. And the companies that you mentioned are there earlier than the others. GE has reaped a lot of benefits of reverse innovation. But if you look at their portfolio of innovation architecture, it will not boast of more than 20% of innovation from the emerging markets. So they are at different stages. I would think that these firms have early experience, and but they're still learning.
Q. What kind of changes are companies making to their internal structures to factor in emerging markets?
A. There's already a significant participation of emerging market executives on the boards of multinational companies now. Typically we see multinational companies that are based in the West, headquartered in the West. But we already have a lot of emerging market-based multinational companies that are going aggressively out. India is a prime example. Tata has been more aggressive than the others. Then you have Lenovo and Haier from China. We see more and more emerging market executives on the on the board of companies. Cisco and Microsoft are good examples. Among the leading contenders for the Microsoft CEO job, one or two are probably emerging market people. Emerging market voices are being increasingly heard. So it’s not only that they have a seat at the table, but they have an important role to play. This is a positive development from the point of view of balancing of thinking power, balancing of innovation architecture spread throughout the world.
Q. What are some of the new models that are emerging?
A. If you look at the ways companies are going about embracing emerging markets, including and involving emerging markets in decision-making, there are two ways they are approaching them. One, they're looking at emerging markets as primarily a source of revenue. So by 2025, 17% of the growth is going to come from emerging markets. That’s a huge number. Two, these markets also become a huge talent pool. That’s also accelerating the way they are placing R&D centers and product development centers, which is also helping emerging markets gain more clout in the decision-making of multinational companies all over the world. Companies are approaching it from both ends: first getting more emerging market executives to be in charge of marketing not only in one emerging market, but lots of emerging markets as well as some developing markets because they have a role to play in the extraction of revenues, but also in the supply of talent. Emerging market executives are becoming more prominent in the headquarters.
The headquarters themselves are not just focused on their one corporate location, but are also spreading over. Halliburton, an oil services company, now has dual headquarters in Houston and Dubai. Even though Houston is the registered office, Dubai is becoming a co-headquarters because the Middle East and the rest of Asia and Russia have become a hotbed of oil exploration. To be able to serve and manage those markets, you need a strong presence. Also, Halliburton has discovered that if they have a co-headquarters, (it) signals a positive commitment and outlook about their intention about emerging markets. So more and more companies like Cisco and Halliburton are going to start treating emerging markets as very significant bases if not the sole headquarters: it could be a co-located headquarters, headquarters for design engineering, headquarters for supply chain. There could be more of this coming in the future.