The Innovation Wave in Emerging Markets

Once the province of technology and pharmaceutical companies, innovation is rapidly moving up the agenda of CEOs throughout the global economy. “Meeting the Innovation Imperative” is the key theme at the World Economic Forum’s annual meeting in the Chinese seaport city of Dalian. Here, at the Dalian Convention Center—whose sleek design and smart use of new technology make an appropriate setting—more than 1,600 top executives from 90 countries have been thinking through the implications. With global competition fiercer than ever, leaders of countries and companies have no option but to employ an innovation-driven strategy: to harness technological, economic, and social shifts and create an environment conducive to entrepreneurship and innovation.

Innovation, almost by definition, has the potential to ignite growth and boost performance. It is sought—and celebrated—for good reason. But in turbulent times, when R&D budgets are vulnerable and growth is more elusive, the stakes are even higher. The right idea, launched at the right time, can push a company far ahead of its peers.

None of this is lost on today’s executives. In a recent BCG study of the world’s most innovative companies, 85 percent of CEOs we surveyed ranked innovation as a top-three priority, with 40 percent ranking it as the top priority. They understand, better than most people do, that in a world of rapid change, standing still means falling behind.

It’s a valuable insight in general but, based on conversations I’ve been having here in Dalian, it resonates particularly well in emerging markets. Indeed, some of the most creative and profitable ideas are coming from these markets. Take Xiaomi, a Chinese consumer electronics maker that has been dubbed the “Apple” of China. It is great at developing elegant products at low prices that reflect a deep understanding of its customers.

Some 90 percent of Indian companies and 89 percent of South American ones rated innovation a top-three priority, compared with the global average of 76 percent. And in the past five years, the number of patents granted by the U.S. Patent and Trademark Office to companies based in emerging markets increased at a rate more than three times faster than that of companies in other countries.

While every company has its own reasons for investing in new ideas, I can think of three reasons why innovation has become a high priority in emerging markets.

First, sustainability is a powerful catalyst for change. A study we did with MIT Sloan Management Review found that companies in developing markets are the most likely to focus on sustainability-related business model innovation. It’s often the best way—sometimes the only way—to deal with acute resource scarcity and population growth challenges (necessity, of course, being the mother of invention).

It’s worth noting that some of these companies are doing a lot more than just coping with constraints. Together with the World Economic Forum, BCG identified a group of “sustainability champions” that have managed to consistently generate above-average growth rates and profit margins, proving that you can do well by doing good.

Second, companies in some emerging markets—China and India, in particular—are seeing the end of easy growth. Their home economies, while still growing, are downshifting, and their cost advantages—a traditional strong suit—are shrinking. They find themselves having to focus more intensely on developing other sources of competitive advantage, including innovation. For some, the shift is well under way. Among the BCG global challengers—a list of 100 fast-growing and fast-globalizing companies from rapidly developing economies—annual spending on R&D more than tripled from 2007 through 2011.

Third, there is a mindset in emerging markets that lends itself to innovation. When we did an in-depth study of the consumer markets in China and India, we were struck by how entrepreneurs and executives work—their pursuit of success is relentless. They display an extraordinary creativity and industriousness and have the confidence to invest and take actions to spur growth. They often have less fear of making mistakes—the weight that often adds time and cost to innovation processes.

While the drivers of innovation may be distinct in emerging markets, the fundamentals are not. Strong leadership is essential, irrespective of geography. Across the eight innovation surveys we’ve done since 2005, the CEO has consistently been the most commonly cited force behind innovation. Effective leaders do several things to lay the groundwork for innovation.

They actively encourage entrepreneurship. Forward-looking companies continually reinvent their business models through experimentation and innovation. To let such a culture flourish, leaders have to be willing to share authority, challenge the status quo, encourage creativity and tolerate failure.

They set clear priorities. As important as entrepreneurship is, a leader ultimately has to lead. The person at the top frequently and sometimes uniquely enjoys an ideal vantage point for choosing between the short and the long term, and among markets and sectors. But no matter how clear their vision, leaders can’t manage innovation on their own. Companies need rigorous processes for assessing which ideas should move into development and which should not. Being able to say no is an essential driver of innovation productivity.

They strike a balance between efficiency and innovation. In many parts of the world, companies are still under pressure to cut costs and drive efficiencies. But the increasing pace of change means they also need to emphasize innovation. Resolving this contradiction requires the ability to both explore new avenues and fully leverage existing ones.

Combined with a healthy appetite for innovation, these leadership qualities have the potential to unleash a new wave of business creativity in emerging markets—and with it, perhaps, a new generation of global competitors.

This commentary originally appeared on the FT’s beyondbrics blog on September 11, 2013.