Innovation and the Developing World

Innovation from, by and for the Developing World

In this post I have re-blogged two related articles about Open Innovation. The point of combining these articles is that the idea of Open Innovation, first promoted by Prof. Henry Chesbrough of the University of California, Berkeley, applies not only to firms and industry sectors, but to global ecosystems as well. It used to be that we looked at technological advancement as coming from the ‘most developed’ countries and moving to lesser developed countries, which were engaged in playing catch-up. Now we see that many developing countries have a competitive advantage as sources of innovation, and, conversely, there is greater emphasis being placed on innovations’ applicability to addressing developing world challenges through social enterprise.

The current trend of bringing science, technology & innovation into the international development conversation is a positive, and long-overdue step.

The following is reblogged from my original posts of June 30^th and August 5^th 2013, with the permission of King Abdullah University of Science and Technology http://www.innovation.kaust.edu.sa

Innovation at the Base of the Economic Pyramid

News from the London School of Economics “Business Model Innovation at the Base of the Economic Pyramid”

When I started in the technology transfer business about fifteen years ago, there was a pervasive focus on Western markets for products and services that could be developed from new technologies. It was a safe assumption that more than 95% of the market for anything high-tech would be among North America, western Europe, and Japan, and that the basic market drivers for technological innovations would be pretty much the same: better, faster, cheaper.

Since then, the world has changed radically (or perhaps just our worldview has changed). A growing number of countries are becoming more developed. Along with this, we have seen growing attention given to social enterprise and the base of the economic pyramid. The base of the economic pyramid (BOP) is defined as the four billion people who live on the equivalent of less than $2 per day. The concept of the economic opportunity at the BOP was popularized through the work of C. K. Prahalad. His early work has been criticized for the implied approach of turning the poor into consumers. However, the current generation of those addressing the base of the economic pyramid often leverage public-private sector partnerships to deliver mission-driven solutions through social enterprise.

This makes the job of technology transfer much more difficult, since the market drivers of the BOP are less well understood and data is scarce. It goes without saying that the BOP is not a homogeneous, unified market: it is spread all over the globe. The BOP are rural and urban, and vary in terms of culture, demographics, and a host of other factors. However, the benefits of alleviating some of the most pressing humanitarian problems such as basic sanitation, clean energy and water, and basic nutrition and healthcare services make the effort to overcome the challenges worthwhile.

Bringing innovative technologies to this constituency required a paradigm shift in our thinking about go-to-market strategy, including engagement of non-traditional actors, including Non-Governmental Organizations (NGOs) and major international donor agencies—in addition to the companies that are the traditional domain of tech transfer offices.

Insourcing, Disruption, and Reverse Innovation

The innovation landscape is changing rapidly, and it’s not because of cheaper labor or growth in multinational corporations. In fact, it’s the opposite. “Reverse innovation” means manufacturing and R&D are joining forces—great news for economies on the rise.

The latter part of the twentieth century was marked by a race to outsource. Lured by low overhead costs, inexpensive labor, and seemingly faster time-to-market, U.S. companies (and those of other developed nations) scrambled to ship their manufacturing to places like China and India.

Glocalization was the term for this old model. Major multinational companies performed R&D at home, developing products for economies like their own. But manufacturing was outsourced to developing countries in order to take advantage of cheap labor. Products were largely standardized, leveraging economies of scale, with little differentiation required. A product might be tweaked for a developing economy as an afterthought—but never built with that economy in mind.

The problem here is that when manufacturing takes place far from engineering and design, innovation is stunted. Developers can’t see which parts are unnecessarily difficult for workers to assemble. Workers can’t suggest process improvements leading to greater efficiencies. Because engineers, marketers, and manufacturers never cross paths, they can’t find solutions to novel problems. They exist in a closed loop.

The GE Solution: Reverse Innovation

General Electric, one of the world’s largest corporations and a notable outsourcer, knows this. As a result, the company has turned the glocalization model upside down. As Charles Fishman noted in the Atlantic, the company added 1,700 employees to its “Appliance Park” manufacturing center in Louisville, Kentucky, USA in 2012, a once-bustling facility that had gone quiet during the outsourcing boom. The return of manufacturing means that product R&D, assembly, and marketing happen in the same place—leading to efficiencies that would have otherwise gone unrealized.

The switch also made financial sense, as GE discovered hidden costs associated with supply chain management. Insourcing production of major consumer appliances revealed that the cost savings of outsourcing were not as compelling as they once seemed.

GE is also applying this integrated model to manufacturing for developing countries. For example, the company developed an ultrasound unit in China specifically for developing world markets. This “reverse innovation” is the inverse of glocalization: the product for the emerging economy market is developed in that local context, with all major decision-making taking place in that market environment. GE CEO Jeffrey Immelt, plus Vijay Govindarajan and Chris Trimble, explained reverse innovation further in a 2009 essay in the Harvard Business Review.

Technology by, for, and of the Developing World

When glocalization was prevalent, the vast majority of the marketplace for any high-tech product was North America, Western Europe, and Japan. The rest of the world was a market that didn’t have the purchasing power to command significant attention. But now, the traditionally most developed economies are expected to continue to grow, but slowly. Developing economies, especially major emerging markets, in contrast, are expected to show robust growth.

In response, many developing countries have been building their R&D capacities. Corporate R&D centers are springing up in major marketplaces, tasked with reverse-innovating technology solutions for local market needs. For GE, reverse innovation is undertaken by “local growth teams,” or LGTs. Empowering LGTs in emerging markets is great from the perspective of economic development, and the resulting “cradle-to-grave” business activity bodes well for developing economies’ prosperity and innovation.

Experimentation Leads to Specialization

Reverse innovation is especially promising for developing nations with high growth potential for specific types of high-tech goods and services. The advantage of having development activities close to the market goes beyond better understanding of the customer. The growing market itself is a platform for rapid experimentation. Rapid experimentation, and thus innovation, occurs when product development is integrated with manufacturing. This creates an incentive for companies seeking to create or develop a particular market to perform R&D and product development activities locally.

Writing for the Atlantic, James Fallows gives the example of China’s experimentation with coal and carbon emission mitigation. In China, innovation in sequestration techniques, post-combustion capture, and “cleaner” pre-combustion coal technologies is thriving. Why? Because China leverages all phases of market research, development, and industrial deployment. Innovation happens more quickly and efficiently than anywhere else in the world.

Says Fallows, “In the search for ‘progress on coal,’ like other forms of energy research and development, China is now the Google, the Intel, the General Motors and Ford of their heyday—the place where the doing occurs, and thus the learning by doing as well.”

Reverse-Innovating for Saudi Arabia

What does this have to do with KAUST? Two of our leading research centers are Water Desalination and Reuse, and Advanced Membranes and Porous Materials. The Kingdom of Saudi Arabia is the world’s biggest market for desalination technology. Just as China has a core competency in advanced clean coal technology by virtue of it providing a test bed for experimentation and market demand, so Saudi Arabia is developing a significant competitive advantage in water desalination.

KAUST is well-positioned in the region and the world to play a leading role in the realigned innovation system in such fundamental fields as water, food, and energy. Reverse innovation dovetails nicely (and by design) with Technology Transfer & Innovation (TTI)’s pledge to avoid intellectual capital flight, by seeking commercialization partners, such as GE-esque local growth teams, within the Kingdom.

In this environment of diversification of R&D to the sites of greatest potential, and centralization of research and manufacturing within local markets, KAUST is well-positioned to leverage its research capacities and inventiveness. In so doing, we hope to generate the economic development outcomes mandated by our mission.

If you want more on this topic, SciDev has posted an excellent summary, “Supporting Grassroots Innovation,” at: http://www.scidev.net/global/enterprise/spotlight/supporting-grassroots-innovation.html.