The competitive advantages of emerging economies: from cheap labour over sophistication of demand to innovation incubation

In a previous post i wrote about (anecdotical) evidence on back-shoring of production activities from the Far East to the Western World. While it remains to be seen whether this phenomenon will gain further momentum and come on cruising speed, there are also signs of a broadening of business functions being off-shored from the West to the East. I.e., whereas traditionally labour-intensive activities were being off-shored, we may go to an era where also research-intensive activities may become increasingly anchored in –at present- emerging economies and not because their researchers are cheaper, but because the relevance to install research units in such places may increase. In the short run, to support reverse innovation practices; in the mid and long run because the R&D endowments may outperform those in (a number of) Western countries and because their (high-end) customers may turn into such an important point of reference for global demand functions that it may become incontournable for industrial players to have R&D assets and activities in such countries.

In fact, a close look at investments in fundaments underpinning R&D and technological power in countries like China and India (number of graduated engineers, investment in R&D, patents, scientific publications) and the quick rise of a broad middle class with increasing spending power, illustrates the powerful cocktail for domestic progress that this kind of countries is brewing for itself and as a magic potion to lure upstream business functions to their territories.

In other words, whereas local-led innovations in emerging countries are at present typically viewed as frugal or copycat innovations, this need not stay this way as their home grounds are likely to offer fertile soil and lead markets for the development of advanced products over time.

As a consequence, I argue that Western companies should not trivialize the global market power of innovation forces originating in emerging economies. By extension: if Western managers do not take the logics of what determines emerging market leadership in a specific market niche or product category in their stride, they may miss out in the long run on global market leadership. In line with the former, and given that –from a global perspective- the commercial point of gravity is moving away from European and North American territory, the importance of trend spotting, demand analyses and forward looking activities with regard to customer preferences in emerging economies will continue to increase. Therefore, Western companies should monitor those economies well if they want to capture global insights as to in which direction to develop their product and service portfolio. Hence it is important that Western companies dispose of antennas –own ones or via intermediary organizations- to raise their absorptive capacity for capturing emerging economies-borne customer trends and to tap into the innovation assets that these economies may shelter –to raise their exploitative capacity in view of pursuing innovations.

As far as implications for policy makers are concerned, I advocate they should step up the support for the multinationalization of innovation and embedding of Western firms into emerging economies. On the one hand, by backing up the internationalization strategies of high-end research and technology centres. On the other hand, by stimulate the settlement abroad of providers of knowledge-intensive business services (e.g. consultancies, engineering companies, and market research bureaus) from the private realm that can act as brokers of contacts and knowledge, trend watchers and champions of an (on-distance) embeddedness of Western companies into local user and producer communities.

For a more in-depth insight on this matter, please follow the next link (courtesy of Boletin de Estudios Economicos).