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Emerging markets drive innovation, says Roland Berger study

BRIC - Emerging Markets

Munich: Emerging markets are driving global innovation with China and India both investing heavily in research and development, says a new study by German strategy consulting firm Roland Berger.

  • Worldwide spending on research and development (R&D) set to hit USD 1.4 trillion in 2012 (+5%)
  • Emerging markets investing more and more heavily in developing new products: China and India responsible for almost 20% of global R&D investment
  • Emerging markets increasingly developing "frugal products" for their own mass markets then successfully exporting them to the West — a process known as reverse innovation
  • Modularization is the key success factor in product strategies in developing markets

Competition in emerging markets is growing ever fiercer. Local companies are increasingly investing in R&D and launching competitive products. China and India are the biggest engines driving innovation, together responsible for 20% of global investment in R&D. Simple, cost-effective items — "frugal products" — are particularly successful in the lower and middle market segments. Often these products can later be exported to Western markets, a process known as "reverse innovation". Western companies looking to exploit the great innovation potential in emerging markets should carry out key value-creation activities locally, from development and production to sales. They must focus more on modular products based on standard components.

These are the key findings of the new study "Emerging markets are changing the global innovation agenda" in the series "8 Billion Business Opportunities" published by Roland Berger Strategy Consultants. The study forms part of the GLOBAL TOPICS initiative at Roland Berger.

In 2012, firms around the world will invest a total of USD 1.4 trillion in research and investment activities, 5.2% more than in the previous year. But how and where that money is being spent is undergoing a fundamental transformation.

"Companies in emerging markets are no longer simply the "workbench" of industrialized nations. Local companies are investing more and more in research projects and developing their own competitive products," says Bernd Brunke, Partner and member of the Global Management Team at Roland Berger Strategy Consultants.

Emerging markets drive R&D

China and India have established themselves as the most important locations for innovation. Over the past five years they have doubled the amount they invest in R&D, reaching USD 200 billion in China and USD 40 billion in India.

These two countries alone now account for around one-fifth of global spending on innovation. The list of the world's 20 most innovative companies includes five from China, India and Brazil. These three countries feature in Roland Berger's "Focus 20" group of countries, those set to show the most economic growth through 2030.

The list also includes Argentina, Brazil, China, Columbia, Egypt, India, Indonesia, Iran, Iraq, Malaysia, Mexico, Nigeria, Pakistan, Peru, Russia, Saudi Arabia, South Africa, Thailand, Turkey and Vietnam.

"The trend toward emerging markets investing more heavily in developing new products puts Western firms under considerable pressure," says Roland Berger strategist Michael Zollenkop.

"Western companies must react if they want to compete in developing countries with their own innovative solutions. Highly developed products designed for industrialized countries are often unsuitable for developing markets."

Frugal products — from emerging to industrialized countries

Cheap products that are easy to use have a much greater chance of success in emerging markets than expensive products with too many functions. Local firms are increasingly developing their own "frugal products" with local needs in mind.

"These simple products are manufactured specifically for the low and middle market segment in emerging markets. But often they also gain a foothold in mature markets — a process known as reverse innovation," says Bernd Brunke.

"In the West, these low-cost products offer an alternative to highly developed, more expensive products."

Frugal products are enjoying great success around the world. Sales of such products grow 7% each year worldwide and 10% in China and India. Companies wishing to develop simple, localized solutions for emerging markets need to invest in local R&D so that they can understand the needs of local markets better.

Many companies have already woken up to the importance of developing and manufacturing products locally. Thus, more than two-thirds of firms plan to carry out 20% or more of production in developing countries by 2020, a trend that is growing over time. Modularization is a key part of the product strategy here. By using standardized components at specific interfaces within the product, companies can keep their production costs to a minimum and react flexibly to any swings in demand.

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