How emerging markets are driving global innovation

As China's exports soar again, The Economist's Tom Standage explains how Chinese and Indian companies are becoming innovators, not imitators. How should the West respond?

by Tom Standage
Last Updated: 06 Nov 2012
In the 1960s, when Japan emerged as a manufacturing exporter, it soon became a byword for low cost and low quality. Much fun was made of unreliable Japanese watches and cheap Japanese cars. But quality gradually improved and Japan went on to become a powerful force in electronics, carmaking and other industries. At first, Western companies could not believe it. They attributed Japan’s success to cheap labour or government subsidies. But the Japanese had, in fact, devised a new system of making things that became known as ‘lean manufacturing’. Western firms were quickly doing their best to copy it. The imitators had become the innovators, and vice versa.

Now China is going through the same transition. Today many foreigners think that its home-grown electronics and cars are cheap and shoddy, as Japan’s were thought to be 40 years ago. But quality is steadily improving and China is being taken increasingly seriously as an innovator. The firm that best embodies this new, high-tech China is Huawei, which has emerged in the past decade as one of the world’s largest makers of telecoms equipment. Initially seen as a low-cost imitator, it is now known as a pioneer in areas such as ‘remote radio head’ technology, which reduces the size and energy consumption of mobile base-stations, and LTE, the emerging standard for fourth-generation (4G) wireless networks. Because Huawei’s products are mostly buried inside telecoms networks, most Westerners have never heard of it. But it has already had just as great an impact on its industry as Sony or Toyota did when they emerged onto the world stage. (The Economist recently presented Huawei with its annual award for corporate innovation, the first time it has been won by a Chinese firm.)

It is not just China. India, too, is emerging as a hotbed of innovation. Its telecoms operators have devised the most efficient low-cost business models in the industry. Tata Motors, an Indian firm, has devised the world’s cheapest car, the $2,500 Nano. And Indian medics have pioneered super-efficient hospital-management systems and low-cost surgical procedures, both of which could teach the West’s bloated health-care systems a thing or two. All this is often referred to as ‘frugal innovation’, in which the necessity to cut costs (to make things affordable to Indian consumers) becomes the mother of invention. Another example comes from Africa, where the cost and difficulty of transferring money from one place to another prompted the development, in Kenya, of a world-beating mobile-banking system (the winner of another of The Economist’s innovation awards).

All this innovation is great news for people in developing countries, who are gaining access to goods and services once confined to the elite. Consumers in rich countries will also benefit from cheap, innovative new products (such as dual-SIM phones, an idea pioneered by Chinese handset-makers). The question is how companies in the rich world should respond. The smartest firms are shifting some of their research and development, not just manufacturing, to developing countries to tap into these new ideas. At the same time, Chinese and Indian firms are buying Western firms and setting up operations in Western countries in order to reach new markets.

All this will cause wrenching change in many industries. Yet it is in the nature of innovation to feed upon itself. In the long run, innovation in the emerging world will encourage, rather than undermine, innovation in the rich world. (Western carmakers learned the techniques of lean production from their Japanese rivals, just as the Japanese had earlier learned the techniques of mass production from the Americans.) And what all these examples show is that rubbishing the Chinese or the Indians as low-cost imitators will no longer wash.

Tom Standage is digital editor of The Economist

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