As growth in developed economies such as the United States, Japan and Europe continues to languish, the fastest engines of global growth for several years to come will be the emerging markets of India and China. According to the International Monetary Fund, India and China may see growth rates of 9% and 7.5%, respectively, in 2012.1 Multinationals are stepping up their capabilities in emerging economies by opening more R&D labs, factories and sales and marketing offices that can design, develop and sell locally relevant products and services. Between 2003 and 2007, multinationals established more than 1,100 R&D centers in India and China, investing a total of $24 billion.2 The result: more and more products and services marketed by multinationals in emerging markets — such as General Motors’ Buick LaCrosse in China and Johnson & Johnson’s reusable surgical stapler in India — are being redesigned or entirely built from scratch using local R&D talent.3
By locating R&D and manufacturing activities in growth markets, multinational companies aim to design and deliver products and services that are both economical and better suited for the average local customer.4 (See “About the Research.”) This approach has clear advantages over importing and selling high-priced products and services developed and produced in the West. However, many multinationals that rely on “value chain localization” still focus on affluent, urban customers rather than the much larger population of urban and rural poor. This strategy does not adequately prepare them for the far greater challenge (and opportunity) of reaching the urban and rural poor.
1. International Monetary Fund, "World Economic Outlook: Slowing Growth, Rising Risks," September 2011.
2. IBM Global Business Services, "Global Location Trends," Annual Report, October 2009.
3. F. Warner, "Made in China," Fast Company, April 1, 2007.
4. See N.S. Lang and S. Mauerer, "Winning the BRIC Auto Markets: Achieving Deep Localization in Brazil, Russia, India, and China," (Boston: Boston Consulting Group, January 2010).
5. "Shanghai Invests in Being 'Smarter'," Shanghai Daily, Jan. 24, 2011.
6. "Rural India to Fuel Mobile Services Growth," Indian Express, Jan. 23, 2011.
7. The term "next billion" was initially coined by the World Resources Institute's Markets & Enterprise Program as part of a website it launched in 2005 called www.NextBillion.net. The phrase "next billion" designates the next billion people entering the middle class from the base of the economic pyramid (BoP) worldwide. The term BoP was first introduced by C.K. Prahalad and Stuart L. Hart in their article "The Fortune at the Bottom of the Pyramid" (Strategy + Business 26, 2002). But "next billion" also indicates the next billion(s) in profits businesses can make by devising the right business models to integrate the BoP consumers into formal economies. See www.nextbillion.net/about.aspx.
8. N. Radjou, "Innovation Networks: A New Market Structure Will Revitalize Invention-to-Innovation Cycles," Forrester Research, June 17, 2004; J. Hagel and J.S. Brown, "The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization," 1st ed. (Boston, Massachusetts.: Harvard Business Press, 2005); and V.K. Fung, W.K. Fung and Y. Wind, "Competing in a Flat World: Building Enterprises for a Borderless World," 1st ed. (New York: Pearson Prentice Hall, 2007).
9. J. Lawrence, "The New Shape of Innovation," I-Global Intelligence for the CIO, July 19, 2010.
10. C.K. Prahalad and R. A. Mashelkar, "Innovation's Holy Grail," Harvard Business Review 88, no 7/8 (July-August 2010): 132-141.
11. N. Radjou, "The Rise of Globally Adaptive Organizations," Forrester Research, December 13, 2006.
12. Prahalad and Mashelkar, "Innovation's Holy Grail."
13. See www.nokia.co.in/about-nokia/company.
15. Jawahar Kanjilal, interview with authors, Feb. 3, 2010.
16. "Nokia Passes Key Milestones as Services Business Continues Strong Momentum," February 15, 2010.
17. N. Radjou, "Mobile Banking's Next Big Market: The United States?," Harvard Business Review Blog Network, October 28, 2009.
18. J. Immelt, V. Govindarajan and C. Trimble, "How GE Is Disrupting Itself," Harvard Business Review 87, no. 10 (October 2009): 56-65.
19. Joydeep Nag, interview with authors, Nov. 30, 2011; and visit to GE's R&D lab, the John F. Welch Technology Centre, in Bangalore, India, Dec. 16, 2009.
20. "GE Healthcare's New Initiatives to Expand IT India Business," Daily News & Analysis, Nov. 23, 2009.
21. "GE Spearheads Affordable Healthcare for All in Rural India." Mathrubhumi, Sep. 27, 2008.
23. H. Chesbrough, "Open Innovation: The New Imperative for Creating and Profiting From Technology" (Boston: Harvard Business Press, 2003).
24. S. Vandebroek, interview with authors, March 17, 2010.