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Dries Lesage and Thijs Van de GraafRISING POWERS AND MULTILATERAL INSTITUTIONS

Jerry Haar and Ricardo Ernst (editors)INNOVATION IN EMERGING MARKETS

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Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England

Innovation in Emerging MarketsEdited by

Jerry HaarProfessor of Management and International Business, Florida International University, senior research fellow, McDonough School of Business, Georgetown University, and Global Fellow, Woodrow Wilson International Center for Scholars, USA

and

Ricardo ErnstProfessor of Operations and Global Logistics, Managing Director of the Global Business Initiative, Managing Director of the Latin American Board, and former Deputy Dean, all at the McDonough School of Business, Georgetown University, USA

INNOVATION IN EMERGING MARKETS

Introduction, conclusion, editorial matter and selection © Jerry Haar and Ricardo Ernst, 2016Individual chapters © Respective authors, 2016Foreword © Ana Patricia Botín, 2016Foreword © Samuel Lewis Navarro, 2016

All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission. In accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS.

Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

First published 2016 byPALGRAVE MACMILLAN

The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988.

Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS.

Palgrave Macmillan in the US is a division of Nature America, Inc., One New York Plaza, Suite 4500 New York, NY 10004-1562.

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DOI: 10.1057/9781137480293

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Library of Congress Cataloging-in-Publication DataNames: Haar, Jerry, editor. | Ernst, Ricardo, editor.Title: Innovation in emerging markets / Jerry Haar, Ricardo Ernst, [editors].Description: Houndmills, Basingstoke, Hampshire ; New York, NY : Palgrave Macmillan, 2016. | Includes index.Identifiers: LCCN 2015038913 | ISBN 9781137480286 (hardback)Subjects: LCSH: Technological innovations—Economic aspects—Developing countries. | Diffusion of innovations—Developing countries. | Economic development—Developing countries.Classification: LCC HC59.72.T4 I5256 2016 | DDC 338/.064091724—dc23LC record available at http://lccn.loc.gov/2015038913

A catalog record for this book is available from the Library of Congress.

A catalogue record for the book is available from the British Library

Typeset by MPS Limited, Chennai, India.

Softcover reprint of the hardcover 1st edition 2016 978-1-137-48028-6

ISBN 978-1-349-69390-0 ISBN 978-1-137-48029-3 (eBook)

To all the innovators in emerging markets and the public and private institutions and

enterprises that strive to create, sustain, and expand an ecosystem of innovation

ix

List of Figures and Tables xi

Foreword by Ana Patricia Botín xiv

Foreword by Samuel Lewis Navarro xv

Preface and Acknowledgements xvi

List of Contributors xix

List of Abbreviations xxi

1 Introduction 1Jerry Haar and Ricardo Ernst

2 Releasing Trapped Value: The Coming Challenge of Innovation in the Context of Emerging Markets 32Bhaskar Chakravorti, Graham Macmillan, and Tony Siesfeld

3 Innovation in Emerging Markets: Asia 51Rebecca A. Fannin

4 Innovation in Emerging Markets: The Case of Latin America 72Lourdes Casanova, Jeff Dayton-Johnson, Nils Olaya Fonstad, and Sukriti Jain

5 Entrepreneurship and Innovation in the Middle East: Current Challenges and Recommended Policies 87Norean R. Sharpe and Christopher M. Schroeder

6 Innovation in Central Europe 102Marina Dabic, Jadranka Švarc, and Emira Becic

7 Innovation in Africa: A View from the Peaks and Hilltops of a Spiky Continent 121David Wernick

8 Reverse Innovation in Emerging Markets 140Vijay Govindarajan and Ravi Ramamurti

9 Social Enterprise and Innovation in Emerging Markets 158Leslie R. Crutchfield and Kyle Peterson

10 Social Media and Innovation 178Michael Shoag and Tory Colvin

11 Innovation in Financial Services 196Krzysztof Rybinski

Contents

12 Education 3.0: Facing the Challenge of Human Capital Building in Emerging Economies 215Gabriel Sanchez Zinny

13 Health-Care Innovation in Emerging Markets 233Françoise Simon

14 Catch-Up Innovation and Shared Prosperity 253Mark A. Dutz

15 Inclusive Innovation: Harnessing Creativity to Enhance the Economic Opportunities and Welfare of the Poor 271Carl Dahlman, Esperanza Lasagabaster, and Kurt Larsen

16 Conclusion 291Ricardo Ernst and Jerry Haar

Index 299

x Contents

xi

List of Figures and Tables

Figures

1.1 Education as a human aspect of innovation: top ten high- and top ten middle-income economies 11

2.1 Frequency of citation of business case rationales 44

2.2 Barriers to participating in sustainable and inclusive business 48

4.1 R&D expenditure as a percentage of GDP, 2012 74

4.2 High-technology exports as a percentage of total exports, 2012 75

4.3 Assessment of PISA scores and spending on education, 2012 77

4.4 Mobile technology and Internet penetration 80

5.1 Ease of doing business rank 88

5.2 Strength of insolvency index 89

5.3 Days to export and import vs rank 90

5.4 Doing business rank vs GNI per capita 91

6.1 Human resources in science and technology 105

6.2 R&D performed by public and business sectors, 2012 107

8.1 Reverse innovation 141

9.1 Focus on market-based solutions 162

9.2 The social enterprise spectrum 163

9.3 Businesses and NGOs offer distinct assets to social innovation 169

11.1 Percentage of adults using four types of financial services 203

11.2 Assets of BZ WBK bank 210

11.3 Number of BZ WBK clients and number of mobile clients 212

13.1 Health delivery systems and services 234

13.2 The triple aim of health care 237

13.3 The decentralized national health system in Brazil 242

Tables

1.1 Innovative clusters worldwide 5

1.2 Top innovating firms, 2014 7

xii List of Figures and Tables

1.3 Reverse innovations 16

1.4 Sustainable innovations 20

3.1 Leading Internet markets in Asia’s emerging countries, 2013, US comparison 51

3.2 Leading smartphone markets in Asia’s emerging countries, 2013, US comparison 52

3.3 Leading venture investors in China and India 55

3.4 Venture capital in Asia nearly triples 55

3.5 Top ten online companies in emerging markets by market capitalization 56

3.6 Arrival of angel investors in Asia 56

3.7 Shift in new patents to China (%) 57

3.8 Patent applications trends – China’s rise, Japan’s stronghold 57

3.9 Top patent filers by company and origin, 2013 57

3.10 China buys into US tech start-ups 58

3.11 How Alibaba stacks up 64

3.12 Online shopping penetration in China (%) 65

3.13 Market potential for online shopping in China 65

3.14 Timeline of Alibaba’s innovative new businesses in the e-commerce marketplace 66

3.15 Alibaba value system 67

6.1 Some identified hot spots and specializations in science and technology 109

8.1 Why innovations may trickle up from poor to rich countries 147

8.2 EMNEs vs DMNEs in the three stages of reverse innovation 152

9.1 Featured market-based solutions 162

9.2 Business models to connect base-of-the-pyramid producers and suppliers with global customer markets 168

9.3 Select impact investors in emerging markets 170

9.4 Select grant makers, capacity-builders, and facilitating organizations 170

9.5 How government influences social enterprise and innovation 173

11.1 Poland’s position in World Economic Forum innovation ranking, 2006 and 2014 198

14.1 Knowledge capital investments as percentage of expanded GDP, 2006 258

List of Figures and Tables xiii

15.1 Number of poor and poverty rates at the international poverty lines of US$1.25 and 2.00 per day, 1981–2010 272

15.2 Inclusive innovation: typical market failures and possible policy solutions 279

xiv

Foreword

Innovation has always powered progress. Today, thanks to digital technol-ogy in particular, that power is greater than ever. Never has it been more important to foster innovation, as a nation’s prosperity relies on it.

Every company has a role to play, but the role of small and medium-sized enterprises (SMEs) is critical. At Santander we believe our purpose is to help people and businesses prosper, so we take a very close interest in what we can do in working with SMEs. Each day, we see the contribution they make to the world economy – especially in emerging economies. Representing over 85 percent of private enterprise, SMEs are the powerhouse of economic growth, generating jobs and the tax revenue that pays for public services.

If these companies are to thrive, economies need to be built on a culture of enterprise, innovation, and ambition. To help turn these words into reality, Santander is increasing its support to entrepreneurs – including disruptive ones. Meanwhile, we are helping to encourage entrepreneurs through 1,100 partnership agreements with universities in over 20 countries. This funding allows students, professors, and researchers to pursue their entrepreneurial ideas and promote an entrepreneurial culture and technology transfer from universities to business.

We can always do more to encourage innovation, but what more should be done? Professors Ernst and Haar have made an important contribu-tion to this debate by analyzing and discussing trends of innovation in emerging markets. Each chapter, authored by an expert in his or her field, delves broadly and deeply into innovation by region, industry, or function. Business people, policy makers, academics and researchers, and graduate students should keep this timely, relevant study close by as they, like us, seek to nurture innovation.

Ana Patricia BotínExecutive Chairman, Santander Group

xv

Foreword

Innovation is an increasingly important driver of competitiveness for com-panies, industries, sectors, and entire nations. While we commonly think of innovation as focusing on products such as smartphones, folding bikes, and biotech and pharmaceuticals, or services such as e-banking, loyalty cards, and low-cost airline carriers, in fact the reach of innovation transcends the private sector – industrial and commercial – to encompass the public and nonprofit sectors as well.

To illustrate, when I had the privilege of serving as Vice-president and Foreign Minister of the Republic of Panama in the government of President Martín Torrijos, we introduced a number of sweeping innovative initiatives. These included expansion of the Panama Canal, reforms of social security and pensions, and a push for Panama to build its own science with empha-sis on the niches of biotechnology, infectious diseases, and bioprospect-ing. Through grant programs, scholarships, and other forms of human capital investment, the government of former president Torrijos hugely supported innovation for a knowledge economy. Government policy, in consort with the private sector, nonprofit organizations, and multilateral agencies, was also instrumental in creating Panama’s Ciudad de Saber (City of Knowledge), the former Clayton military base, now home to academic organizations, technology companies, and nongovernmental organizations.

This comprehensive, highly readable book is a most welcome addition to the literature on innovation, especially with respect to emerging markets. Ricardo Ernst and Jerry Haar, along with the experts contributing to more than a dozen chapters, are to be commended for their important contribu-tion. One hopes that they and other scholars in the field continue to exam-ine the dynamic relationship between innovation and economic growth and development and that policy makers and business leaders heed the advice and recommendations that emanate from their work.

Samuel Lewis NavarroVice-president and Foreign Minister of the

Republic of Panama, 2004–2009

xvi

Preface and Acknowledgements

Whether a consumer product (iPhone) or service (Uber), a firm (3M, Embraer), sector (biopharmaceutical), industry (mobile payments), or coun-try (Taiwan, Israel), innovation is a driving, catalytic force in both domestic and global commerce today.

Research confirms that innovative enterprises generally achieve stronger growth or are more successful than those that do not innovate. There is a strong correlation between market performance and new products; and while new products can capture and boost market share and profitability, nonprice factors such as design and quality can increase competitive sales growth.1

But the performance encompasses not just products but processes as well, such as Toyota’s production system, Benetton’s IT-led production network, online trading and shopping – along with positioning (low-cost airlines, fully online higher education) and platform innovation (Boeing’s 737 air-liner, car makers).2

Innovation occurs in many different places – government and corporate research labs, universities, incubators, basements, and garages. In fact, the intrapreneurial spirit is alive and well in the “new corporate garage” where today’s most innovative and world-changing thinking is taking place, in firms such as Medtronic, IBM, Unilever, and Syngenta.3

The “domains” of innovation – where it takes place – include products, processes, services, and business models. As for the forms of innovations, approaches and strategies, there are many. Three in particular stand out:

1. Disruptive innovation. Disruptive innovation, a term of art coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves upmarket, eventually displacing established com-petitors. Disruptors such as mini-mills, disrupting integrated steel mills; cell phones versus fixed line telephony; retail medical clinics overtaking many traditional doctors’ offices; Uber and Lyft disrupting taxi services; and firms like Tesla and Airbnb.

2. Lean manufacturing. For many, lean is the set of “tools” that assist in the identification and steady elimination of waste. As waste is eliminated quality improves, while production time and cost are reduced. Lean thinking changes the focus of management from optimizing separate technologies, assets, and vertical departments to optimizing the flow of products and services through entire value streams that flow horizontally

Preface and Acknowledgements xvii

across technologies, assets, and departments to customers. Although commonly associated with Japanese automotive vehicle manufacturing systems, businesses in all industries and services, including health care and governments, are using lean principles. Illustrative is Aldi, a German-based leading global discount supermarket chain with over 9,000 stores in over 18 countries. In its supply chain management, up to 60 percent of Aldi’s fruit and vegetables are sourced locally where possible, reducing the need for long and costly delivery journeys. This demonstrates a time-based management approach. The characteristics of a lean organization and supply chain are described in the seminal volume Lean Thinking by Womack and Jones.4

3. Blue ocean strategy. Based on a study of 150 strategic moves (spanning more than 100 years across 30 industries), the authors W. Chan Kim and Renée Mauborgne argue that lasting success comes not from battling competitors but from creating “blue oceans” – untapped new market spaces ripe for growth. Southwest Airlines, a US company, made history as the world’s first low-cost carrier, positioning itself as a competitor to the car – not to other airlines.5

In all cases of innovation, human capital is the most critical factor – it is the fountain of innovative thought and action. In research personnel rank-ings, a nation’s size is inconsequential as the leaders are Finland, Iceland, Denmark, Israel, and Singapore according to Bloomberg’s Global Innovation Index. In terms of R&D – with human capital at its core – the champions are South Korea, Israel, Finland, Sweden, and Japan.

The aim of the volume is to advance the knowledge and understand-ing of innovation in emerging markets as an important force in the global economy. These innovations include: wind-up radios in Africa; microcredit lending in South Asia and Latin America; the Jaipur foot, an artificial limb designed in India and simple to assemble, making use of low-tech materials; and CT scanners in China made by GE not only for that market but for rural locales in industrialized nations, innovation for and from emerging nations.

With this focus on the emerging markets of Asia, Africa, Latin America, the Middle East, and Central Europe, the contributors to this volume address such critically important themes and issues as releasing trapped value, catch-up innovation, reverse innovation, and social inclusion inno-vation as well as innovation in financial and nonfinancial services, health care, education, media, and social enterprises.

This information should be of great interest to policy makers; academics in business, engineering and information technology, public policy, and economic development; national, regional, and local economic develop-ment agencies; business associations; and innovators and entrepreneurs. Innovation, as a force of economic and social change, is reshaping the

xviii Preface and Acknowledgements

world. We analyze the trends, parameters, conditions, and outcomes of this transformative force.

The editors wish to extend their deepest gratitude to the Santander Group, its CEO Ana Patricia Botín, and to entrepreneur and former Panamanian Vice-president Samuel Lewis Navarro for their generous support of the pub-lication of this book. We also wish to acknowledge the indispensable contri-butions of Surabhi Agrawal, Shanthala Gorur Ashwath, Johanna Hedman, Charles Rice, Leonor Dominguez, the Center for International Affairs at Harvard University, the McDonough School of Business, Georgetown University, and Professor Timothy Shaw and the International Political Economy Series team at Palgrave Macmillan.

Notes

1. Tidd, J. (2006). From Knowledge Management to Strategic Competence: Measuring Technological, Market and Organizational Innovation. London: Imperial College Press.

2. Bessant, J. and Tidd, J. (2011). Innovation and Entrepreneurship. New York: John Wiley & Sons.

3. Anthony, S. D. (2012). “The New Corporate Garage,” Harvard Business Review, September: 3–11.

4. Womack, J. P. and Jones, D. T. (2003). Lean Thinking. New York: Productivity Press.5. Kim, W. C. and Mauborgne, R. (2015). Blue Ocean Strategy. Boston, MA: Harvard

Business Review Press.

xix

Emira Becic is a senior advisor for the Directorate for Science and Technology of the Ministry of Science, Education and Sports, Croatia.

Lourdes Casanova is a senior lecturer and Academic Director at the Emerging Markets Institute, Johnson School of Business, Cornell University, USA.

Bhaskar Chakravorti is Senior Associate Dean of International Business and Finance and Professor of the Practice of International Business at The Fletcher School of Law and Diplomacy, Tufts University, USA.

Tory Colvin is Account Director at Forum One, USA, a digital agency that crafts solutions for foundations, think tanks, nonprofits, and government agencies.

Leslie R. Crutchfield is senior advisor to FSG, USA, a consulting firm that helps foundations, corporations, governments, and nonprofits worldwide, and a senior research fellow at McDonough School of Business, Georgetown University

Marina Dabic is Professor of Entrepreneurship and International Business at the University of Zagreb, Croatia, and Nottingham Trent University

Carl Dahlman is Head of both the Thematic Division and the Global Development Research at the OECD Development Centre, France.

Jeff Dayton-Johnson is Professor of Development Practice and Policy and Dean, Middlebury Institute of International Studies, USA.

Mark A. Dutz is a lead economist at the Trade and Competitiveness Global Practice, World Bank Group, USA.

Ricardo Ernst is Professor of Operations and Global Logistics, Managing Director of the Global Business Initiative, Managing Director of the Latin American Board, Co-Director of the Global Logistics Research Program and former Deputy Dean, all at the McDonough School of Business, Georgetown University, USA.

Rebecca A. Fannin is Founder of Silicon Dragon Ventures, USA, and con-tributes to Forbes.com.

Nils Olaya Fonstad is Research Scientist for Europe and LATAM at the MIT Center for Information Systems Research, USA.

Vijay Govindarajan is Coxe Distinguished Professor at the Tuck School of Business, Dartmouth College, USA, and Marvin Bower Fellow at the Harvard Business School.

List of Contributors

xx List of Contributors

Jerry Haar, professor of management and international business, Florida International University, senior research fellow, McDonough School of Business, Georgetown University, research affiliate of the David Rockefeller Center of Latin American Studies, Harvard University, and Global Fellow, Woodrow Wilson International Center for Scholars, USA.

Sukriti Jain is a research assistant at the Emerging Markets Institute, Johnson School of Business, Cornell University, USA.

Kurt Larsen is a senior Education Specialist for the Global Education Practice at the World Bank, USA.

Esperanza Lasagabaster is Practice Manager of Trade and Competitiveness for the South Asia Region, World Bank Group, USA.

Graham Macmillan is Director of Partnerships for Citi Corporate Citizenship, Citi, USA.

Kyle Peterson is Managing Director at FSG, USA.

Ravi Ramamurti is Distinguished Professor of International Business and Strategy and Director at the Center for Emerging Markets, Northeastern University, USA.

Krzysztof Rybinski is Rector at the New Economic University, Almaty, Kazakhstan.

Gabriel Sanchez Zinny is Founder and President of KUEPA and Managing Director of Blue Star Strategies, USA.

Christopher M. Schroeder is a venture investor based in the USA. He is the author of Startup Rising: The Entrepreneurial Revolution Remaking the Middle East.

Norean R. Sharpe is Senior Associate Dean and Distinguished Teaching Professor of Statistics and Operations at McDonough School of Business, Georgetown University, USA.

Michael Shoag is Managing Director, Forum One, USA, a digital agency that crafts solutions for foundations, think tanks, nonprofits, and government agencies.

Tony Siesfeld is Director of Monitor Deloitte, USA, and a senior leader of Monitor Institute.

Françoise Simon is a professor emerita and senior lecturer at the Mailman School of Public Health, Columbia University, and a senior faculty at the Icahn School of Medicine at Mount Sinai

Jadranka Švarc is a scientific advisor at the Institute of Social Sciences Ivo Pilar, Zagreb, Croatia.

David Wernick is a senior lecturer at the College of Business, Florida International University, USA.

xxi

CITEC Commission for Incorporation of Technologies

CMMi Capability Maturity Model Integration

CNDRL National Drug Reimbursement List

CORFO Production Development Corporation

CRIATEC Brazilian seed capital fund

CSR Corporate Social Responsibility

DBT Department of Biotechnology

DFID Department for International Development (UK)

DMNEs developed country multinational enterprises

ECG electrocardiogram

ECU engine control unit

EIT European Institute for Innovation and Technology

EMBRAPA Brazilian Agricultural Research Corporation

EMNEs emerging market multinational enterprises

ESFRI European Strategic Forum on Research Infrastructures

ESI European Structural and Investment Funds

ETI Global Enabling Trade Index

FCPA Foreign Corrupt Practices Act

FedC Community Pharmacies

FINEP Funding Authority for Studies and Projects

FONTAR Argentine Technological Fund

GATT General Agreement on Tariffs and Trade

GCC Gulf Cooperation Council

GELP Global Educational Leaders’ Program

GEM Global Entrepreneurship Monitor

GII Global Innovation Index

GNI Gross National Income

HPS Huff Power Systems

HRST human resources sciences and technology

HVC hybrid value chain

List of Abbreviations

xxii List of Abbreviations

ICT Information and Communications Technology

IFC International Finance Corporate

INOVAR Innovation Program (Brazil)

INPI National Industrial Property Institute

IPR intellectual property rights

ITIF Information Technology Innovation Foundation

JIC South Moravian Innovation Centre

LAVCA Latin American Venture Capital Association

LGTs local growth teams

MENA Middle East and North Africa

MIF Multilateral Investment Fund

MIM Monitor Inclusive Markets

MIT Massachusetts Institute of Technology

MOH Ministry of Health

MSTQ metrology, standards, testing and quality

MVNO Mobile Virtual Network Operator

NAFTA North American Free Trade Agreement

NBA Network Behavior Analysis

NBDS National Biotechnology Development Strategy

NICE British National Institute of Health and Clinical Excellence

NRF National Research Foundation

NRI Networked Readiness Index

NSVF New School Venture Fund

ODA Office of Development Assitance

OECD Organization for Economic Cooperation and Development

OEI Organization of Ibero-American States

PATH Program for Appropriate Technology in Health

PISA Program for International Student Achievement

PSL priority sector lending

RBI Reserve Bank of India

SBA Small Business Act

SEBRAE Brazilian Service of Support for Micro and Small Companies

SIBA Sustainable and Inclusive Business Activities

SIPO State Intellectual Property Office

List of Abbreviations xxiii

SITEAL Latin American Educational Tendencies Information System

SPH Shanghai Pharmaceuticals

STIC Shanghai Technology Innovation Center

SUS United Health System

TFP total factor productivity

TRIPS Trade-Related Aspects of Intellectual Property Rights

UAE United Arab Emirates

UNIFESP Federal University of São Paulo

USAID US Agency for International Development

USPTO US Patent and Trademark Office

WIPO World International Property Organization