The Rest’ are innovating in ways that mostly go unnoticed by the West.
By Ron Leung | October 24, 2016
“The future has already arrived. It is just not evenly distributed,” said sci-fi writer William Gibson in 1999. This is especially true of the economic landscape across developing countries, populated by skyscrapers, shiny startups, and urban slums. This skyline is representative of the overwhelming view of the West – that ‘the Rest’, such as China, India, and Brazil, can only copy but not truly innovate. Although a misconceived notion, there is some truth to it. Indeed, ‘the Rest’ have become particularly adept at copying. But these successes are harder than they may sound.
While there are many Chinese and Indian companies whose business models are based on the premise of copying US products pixel for pixel before selling them at a lower price, this does not preclude innovation any more than dollar stores preclude iPhones and 3D printer manufacturer MakerBot.
While these copycats may account for many of the goods and services the West imports from ‘the Rest’, there has been tremendous innovation by the latter that has gone unnoticed – perhaps as a result of primarily manifesting itself in ‘Rest-Rest’ trade. Another factor underlying the West’s prejudice is the belief that censorship and corruption create strong barriers to innovation. Belatedly, the West is discovering many of ‘the Rest’s’ innovations, and the companies leading them.
We discuss how this blindness may be harmful and how it has led to missed opportunities for entrepreneurs and investors in what is regarded as a niche segment of social impact startups.
The stakes and the wealth of nations
Throughout history, the arrival of new economic leaders has been accompanied by grave disruptions to the geopolitical order, disruptions that have proven especially troublesome to established contemporary leaders. In the 18th century, Britain was the dominant European power; the establishment of Pax Britannica at the beginning of the following century ushering in a period of relative peace and prosperity across Europe. At the same time, Spain, whose presence was on the decline, experienced a century of economic uncertainty punctuated by seven sovereign defaults. Elsewhere, the emergence of the US as a hegemonic power following World War II forced European powers to divest from their African and Asian colonies. Soon after, France became embroiled in costly wars in Vietnam and Algeria, and Britain’s protracted economic decline led to the devaluation of the pound and a bailout from the IMF in 1976.
The ongoing repercussions of the Asian Tigers’ (Hong Kong, Singapore, South Korea, and Taiwan) ascendency in the 1980s and 1990s, while less disruptive, serve as further evidence of the correlation between new economic leaders and disruptions. Here, changes came in the form of relocation of industrial production, growing wage inequality, and a hollowing out of the middle class in the US and Europe. However, the tigers are small compared to new emerging powers. In 2015, their combined populations and share of world GDP was 86m and 4%, respectively. The emergence of new economic powers in China, India, and Brazil is regarded as a greater challenge due to their overall populations (2.9bn) and sizeable economies (20.5% of nominal world GDP).
One major risk is the accelerated decline of the middle class in developed countries, the past 30 years having played witness to an erosion of middle-class jobs in the US, EU, and Japan. Why did so many companies in the West fail to innovate and compete in new markets?
While sovereign defaults in major economies are unlikely, the real risks are the continued decline of the middle class and the failure of companies to create middle-income jobs.
This time is different
Google, Facebook, and Apple; Tesla Motors’ mass commercialisation of electric cars and powertrains; and Space X’s low-cost commercial space transportation: Companies from developed countries heralded as the faces of innovation have emphasised technology, becoming inextricably associated with their designs.
However, innovators emerging from developing countries are more diverse. The differences between the two groups reflect the economic and physical infrastructure of many developing countries such as the dominance of mobile computing over fixed desktop/laptop computers, limited access to the electric grid, and widespread economic, digital, and political exclusion.
An additional three areas of contrast, with regards to innovations from developing countries, are as follows:
- The creation of new marketplaces without the destruction and replacement of existing ones;
- Collaboration with the public sector and more e-government and m-government initiatives; and
- Economic and political inclusiveness for citizens who previously had no access to market or public goods and services.
How past investments hold countries back
Past investments can have a knock-on effect on those made in the future, namely, raising the cost. In many cases, physical infrastructure needs to be transformed rather than built, and new regulatory regimes overlap with existing ones. Disruptive technologies also have incumbents who, expecting to suffer losses, tend to resist change. As a result, history is littered with cases of good companies gone bad, a phenomenon known as the innovator’s dilemma, a term coined by US scholar and disruptive innovations expert Clayton Christensen. By way of example, as the founder of e-commerce company Flipkart says in an Economist article on smart systems, “the best thing about India is we don’t have to replace anything”.
When it comes to internet connectivity, most developing countries are jumping straight to the mobile sector by creating cloud and mobile infrastructure. Fixed-line connections, on the other hand, have stagnated. This pattern is expected to continue into 2021, when there will be an expected 3.1bn additional mobile internet users compared to 2015; 2.5bn of whom will hail from developing countries (see Figure 1).
Figure 1: Fixed-line vs Mobile Internet Connections, 2021 (millions)
Sources: International Telecommunications Union, 2001, 2011, and 2015; Ericsson Mobility Report, 2016
Many companies in developed countries have invested massively in service and distribution channels that users had, in the past, come to expect on desktops. Now, consumers carry know-how and expectations for websites and applications, and additional investments for mobile channels can be massive as companies struggle with balancing mobile applications and user experience.
For example, Indian e-commerce site Paytm, founded in 2010, has grown into one of the world’s largest mobile payment service platforms. The site’s customers have altogether registered 100m+ ‘e-wallets’ with which they can purchase airline tickets, book taxis, recharge mobile phones, and make electronic payments. In OECD countries, there is no company that operates on a comparable scale.
In addition, many developed countries are invested in large-scale, centralised power generation focused on coal, gas, and nuclear infrastructure – significantly different compared to renewable sources such as solar, wind, and hydro. For instance, gas needs to be liquified and gasified before being transported overland in pipelines, all of which involves capital-intensive investments and, in turn, creates a regulatory regime suited for bilateral monopolies.
Solar, wind, and hydro, on the other hand, can be decentralised (distributed generation). Modern microgrids are localised, small-scale grids that can operate autonomously or connect to a traditional centralised macrogrid, thereby strengthening resilience and mitigating disturbances. The costs of establishing microgrids is much lower in many developing countries where a traditional electricity infrastructure is absent or underdeveloped.
Competing with clean energy initiatives from Silicon Valley and General Electric are a host of companies such as QFE and Steama.co, which are building low-cost parts of the microgrid solution in China and Africa. They, like others, are outcompeting their developed country counterparts by adapting and scaling successes built in a developing country context (e.g. intermittent internet connectivity, poor transport and payment infrastructure, and low information technology literacy).
Making an impact and seizing new opportunities
‘The Rest’ are innovating in ways that mostly go unnoticed by the West. In part, their solution is to target markets too small for Silicon Valley and others to consider, a point noted by Charles Kenny and Justin Sandefur in a 2013 article for Foreign Policy: “Most technologies were invented in the rich world to tackle rich-world problems … that means they’re designed to be used most effectively by highly educated knowledge workers operating in places where physical and institutional infrastructure is strong.”
But this bias is causing the West to miss out on new markets and opportunities. Until now, social investments targeting developing countries’ health, education, and wider poverty concerns have been considered a niche market. It is time to rethink this line.