REVERSE INNOVATION
How German MNCs can profit globally from local
innovations for the Indian market
By
FRIEDERIKE NISSEN
REVERSE INNOVATION: How German MNCs can profit globally from local innovations for the Indian market
Master Thesis: Master of Science in International Business & Management University of Groningen
Faculty of Economics and Business Landleven 5
9747 AD Groningen The Netherlands http://www.rug.nl
Supervisor: Dipl.-Pol. Jutta C. E. Becker-Ritterspach Co-assessor: Prof. Dr. Luchien Karsten
TABLE OF CONTENTS
1. INTRODUCTION AND RESEARCH DESIGN ...4
1.1. Introduction ...4
1.2. Research objective and questions ...5
2. REVERSE INNOVATION...6
2.1. First step: Local innovation ...8
2.1.1. Innovation ecosystems ...8
2.1.2. Relationships in innovation ecosystems ...9
2.1.3. The Indian innovation system ... 13
2.1.4. Open innovation and knowledge capacities ... 15
2.2. Second step: Reverse innovation transfer ... 16
2.2.1. R&D subsidiary roles and relationship to HQ ... 16
2.2.2. Reverse knowledge transfer ... 18
2.3. Third step: Reverse innovation deployment ... 22
3. EXAMPLES OF REVERSE INNOVATION... 23
3.1. Citigroup ... 23
3.2. General Electric (GE) ... 23
4. THE GERMAN MNC ... 26
4.1. Foreign R&D sites of German MNCs ... 26
4.2. Country-of-origin effect ... 27
5. FRAMEWORK FOR REVERSE INNOVATION ... 28
5.1. 1st step: local innovation in India ... 28
5.2. 2nd step: Reverse innovation transfer ... 30
5.3. 3rd step: Reverse innovation deployment ... 31
6. RESEARCH METHODOLOGY ... 32
7. CASE STUDIES ... 34
7.1. Robert Bosch GmbH (Bosch) ... 34
7.2. DHL ... 36
7.3. Daimler AG ... 39
7.4. Company X ... 43
7.5. SAP AG ... 46
7.6. Siemens AG ... 49
8. REVERSE INNOVATION FROM ANOTHER PERSPECTIVE ... 52
8.1. RI from a German perspective ... 52
8.2. RI from the perspective of an Indian BPO company ... 52
9. ANALYSIS ... 53
9.1. Six steps of Reverse Innovation ... 53
9.2. The global role of R&D centers ... 57
9.3. Business model and process innovations... 58
9.4. Industry-specific likelihood of RI ... 60
9.5. How do German companies realize RI and why do they face problems? ... 61
10. CONCLUSION ... 65
10.1. Limitations ... 68
10.2. Suggestions for further research ... 68
REFERENCES ... 70
LIST OF TABLES
Table 1: Three steps of Reverse Innovation ...7
Table 2: Types of R&D unit roles ... 17
Table 3: Reverse knowledge transfer... 19
Table 4: Theoretical framework ... 32
Table 5: Interviews taken ... 33
Table 6: Six steps of Reverse Innovation ... 53
Table 7: Cross-industry analysis ... 60
LIST OF FIGURES Figure 1: Historical path to Reverse Innovation ...6
Figure 2: Relationships in an innovation ecosystem ... 13
LIST OF ABBREVIATIONS B2B Business-to-Business B2C Business-to-Consumer BOP Bottom of the Pyramid BPO Business Process Outsourcing CEO Chief Executive Officer
CMMI Capability Maturity Model Integration
CT T IN Siemens Corporate Research and Technologies CVP Customer Value Proposition
FDI Foreign Direct Investment GE General Electric
HBM Human Body Model
HQ Headquarters
IPR Intellectual Property Right IT Information Technology LGT Local Growth Team
LTE Long Term Evolution (expected to replace the UMTS technology) MBRDI Mercedes-Benz Research and Development India
MNC Multinational Corporation MRS Multi Resource Scheduling NIH Not invented here
OECD Organization for Economic Co-operation and Development R&D Research & Development
RBEI Robert Bosch Engineering and Business Solutions Ltd. RBIN Robert Bosch India Ltd.
RI Reverse Innovation
SCM Supply Chain Management
SME Small and medium sized enterprises TCS Tata Consultancy Services
INTRODUCTION and research design
4 1. INTRODUCTION AND RESEARCH DESIGN
1.1. Introduction
Emerging markets like India and China are being seen as the future innovation powerhouses (and not just growth markets) by Western multinational companies (MNCs) for some time now. Initially, MNCs approached these emerging markets by developing products at home and distributing them worldwide, with some adaptations to local consumer needs. This so called glocalization approach worked fine in times when rich countries accounted for the vast majority of the market, but those times have slowly changed. The imperialistic perspective to see emerging markets as targets resulted in the failure of many Western MNCs to innovate for the Indian and Chinese market while incumbents reaped benefits of their local advantage (Prahalad & Lieberthal, 2003). Reverse Innovation (RI), the development of products in these developing markets of India and China, and the subsequent global distribution, needs to accomplish the new challenge of global competition for Western MNCs (Immelt, Govindarajan & Trimble, 2009). Companies based in developed countries must realize that the innovation required to serve the Indian and Chinese market has the potential to serve the global market as well; at least to provide a template to take those products to other ‘emerging markets’ of the world. Hence, the thinking of managers should go further than just serving the ‘bottom of the pyramid’ (BOP), the notion made famous by C. K. Prahalad for developing sustainable business models addressing the poor in emerging economies (Prahalad, 2006).
The article by R. Immelt, chairman and chief executive officer of General Electric (GE), V.G. Govindarajan and C. Trimble, entitled “How GE is disrupting itself” highlights the concept of RI in discussing how GE uses emerging markets for product and service innovations to take these innovations back into developed markets. Local growth teams in India and China should ensure access to the BOP market. However, it seems to be a long process, as the vast majority of the resources for R&D are still devoted for the developed world. However, the message is clear: “Reverse innovation isn’t optional; it’s oxygen.” (Immelt et al. 2009)
One example that shows that products invented for the BOP market have the potential for global success, is the invention of Tata Motors’ low cost car for the Indian market, the Tata Nano. Now the company plans to introduce the car in other emerging markets like Africa, but also in the US and Europe (Govindarajan, 2009a). Examples like this show that local firms outnumber large Western MNCs in emerging economies like India, but they will also globally if Western MNCs do not start to rethink their business approach (London & Hart, 2004).
INTRODUCTION and research design
5
1.2. Research objective and questions
Even though a number of studies have highlighted the new phenomenon that subsidiaries transfer knowledge back to the home base (e.g. Ambos et al. 2006, Frost and Zhou, 2005), existing literature does not provide a theoretical framework for the process of RI. There is hardly any literature that analyzes the whole concept of RI, and addresses the problems that have to be overcome to successfully deploy innovations, either product, service, process or business model innovations, from India in the company and/or in other markets.
Furthermore, it is not surprising that more examples of American MNCs already realizing RI can be found, as the U.S. has by far the strongest foreign direct investment (FDI) activities in the R&D sector. A TIFAC report from 1998 to 2003 reveals that the U.S. has with 53 the maximum number of R&D centers in India with the maximum number of R&D workers employed. Germany, for comparison, has only 7 R&D centers in India (Mrilani & Wakdikar, 2008; citing the TIFAC report). This is also reflected in the scarce literature about RI, as other case studies have focused solely on American firms. Therefore, it will be especially interesting to put the focus of this research on German MNCs and analyze their approach to the new phenomenon of RI.
The study will be of academic and practical importance. It will provide a theoretical framework for RI that future research can build on, highlighting the theoretical factors that need to be considered when analyzing RI. Moreover, it will also provide practical value for managers on how to realize RI to increase the performance of the firm, and how to overcome possible problems. As this research will distinguish different stages of RI, managers can easily identify where their companies are currently located and how they could proceed. It will not only be a benchmark study to analyze how companies realize local innovations in India, but will further give insights on how innovation transfer can be realized and what has to be taken into account to ensure an innovation deployment in another country. Optimally, managers should be enlightened by this study to more heavily consider RI as a future business model to stay competitive with companies from emerging economies – in emerging economies and in the developed world.
RI is more than transferring knowledge. It is a complex and relatively new trend that brings new challenges for companies. To analyze the process of RI from German subsidiaries in India to the parent in Germany this research addresses the following two main questions that are guided by three sub questions each:
How do German MNCs realize Reverse Innovation from India to improve global performance?
· How do German subsidiaries in India develop local innovations?
· How is the local innovation from India transferred to the mother company in Germany? · How does the German headquarter deploy the innovation?
Why do German MNCs face obstacles with Reverse Innovation?
· Which obstacles hinder local innovations in India?
Reverse innovation
6 2. REVERSE INNOVATION
RI is a relatively new phenomenon of “developing products in countries like China and India and then distributing them globally.” (Immelt et al. 2009) The notion was made famous by Vijay Govindarajan, but the idea that innovations for developing countries, especially for the BOP market, have the potential to lead also to benefits in the developed world, is already introduced by Prahalad and Lieberthal (1998). Other authors call it also ‘innovation blowback’ (Brown & Hagel, 2005) or ‘reverse diffusion’ (Edwards & Tempel, 2010). According to Govindarajan (2009b), the approach of American MNCs to serve emerging markets follows four phases (see figure 1). In the globalization phase, MNCs develop products at home and distribute them globally. In the glocalization phase, products are still developed at home, but MNCs make use of lower production costs in emerging markets and increasingly de-feature products to meet the lower-budget local market needs. The third phase, called local innovation, is the first part of the RI process. In that phase MNCs develop products within emerging markets for emerging markets. Herewith they leave behind the assumption that products from the developed world just have to be modified to meet emerging market needs, but instead start to innovate from scratch using their global resources. Phase four completes the process of RI by taking the successfully deployed innovation for emerging economies and modifying it for worldwide use (Govindarajan, 2009b; Cramer, 2010a).
Figure 1: Historical path to Reverse Innovation, Source: Cramer, (2010b)
Reverse innovation
7 dramatic departure can either be interpreted as radical innovation, as something new to the world, or at least something that reduces costs and/or improves performance dramatically (Gils et al. 2009). RI may only be discontinuous but not necessarily disruptive (Govindarajan, 2009b).
There is a lot of discussion what and who the BOP is. According to Prahalad (2009), the concept of the BOP was originally introduced to shift attention to the 4 to 5 billion poor who are un-served or underserved by MNCs. Of course, the definition of poor is also debatable. It can be defined as people who live on less than $2/day or even $1/day. This research however, is not solely focusing on innovations for the poorest of the poor, but also on innovations for the upcoming middle class. Prahalad (2009) points out that approximately 60 percent of the global middle class can be expected in Asia, indicating the opportunity of serving this market with customized innovations. As this study is interested in the opportunity that innovations with a totally different price-profit formula can have for the developed world, the term BOP is used more as a description of the emerging economy market, including the very poor as well as the (upcoming) middle class.
In this research RI describes the process of innovations for the BOP developed by German subsidiaries in India, and the subsequent reverse transfer back to the mother company in Germany and/or other markets in the developed world. Thereby RI includes also reverse knowledge transfer, which is far more elaborated in scientific papers (see table 3; section 2.2.2.). Because the process of RI is relatively unstudied, this study refers to commonalities with reverse knowledge transfer, especially the three steps of reverse knowledge transfer investigated by Narula and Michel (2009).
Narula and Michel (2009) argue that not only MNCs but also the home country innovation system can benefit from reverse knowledge transfer. Therefore, new knowledge developed abroad should be encouraged to be transferred to the rest of the firm and to the local environment of the home country. However, many MNCs face enormous difficulties with doing so; inhibiting factors are risk-averseness of firms (Narula & Michel, 2009), which leads to organizational inertia in relocating R&D abroad (Criscuolo & Narula, 2005), absorptive capacity (Cohen & Levinthal, 1990), willingness of subsidiaries to diffuse knowledge, subsidiary role (see section 2.2.1.), location and knowledge specific factors, etc. Herewith, it becomes clear that merely establishing subsidiaries abroad is not enough. According to Narula and Michel (2009) companies have to follow three possible steps of reverse knowledge transfer: from the local environment of the host country to the MNC’s subsidiary, from the MNC subsidiary to the parent company, and from the parent company to the local environment of the country of origin. Because innovation activities are mainly about the creation and diffusion of knowledge (Criscuolo & Narula, 2005), a combination of these steps with Govindarajan’s (2009b) understanding of RI will guide this research from now.
Three steps of Reverse Innovation 1st step Local innovation:
“In country, for country” innovations
Knowledge creation in innovation ecosystems 2nd step Reverse innovation transfer:
“In country, for the world” innovation
Taking innovations from the MNC subsidiary to the parent company and/or other global markets
3rd step Reverse innovation deployment:
Modifying innovations for other markets Market deployment
Questioning the existing business model
Reverse innovation
8 The first step is a crucial one; the subsidiary has to integrate itself in the host environment for gaining location- and context-specific knowledge; i.e. learning from a network of suppliers, partners, investors, customers, competitors, and companies and institutions that are not necessarily in the same field. Subsidiaries need a network structure, value-chain partnerships and embeddedness in the host country to be able to meet consumer needs (see for example: Hansen & Birkinshaw, 2007; Kanter, 1994, Geppert & Williams, 2006; Morgan & Kristensen, 2006). In the context of RI this study is best suited to depart from the description of an innovation ecosystem, which will be described in the next section.
The second step is the core of RI and describes the taking-back process of the successfully deployed in-country for-country innovations from the first step. This research describes the process of how innovations from the Indian subsidiary are transferred to the German HQ. From a knowledge management perspective the Indian subsidiary needs disseminative capacity to transfer the knowledge in a way that it can be understood by its parent (Tang et al. 2010). Complementarily, the German parent needs sufficient absorptive capacity to assimilate the innovative knowledge generated by the Indian subsidiary. The transfer is also dependent on factors concerning the headquarter-subsidiary relationship, including power and organizational structure, subsidiary role, subsidiary initiatives, etc. (Baliga & Jaeger, 1984; White & Poynter, 1984; Birkinshaw & Ridderstrale, 1999).
The last and final step is the reverse innovation deployment, which means that product or service innovations have to be brought into the home market or other global markets, and that process or business model innovations need to be deployed within the company. To limit the scope of this research, the third part of RI will not elaborate the market deployment of new products from a marketing perspective. It is rather interesting to analyze the interdependencies of product and/or service innovations with process and business model innovations as Johnson et al. (2008) argue that radical innovations usually need completely new business models.
2.1. First step: Local innovation
2.1.1. Innovation ecosystems
Reverse innovation
9 business ecosystem sees business as a part of an ecosystem and rejects, like value networks, both geographical proximity and industry. However, unlike value networks, competition and cooperation exist simultaneously to develop innovations and enhance value for customers, who are themselves part of the ecosystem. Business ecosystems have decentralized control, which leads to the advantage to adapt to sudden changes in the environment. However, the higher the bargaining and market power the higher is usually also the control over other actors within the system. Enablers like interconnectedness and shared fate lead to knowledge sharing and creation within the system. Business ecosystems are well suited for absorptive innovation strategies, i.e. to use external knowledge sources and integrate the spillovers in the firm’s existing knowledge base to develop innovations. Peltoniemi (2004) concludes that if we talk about imitative or conservative (relying solely on the firm’s own research) innovation strategies, we cannot refer to the notion of business ecosystems.
2.1.2. Relationships in innovation ecosystems
Innovation ecosystems only exist when the different actors are willing to collaborate on R&D issues, which should optimally result in a better usage of internal and external capabilities (Belderbos et al. 2004). However, the question is who cooperates with whom and which linkages have which specificities? Bajeux-Besainou et al. (2007) visualized firms as nodes in an innovation ecosystem and found that firms especially collaborate in R&D in industries of high uncertainty with rapid technological change; for example information technology (IT) and pharmaceutical sector (Hedlund, 1986). Firms joining a network would like to reduce uncertainty, especially in technology areas that are new to the firm. Hagedoorn’s (2002) historical data analysis of cooperative R&D uncovers that R&D partnering is still a ‘game’ dominated by companies from developed countries. Not surprisingly, his study reveals the dominance of the USA in the high-tech industries. Because short-term projects and relationships with many partners increase strategic flexibility, many firms sought to collaborate in the field of R&D with US firms. Even if there may be stronger actors in an innovation ecosystem, it cannot be controlled by any single player (Birkinshaw, 2007). The behaviour of an ecosystem is rather determined by the relationships between its different actors (Camarinha-Matos & Afsarmanesh, 2006). In this study I am especially interested in the relationships between German MNCs and members of their innovation ecosystem in the Indian market. When talking about the German subsidiary in India, it is assumed that the research laboratory is part of it. However, not only the specific subsidiary in India may be part of the business ecosystem but also the R&D headquarter (HQ) in Germany. This mainly depends on autonomy issues concerning the headquarter-subsidiary relationship, which will be discussed later. Possible R&D collaborators of MNC subsidiaries are suppliers, customers, competitors, research institutes and universities, as well as consultants (Belderbos et al. 2004; Fritsch & Lukas, 2001).
Firms decide to collaborate on R&D if the external knowledge spillover is an important source for their innovation process (Belderbos et al. 2004b). Innovations have mainly two goals: cost reduction and/or market expansion (Belderbos et al. 2004a). Because different types of cooperations may serve different purposes, this research proceeds with analyzing the different cooperating partners within an innovation ecosystem.
Suppliers
Reverse innovation
10 ecosystems. This becomes obvious with the example of Airbus. The innovation of the A380 confronted other participants of the ecosystem with innovation challenges. Some upstream suppliers needed to innovate for example new engines and downstream buyers, for example airports, needed to develop and invest in new infrastructure for the oversized aircraft. Thereby the focal firm is very well dependent on external firms in the ecosystem to successfully deploy the innovation in the market. Their findings suggest that firms are more concerned about the supplier than customer relationships. When contracting with a supplier, the firm faces technological uncertainty, because it does not know when suppliers will innovate appropriate solutions, and behavioral uncertainty, because suppliers can act in an opportunistic way. Findings reveal that the benefits of vertical integration increase over the course of the technology lifecycle because technological uncertainty will decrease. Fritsch & Lukas (2001) found that firms engaged in supplier relationships tend to have a relatively low share of value added to turnover suggesting that this type of R&D collaboration tends to be a substitute for internal R&D. Moreover, collaboration with suppliers is often realized to be able to focus on the company’s core business while ensuring cost reductions through quality improvements made by suppliers (Belderbos et al. 2004a). This is confirmed by a survey of Capgemini (2008); however, the fact, that less than 50 percent of the respondents of the survey were satisfied with their relationship with suppliers indicates the need for improvements. Ninety-three per cent of the dissatisfied respondents judged their inadequate use of open innovation environment as one of the primary reasons for their dissatisfaction. The authors suggest viewing suppliers increasingly as a strategic partner to overcome and balance the challenges of this type of collaboration.
Customers
The relationship to customers is usually made sure through marketing and sales manager of a firm (Ander & Kapoor, 2010). This relationship can be crucial to reduce risk of market deployment for radical innovations (Belderbos et al. 2004a). However, findings on how customers affect innovation output are mixed. Lööf and Heshmati (2002) found that customer cooperation affects the innovation output negatively while cooperation with competitors and universities had a positive impact. Moreover, Belderbos et al. (2004a) could not find any impact of customer cooperation on productivity growth, but suggests that the information from customer demands and technological requirements are already included in market transaction, and that no formal R&D cooperation with customers is needed. In contrast, the survey of Capgemini (2008) found a correlation between customer collaboration and innovation performance. The survey revealed that the majority of the participants who indicated to struggle with generating new product or service ideas for development, mentioned also an unsatisfactory relationship to customers indicating that customer collaboration is needed for new product/service development. Moreover, these companies also failed to predict customers’ unmet needs.
Reverse innovation
11 At first sight, the customer collaboration seems to be contradictory. Whereas Christensen (2003) suggests not listening to customers for disruptive innovations, the outcome of Capgemini’s survey (2008) proposes a need to improve customer involvement for the process of innovation. It should be noted, however, that the survey of Capgemini (2008) not specifies the type of innovation. It can be expected that customer collaboration is advisable for incremental innovations, but less advisable for radical, and not suitable for disruptive innovations. The problem is that both incremental and radical innovations have the potential to be disruptive. Nevertheless, following Christensen’s thinking, many customers are over-served with “too good, too expensive, and too inconvenient products” (Christensen, n.d.). Disruptive innovations usually start with a simple product or service at the BOP market and eventually displace established competitors. Because RI starts in emerging economies, Western companies more likely need to invent radically to serve the BOP market. Hence, RI more likely starts with radical innovations and therefore, customer collaboration is expected to be low. It is worth mentioning that there is a difference between ‘listening to customers’ and ‘predicting customers’ unmet needs. Tata Motor, for instance, developed the low-cost car by observing potential customers and thereby predicting its needs. Also the case of GE (section 3) reveals the interaction with customers through local growth teams in order to innovate disruptively. Hence, for the process of RI Western companies seem well advised to observe potential customers to develop a sense for emerging market needs.
Competitors
MNC subsidiaries are an effective channel through which a MNC can source host country technology. However, they are also a channel through which innovative knowledge can flow to competitors. Singh (2007) analyzed the inflows and outflows of knowledge from MNCs to host country organizations and summarized that MNCs often restrict knowledge leakage to competitors by establishing a global innovation network, which makes knowledge from just one subsidiary unusable. R&D collaboration with competitors seems to be dependent on the mission of the subsidiary, which will be discussed further in section 2.2.1. If the subsidiary’s focus is on incremental innovations, the competitor R&D collaboration is found to be advantageous (Belderbos et al. 2004a). However, as RI is expected to start with radical innovations, the collaboration with competitors is questionable. Singh (2005) reviewed that MNCs with advanced technology either do not locate subsidiaries in host countries or they establish them further from potential local competitors to minimize the risk of knowledge spillovers. However, Singh (2007) concludes that if MNC subsidiaries are isolated from the domestic economy, and hence also domestic competitors, they are also cut off by positive knowledge spillovers. Isolation will prevent the subsidiary from local embeddedness and can significantly harm the realization of ideas for local innovations. This will be elaborated further in section 2.2.1. In sum, competitor cooperation highlights the dual role of knowledge spillovers in an innovation ecosystem. Whereas outgoing spillovers may jeopardize the cooperative agreement, incoming spillovers increase the attractiveness of cooperative R&D. Belderbos et al. (2004) advises that firms should enhance the effectiveness of incoming spillovers by investing in absorptive capacity.
Research Institutes and universities
Reverse innovation
12 contractual relationship with institutions, or the purchase of a license or patent. On the contrary, for discontinuous innovations, firms engage their research activities with research institutes and universities mostly within consortia. Firstly, this is to keep themselves informed about technological improvements and secondly, to reduce costs, uncertainty and high risks of these long-term research activities. Furthermore, Gils et al. (2009) found that unless firms have no product idea, they are not eager to develop technology. Universities or research institutes are mainly knowledge suppliers for R&D departments of firms after they get product ideas from marketing, or their customers, for example. Universities and research institutes usually do not suggest innovation activities, but when firms come up with interesting product ideas, research institutes and universities are then scanned for technological developments (Gils et al. (2009).
Compared to other types of R&D collaboration, the R&D collaboration with research institutes and universities can be seen as relatively inexpensive, especially when coupled with public funding opportunities. The more generic type of knowledge not only makes industry-institution R&D collaboration desirable but can also stimulate other types of R&D collaboration (Belderbos et al. 2004b). However, the cooperation is not an easy task for both sides, because the aim of universities is publish and receive grants for research, as well as provide quality degrees, whereas firms want results. Due to the difference in the aims, a high level of trust is needed to make this collaboration work (Ettlie, 2006).
Consultants
Although the cooperation with consultants cannot be seen as traditional R&D cooperation (Belderbos et al., 2004), recent studies emphasize the mediating and supporting role of consultants within innovation ecosystems. Consultants can be described as boundary spanners between different participants. They can provide help for gaining resources that were previously hidden, and are therefore an important cooperating partner for firms. They mediate the innovation process, but have to manage and protect their reputation. In comparison to multinationals that welcome new opportunities, this results in less openness and a more careful approach of establishing relationships (Thistoll & Pauleen, 2010). Fritsch and Lukas (2001) found that when large firms were engaged in R&D collaboration, they were more likely to have a ‘gatekeeper’, “i.e. a person who systematically monitors external information that could be relevant for a firm’s innovation activities” (Fischer & Lukas, 2001). Tushman and Katz (1980) describe a gatekeeper as a boundary spanner who is able to gather and understand external information, and is able to translate this information into meaningful terms for the research group. The role of a gatekeeper is most needed if the expertise of the individuals within an organization differs from the expertise of external members of the innovation ecosystem (Cohen & Levinthal, 1990).
Reverse innovation
13 Cooperating with research institutes and universities is found to be important for large firms with a strong science orientation of their R&D work aiming to develop radical innovations. A major challenge for this type of cooperation seems to be the different goals as well as the academic strength of the host environment (Ettlie, 2006; Belderbos, Leten & Suzuki, 2007). Consultants are rather unusual cooperation partner in R&D, because studies lack in providing results on how their work can be associated with success in innovation activities. However, their role as boundary spanners and mediators of innovations in ecosystems should not be neglected.
Regarding the how question of this research, I assume that RI starts with collaboration in innovation ecosystems, although existing literature still lacks to distinguish, which unit of the MNC cooperates with the different actors in an innovation ecosystem. For the process of RI, it seems important to know who initiates RI; that could be the R&D unit in India, the subsidiary in India, even the HQ in Germany. The initiator of RI seems to be the unit that assimilates the Indian market knowledge, hence the unit that cooperates tightly in the innovation ecosystem. Firstly, there may be local relationships either with the subsidiary and/or the R&D function with the different actors of the innovation ecosystem. Secondly, there may be also direct relationships from the mother company in Germany with the actors in India. The possible relationships are visualized in figure 1.
Figure 2: Relationships in an innovation ecosystem
To what extent a subsidiary can be an initiator of RI depends on a variety of factors. For the first step, the subsidiary has to develop innovations, which is not only dependent on the relationships to different actors within the innovation ecosystem, but also on the specificities of the local innovation system, here the Indian innovation system.
2.1.3. The Indian innovation system
Reverse innovation
14 technical know-how can be seen as advantageous for serving the huge upcoming middle class in emerging economies, R&D will also play a crucial role in India. Even in times of virtual organizations, departments, or units spatial proximity will enhance learning capabilities from other actors in the innovation ecosystem, foster trust between actors, which in turn leads to more efficient collaboration and innovation. As India follows after China and the U.S. as the third most attractive R&D location (Mrilani & Wakdikar, 2008) nearly every MNC nowadays is engaged in some sort of R&D work in India (Herstatt et al. 2008; Patibandla & Petersen, 2002); examples are Daimler-Benz, IBM, Novartis, Texas Instruments and SAP (Boutellier et al. 1999, p. 560ff.). However, the question is: What makes India a preferred R&D location?
Herstatt et al. (2008) analyzed key elements and corporate perspectives of India’s national innovation system. They have found that India is emerging more and more as a R&D hub for foreign firms. Even though India is still seen as a low-cost location for standardized tasks, its reputation for qualified R&D increases at a steady pace. The authors mentioned above see a large demand for localized products, which encourages R&D activities and at the same time strengthens India’s innovation system.
India is known for a large talent pool of low-cost English speaking engineers and scientists (Prasada, 1997; Patibandla & Petersen, 2002; Dutz, 2007; Leadbeater & Wilsdon, 2007).India’s colleges and universities produce 2.5 million graduates a year, of which 350,000 are engineers and 150,000 are IT-specialists (Herstatt et al. 2008; Leadbeater & Wilsdon, 2007). Hence, Leadbeater and Wilsdon (2007) argue that India does not have an innovation system but an innovation class. In contrast, only about 33,000 engineers graduate each year in Germany (Herstatt et al. 2008).For this reason, it is not surprising that the primary driver of locating R&D in India is the availability of R&D personnel, especially if firms are engaged in higher-order R&D activities. The second driver may be cost advantages that firms are able to generate through lower wages of R&D personnel. However, these may be eroded by higher material or communication costs (Prasada, 1997). Additionally, Herstatt et al. (2008) mention that cost advantages are decreasing because of rising property rates and an increased demand of skilled labour. However, positively, this leads to rising income levels which create new market opportunities for firms.
Reverse innovation
15 education, two attributes MNCs tend to rely on, as they are mostly investing heavily in R&D capacities (Herstatt et al. 2008; Altenburg et al. 2008).
Altenburg et al. (2008) investigated the extent to which China and India are building up their innovation capabilities. Although OECD countries are still ahead in most of the technological capabilities, the vision that China and India could combine cutting-edge technology with low-cost production would represent a major threat for firms from developed countries. Drawing on India’s flagship, the software industry, and its rapid growth in the last years, the authors indicate that India has the potential to compete for knowledge-intensive service tasks. Accordingly, many MNCs like Siemens, SAP, or Intel have established software research centers in India. However, it seems to depend on the “combination of market size and expansion, bargaining power, enormous capital accumulation, heavy investment in human resources, FDI, and strong presence in global professional networks” (Altenburg et al. 2008) that India and China are able to catch up with OECD countries. Nevertheless, in the context of RI the competitive role of the Indian innovation system is important to understand why products/services or processes, innovated for the Indian market, have the potential to be exploited globally as well. It can be argued that products/services and processes made in India (or China) are more suited to the needs of the developing world. The fact that about 80 percent of India’s population lives on less than US$2 a day forces MNCs to develop radical low-cost innovations, which provide potential to disrupt developed markets as well (Leadbeater & Wilson, 2007). One example is the previously mentioned low-cost car of Tata Motors, which is also likely to find demand in the developed world.
After analyzing the external relationships of the Indian subsidiary and the Indian innovation system, it seems also crucial for the process of RI to specify the internal capabilities of the Indian subsidiary to generate ideas and develop innovations. Therefore, the next part describes the knowledge capacities that are needed in an open innovation system.
2.1.4. Open innovation and knowledge capacities
A literature stream that fits perfectly in the concept of innovation ecosystems is introduced by Chesbrough (2003) with the notion ‘open innovation’. Open innovation means that the boundaries of firms become more porous, enabling innovation to move easily between cooperating partners. Companies can no longer lock their intellectual property (IP) but should benefit from each other sharing and transferring knowledge for innovation. This concept highlights, contrary to the concept of closed innovation, that external ideas and external R&D can create significant value for a firm. Open innovation is based on the concept of innovation ecosystems including customers as co producers (Chesbrough, 2003), but faces management with the challenge to discover appropriate methods and practices for the utilization of external knowledge resources (Bergmann, 2009). Depending on the strategy of the firm to develop innovations, i.e. drawing on internal or external knowledge sources, different knowledge capacities are needed.
Reverse innovation
16 on prior related knowledge (Cohen & Levinthal, 1990). Higher absorptive capacity can also compensate inventive capacity indicating that subsidiaries that are strongly embedded in the innovation ecosystem can largely draw on absorptive capacities to develop innovations. Contrarily, subsidiaries with weak external links to other actors in the innovation ecosystem seem to need stronger inventive capacity. However, it should be noted that the subsidiary might need at least basic internal research activities to understand the incoming external knowledge. In other words, inventive capacity will broaden the subsidiary’s knowledge base and hence increase its absorptive capacity. Only an overlap of internal and external knowledge may provide the possibility to use external knowledge sources for new technical developments (Cohen & Levinthal, 1990). This is further supported by Singh (2005) who mentions, “subsidiaries need to be engaged in R&D activities to effectively absorb knowledge from their respective locations.” To what extent a subsidiary can rely on external knowledge sources is likely to depend on their connective capacity, the ability to maintain external networks over time (Lichtenthaler & Lichtenthaler, 2009). As described in the previous section of this paper, innovation ecosystems can consist of many actors, and only if subsidiaries are able to establish links with these actors can they in turn ensure privileged access to their location- or context-specific knowledge, crucial for targeting the Indian market. As RI preconditions local innovation, subsidiaries in India also need innovative capacity, which is the ability to bring inventions to the market (Lichtenthaler & Lichtenthaler, 2009). Transformative capacity, the ability to retain knowledge inside the company, may be of importance as well, but has no direct relationship to the process of RI and is hence neglected in this paper. Desorptive capacity is the ability of transferring knowledge outside the boundaries of a firm. This will be discussed in the second step of RI as disseminative capacity to transfer knowledge to the mother company.
In summary, the first step of RI may only be realized if the German MNC is able to establish an innovation ecosystem by collaborating especially with local Indian actors. It seems likely that the Indian subsidiary is only able to innovate from scratch for the specific demands of the Indian market, if local actors provide context-specific knowledge, and if the Indian subsidiary is able to absorb this knowledge and implement it in their innovation process. Only if the subsidiary is able to bring the product/service innovation into the Indian market, can the second step of RI be initiated. The next section, hence, deals with the how and why question of the innovation transfer to the parent in Germany.
2.2. Second step: Reverse innovation transfer
2.2.1. R&D subsidiary roles and relationship to HQ
Reverse innovation
17 domestic networks according to their global integration and local capability, and Cantwell and Mudambi (2005) who analyzed the determinants why subsidiaries achieve a competence-creating, i.e. international creator, role.
Local adaptor International adaptor International creator
Ronstadt (1977) Technology Transfer Unit
Indigenous Transfer Unit
Global technology Unit; Corporate Technology Unit Pearce (1989) Support laboratory Locally integrated
laboratory
Internationally interdependent laboratory Kuemmerle (1996) Home base exploiting unit Home base augmenting unit Ghoshal (1986) Implementer
subsidiary
Contributor subsidiary Innovator subsidiary Jindra (2007) Receptive role,
quiescent role
Autonomous role Active role Cantwell &
Mudambi ( 2005)
Competence-exploiting subsidiary mandate Competence-creating subsidiary mandate
Table 2: Types of R&D unit roles; adopted from Nobel & Birkinshaw (1998), extended with Jindra (2007), Cantwell & Mudambi (2005)
Local adaptors have a limited development mandate. They conduct R&D first and foremost to adapt
established products to local tastes, customer needs, and resource availability or production conditions, i.e. exploiting existing technology from the R&D HQ (Cantwell & Mudambi, 2005; Criscuolo, Narula & Verspagen, 2002; Jindra, 2007). Hence, they can also be described as “Technology transfer units” (Ronstadt, 1977) or “home-base exploiting units” (Kuemmerle, 1996; Cantwell & Mudambi, 2005) with the main task to ease the transfer of technology from the HQ to the overseas manufacturing location (Nobel & Birkinshaw, 1998). This also explains why local adaptors have essentially no linkages to universities but to local manufacturing and marketing, other local R&D as well as to local customers and suppliers. They have very limited communication with HQ and are mainly controlled through formalization, i.e. decision-making is routinized through rules and procedures (Nobel & Birkinshaw, 1998). Therefore, RI seems to be unlikely from local adaptors because of a one-way knowledge flow from HQ to subsidiaries (Di Minin & Palmberg, 2007) and because improvements and adaptations of already existing products or services provide logically no potential for a reverse transfer.
International adaptors have more R&D autonomy than local adaptors and can be seen as more
Reverse innovation
18 initiator-role of RI; however, in this case HQ can be the initiator to pull back innovations from international adapters.
International creators are home-base augmenting R&D units (Kuemmerle, 1996; Cantwell &
Mudambi, 2005), located in foreign markets to absorb local market information, but at the same time are global leaders in their area of expertise. They usually have multiple linkages to other R&D units of the MNC and to the local innovation ecosystem in the country they are located in. Jindra (2007) defines these subsidiaries as active, combining global integration with high local capability. R&D resources are strongly integrated internally with the MNC and externally with other actors of the innovation ecosystem. The R&D embeddedness in active subsidiaries seems adequate to facilitate exploitation of local opportunities and augmentation of technological activity. They are predominantly controlled from HQ through socialization, i.e. shared organizational values and common expectations lead to coordinated decision-making (Nobel & Birkinshaw, 1998). Hence, the active subsidiary is likely to be an ideal candidate for RI. The assumption that a subsidiary with a high degree of influence within the MNC is a source of RI is supported by Edwards and Tempel (2010) who analyzed reverse diffusion of Human Resource practices from German and British subsidiaries to their American parent. They have found that rather large subsidiaries that have recently grown have initiated reverse diffusion. However, if the subsidiary has a specialized role within the MNC concerning the functions performed and the technology deployed, the diffusion of practices to other sites of the company is rather limited. The higher the commonalities with other sites the higher also the possibility of reverse diffusion. Previous studies outline that foreign R&D units are increasingly having an international orientation, and not only working for the local market needs (e.g. Nobel & Birkinshaw, 1998). Hence, we can also expect an increased potential for RI. Interestingly, Nobel and Birkinshaw (1998) have found that international creators not only have an external network, but also strong communication with local manufacturing and marketing units. However, whereas local and international adapters had strong communication with local customers this could not be found for international creators.
In sum, subsidiaries may only be the source of RI if they are able to increase both their strategic importance internally, and their embeddedness in the innovation ecosystem. Hence, RI is more likely if the subsidiary has the role of an international creator. Helble and Chong (2004) agree on that in stressing the importance of the subsidiary’s internal and external linkages in an innovation ecosystem. Their managerial advice is to increase the strategic importance of the R&D site internally through constant upgrading of the technological level and through intense communication with HQ as well as other R&D subsidiaries. Moreover, they underline the importance of external linkages to other actors of the innovation ecosystem. Only if external and internal linkages are improved can subsidiaries contribute to the corporate R&D organization.
2.2.2. Reverse knowledge transfer
As described earlier, Narula and Michel (2009) distinguish three steps of reverse knowledge transfer: from the local environment of the host country to the subsidiary, from the subsidiary to the parent company, and from the parent company to the local environment of the country of origin. The knowledge capacities discussed for the first part are not sufficient for realizing the second step successfully. Therefore, this section will describe the specific knowledge capacities that are needed to transfer the innovation from the subsidiary to the mother company. Moreover, this section will address knowledge complexity issues that may impede the transfer process.
Reverse innovation
19
Reverse knowledge transfer
Ambos et al. (2006) Changing role of HQ as a receiver of knowledge from dispersed subsidiaries
Yang et al. (2008) Reverse knowledge transfer from subsidiaries to MNC parents are based on different transfer logics, knowledge characteristics are important for reverse knowledge transfer, organizational characteristics for conventional knowledge transfer; host country characteristics have moderating effect; more evolved subsidiaries initiate more reverse knowledge transfer
Napier (2006) Dramatic economic change and increased sophistication of local managers are advantageous for reverse knowledge flow; cultural adaptation and learning may also flow from ‘learners’ to ‘experts’; major mind shift of foreign experts is needed Yahiaoui & Chebbi (2008) Top-down transfer from HQ to subsidiary has a negative impact on the innovation performance of MNCs; subsidiaries have to
convince HQ to implement their knowledge in the innovation process (dependent on absorptive capacity and NIH syndrome sensitivity of HQs), subsidiaries have to identify their own market needs; knowledge combination from the HQ and subsidiary (knowledge hybridization) constitutes a new practice for transnational innovations
Foss & Pedersen (2002) Context-specific knowledge and small absorptive capacity of the receiver inhibits the usability of the transferred knowledge; autonomy of subsidiary seems to be important for knowledge transfer
Mei H.C. Ho (2007) Subsidiary’s internal position of R&D importance encourages it to diffuse knowledge for the whole MNE, willingness to share knowledge depends on availability of external local resources; absorption of useful market experience from customers helps to shape strategic internal importance
Song & Shin (2008) When a host country has stronger technological capabilities than a home country a MNC-HQ tends to outsource knowledge more actively from the host country; the technological capabilities held by the MNC-HQ enhance learning capabilities but reduce motivation to outsource knowledge from host countries (paradox).
Subramaniam (2006) Knowledge transfer does not necessarily achieve knowledge integration; cross-national teams and communication enhance knowledge flow but do not result in effective knowledge integration; integration (i.e. knowledge gets embedded in products) is only effective through cross-national collaboration
Criscuolo & Narula (2005) MNEs are faced with organizational inertia that hinders inter-unit knowledge transfer, need for lateral communication among dispersed research centers because innovation activities are mainly about the creation and diffusion of knowledge, which is mostly tacit and non-codifiable
Frost & Zhou (2005) R&D co-practice increases levels of absorptive capacity and social capital which in turn increases willingness to share knowledge
Reverse innovation
20
Knowledge capacities
It is argued that the knowledge receiver, here the German HQ, may not automatically benefit from innovative knowledge of the knowledge sender, the subsidiary, if it has sufficient absorptive capacity (Tang et al. 2010). Disseminative capacity which is described by Tang et al. (2010) as the “ability of knowledge holders to efficiently, effectively, and convincingly frame knowledge in a way that other people can understand [it] accurately and put their learning into practice” seems to be equally important. If knowledge holders lack this ability the success of the knowledge transfer and hence RI may significantly reduced. The HQ may only be able to absorb the knowledge of innovations from its subsidiary if individuals of the subsidiary are able to precisely communicate and specify what needs to be transferred (Tang et al. 2010). In the context of RI the subsidiary needs the ability to frame the knowledge of the innovation in a way that the mother company can absorb it preconditioning sufficient absorptive capacity of the latter. Tang et al. (2010) have found that the stronger the disseminative capacity of the knowledge holder, and the stronger the absorptive capacity of the knowledge recipient, the more knowledge will be transferred. This stresses the complementary nature of absorptive and disseminative capacity. Lichtenthaler and Lichtenthaler (2009) describe outward knowledge transfer as desorptive capacity. Even though they use it in the context of inter-firm relationships it is similar to the intra-firm disseminative capacity of Tang et al. (2010). For example, if the subsidiary is the initiator of RI, it identifies external knowledge exploitation opportunities, i.e. innovation exploitation opportunities in other countries. Hence, even though RI describes an intra-firm transfer of innovations it may also be described as external opportunities of foreign subsidiaries to spread their innovations to other markets.
Regardless of the specific knowledge capacities that are most important for transferring innovations back home, the HQ and the subsidiary need to a certain extent similar knowledge capacities (Goh, 2002). Lichtenthaler and Lichtenthaler (2009) accentuate that a lack of one knowledge capacity can lead to under-utilization of opportunities that derive from other capacities. Even though some capacities can compensate others (e.g. absorptive capacity can compensate low levels of inventive capacity), the knowledge receiver and sender need a partly overlapping prior knowledge base to successfully transfer knowledge. For instance, if the subsidiary creates knowledge and innovations that are specialized in way that HQ can hardly understand it, the success of RI is rather limited. Therefore, I assume that not only the specificities concerning the functions performed and technology deployed are influencing the success of RI (Edwards & Tempel, 2010), but also commonalities of knowledge and knowledge capacities between subsidiary and HQ. However, the knowledge commonalities should not be pushed so far that the diversity of knowledge which enables innovations is diminished (Cohen & Levinthal, 1990).
Reverse innovation
21
Knowledge complexity
Transferred knowledge is only valuable for innovation activities if a firm is able to embed this new knowledge in products/services or processes. The complexity of knowledge, including the difference between explicit and tacit knowledge, further hinders knowledge transfer activities. As Kogut and Zander (1992) point out, “knowing how to do something is much like a recipe”. In the context of RI the end result should be an innovation for the home or global market. Information, i.e. the description of what is needed for the innovation, can be considered as the ingredients, but the recipe will only imperfectly represent how to develop the innovation (Kogut & Zander, 1992). If the knowledge can be codified, also called explicit knowledge, it can easily be communicated to another unit (Kogut & Zander, 1992). As long as the sender and the receiver share a common language they can read the information written on the recipe. However, Gertler (2003) underlines that the key to innovation and value creation is tacit knowledge, knowledge that exists in the background of people’s consciousness. This knowledge is non-codifiable, and complex in nature, because often, individuals themselves are not aware of the knowledge they possess, or they cannot express it sufficiently (Polanyi, 1966; Gertler, 2003; Kogut & Zander, 1992). As a large part of knowledge is lost in the translation process, it is suggested that tacit knowledge can only be transferred through, for instance, frequent interaction within small groups and long-term relationships (Kogut &Zander, 1992), and through a common social context and learning by doing (Gertler, 2003). The sender needs to teach the receiver how to use the information to get the end result. Obviously, this becomes more difficult over long distances and when the knowledge is context-dependent. Therefore, it seems likely that the more complex the knowledge of the innovation is, the more it will hinder a successful process of RI between India and Germany. Firstly, because the innovation, and hence the knowledge for the innovation, is likely to be context-dependent as it was invented for the Indian market, and secondly, because the geographical distance between Germany and India limits frequent face-to-face interaction.
Singh (2005) observed a negative association between distributed R&D and innovation quality, which further confirms the difficulties firms face when trying to integrate knowledge from foreign R&D units into their own knowledge base. As MNCs focused in the past mainly on high-tech innovations, I assume that the new simplicity innovations for emerging economies question the existing taken-for-granted approach of HQ. Becker-Ritterspach (2006) argues that knowledge integration is accompanied by a dialectic transformation, which means that both the knowledge being transferred and the receiving context undergo a transition. In other words, the more incompatible the knowledge of HQ and subsidiary the more translation and transformation of the knowledge is needed to result in innovations for other markets. Some means to achieve knowledge integration are cross-regional collaboration and personnel rotation (Singh, 2005; Subranamiam, 2006). Cross-regional or lateral communication is further needed to transfer the tacit and non-codifiable components of knowledge and will overcome organizational inertia that hinders knowledge transfer efforts (Criscuolo & Narula, 2005).
Reverse innovation
22
2.3. Third step: Reverse innovation deployment
As described earlier, we can only speak of RI if the German MNC is able to integrate the transferred knowledge from India into products and services and bring them to market, and/or implements, i.e. is able to work with, the new process or business model. This research is not interested in the marketing related functions of new product market deployment because this is elaborated in existing literature to a great extent. Reverse innovation deployment in this research deals instead with the understanding and definition of the business model that specifies how organizations create and capture value. It will further point out the interconnectedness of product/service innovation with process and business model innovation.
Compared to high-tech innovations developed for rich countries, the innovations developed in India will likely to be simpler and cheaper. Logically thinking, this would represent a good template to transfer this innovation also to other emerging economies. However, as the main drivers of RI are the revenue gap between emerging and mature markets and the rise of simplicity in the developed world (Immelt et al. 2009), the innovation in India has the potential to fundamentally change also the developed world market. Germany, for example, is well-known for its technologically advanced automotive sector. Companies like Daimler, BMW and VW invested heavily in incremental innovations that made their cars faster, safer, and better equipped. Therefore, they put the focus on an increased market share but likely did not consider that they had to create and serve a new market – the low-cost car market. As Tata Motors unveiled the prototype of its low-cost car at the Delhi Auto Show in January 2008, the automotive giants were threatened (Scanlon, 2009). Tata Motors not only reaped the benefits of large Western MNCs in India, but can also globally, as the firm plans to bring a low-cost car version also to the developed world. An innovative business model basically drives the success of disrupting the existing price formula of cars. Therefore, we need to dig deeper in the understanding of business models and the interconnectedness with products and processes in the context of innovation.
Examples of Reverse innovation
23 market in India will usually force companies to redefine their profit formula. This is likely to affect the processes and key resources and hence, the business model.
3. EXAMPLES OF REVERSE INNOVATION
3.1. Citigroup
Citigroup provides an interesting example for the success of RI. Citibank India, the consumer banking unit of Citigroup, is the second largest foreign bank in India. The bank has launched in 1998 a cutting-edge innovation of electronic banking, called Suvidha. The account was developed to offer benefits like utility bill payments, automatic creation of fixed deposits, direct credit of salary reimbursements, etc. to salaried individuals (IBEF & KPMG, 2005). Account holders of Suvidha get a debit card, discounts on Citibank products like credit cards and loans, and access to Internet and phone banking. All Suvidha transactions can be done on the phone, the Internet or an ATM. At first, the Suvidha account was only launched in Bangalore, but it became a success and created a new product platform, which was subsequently also launched in New York under the name Bank-at-work. In 2001 the account was also exported to the UK, and later to Singapore, the Philippines, Russia, Thailand, and Poland. In 2007 Bank-at-work had over two million customers (Adhikari, 2007).
Citigroup’s global presence is advantageous for launching new products and services quickly. However, at the same time the company provides customers a local bank, like Citibank India. The Indian subsidiary has the flexibility to innovate especially for the Indian market and to launch new products within guiding principles defined by its parent headquartered in the USA. Whereas the subsidiary develops products and services for the Indian market, Citigroup also made India its global software development, software maintenance, and BPO hub. Therefore, they collaborate with Polaris Software Lab (IBEF & KPMG, 2005), a leading banking and insurance software company located in India (Polaris, 2010), which provides financial technology solutions and offshore IT services. This indicates that not only the subsidiary, but also the HQ established relationships within the Indian innovation system. Furthermore, Citigroup has recognized the large talent pool of India, believing in and training a strong local management, and providing opportunities for Indian managers to be assigned to global positions. Citigroup seemed to realize that India is a future market, and retained the entire earnings for 2003-2004 as capital in India for further growth. As part of the strategic future plan, Citibank plans to expand strongly in the market for consumer financial services (IBEF & KPMG, 2005).
This example shows that products and services that are developed for the Indian market have the potential to be successful also globally. However, the three steps of RI remain unclear. How did Citigroup (or Citibank India) create the knowledge in its innovation ecosystem for Suvidha? Which relationships were helpful? Did they rely on internal research or was it an open innovation approach? Furthermore, how did the transfer of Suvidha happen? Was it initiated by Citibank India or Citigroup? Finally, this case gives no information on how the innovation affected Citigroup’s existing business model.
3.2. General Electric (GE)
Examples of Reverse innovation
24 that it can be used also in rural areas where there is no electricity. Compared with the similar device sold in the U.S. for over $10,000, this innovation has not only led GE to preempt local competitors in India, but also provided a disruptive technology in rich countries like the U.S. (Rosted et al., 2009). Similarly, GE developed in China a PC-based ultrasound machine, a healthcare imaging device, for rural China, which could be sold for less than 15 percent of the cost of GE’s high-end ultrasound machine. It is simpler with less performance but it became a successful product not only for China but also for the U.S.
GE provides a good example in explaining how RI changed the existing business model. For the last 30 years, GE has followed the glocalization approach, where high-end products are developed at home and subsequently adapted and spread to other markets. Nearly every business function was centralized at HQs in the U.S. Later, R&D centers and manufacturing operations were also located in developing countries to take advantage of highly skilled manpower for fewer costs, but the focus was still on products for the developed world, which made attempts for RI impossible. For example, the head of GE Healthcare’s business in India realized that GE’s X-ray imaging product, which is used for basic surgeries, was too expensive for the Indian market. He therefore proposed a cheaper and simpler product better suited to the Indian market. However, GE, still focusing on high-end products for the developed world, rejected the proposal (Immelt et al. 2009). This example indicates that the internal bargaining power of the Indian subsidiary of GE was too weak, and that initiatives were not welcome, and instead ran into the corporate immune system of HQ (Birkinshaw and Ridderstrale, 1999). RI may only be feasible, if the organizational form changes from centralization at HQ to a more decentralized approach where product, process, service or business model innovation can be made in emerging markets and finds an attentive ear at HQs. Otherwise, leaders of subsidiaries in emerging economies face the difficulties in persuading not only the general manager of HQ, but also the heads of global manufacturing, marketing, finance and R&D. GE recognized the value that ideas from India and China could have for the whole MNC, but realized as well that they could not use the same strategy they used in wealthy countries. While performance matters most in developed countries, in China and India, price, portability and ease of use are far more important (Immelt et al. 2009). This cognition emphasized that the glocalization approach cannot be a successful strategy to stay competitive with incumbents from India and China; only revolutionary products especially made for the needs of developing countries could serve the new task. Now GE’s CEO, Jeffrey R. Immelt himself monitors initiatives that come from countries like India and China. Furthermore a local growth team (LGT) model was established to take advantage of the innovation power houses India and China. The model is based on five principles:
1. Shift power to where the growth is. This strategy gives LGTs the autonomy to develop their own strategies, organizations, and products.
2. Build new offerings from the ground up. This strategy inhibits the understanding that developing countries need revolutionary products that cannot be based on products for the developed world. R&D units in China and India now innovate from scratch but draw heavily on existing global R&D efforts.
Examples of Reverse innovation
25 4. Customize objective, targets, and metrics. GE understood that it had to learn quickly to reduce the uncertainty of new innovations. For instance, LGTs in China had to simplify the ultrasound machine and offered trainings for doctors after they saw them struggling with it. 5. Have the LGT report to someone high in the organization. LGTs in developing countries can
only be successful if they are well embedded and linked to the global firm. In GE’s view only the senior executive in the global business unit (or its leader) can fulfill the task of connecting the local team to global R&D centers and taking innovations from emerging economies into wealthy countries.
For GE the establishment of LGTs turned out to be profitable. However Immelt et al. (2009) limit the success-story by mentioning that the majority of the resources of R&D centers in India and China are still devoted to initiatives for the developed world. Finally, it remains to be said that the process from glocalization to RI needs to be accompanied by a shift in the mindset of managers who were basically trained to establish a NIH-syndrome in former days (Immelt et al. 2009).
The case of GE gives us a more detailed understanding for the process of RI than the case of Citigroup. The first step of RI, the local innovation, includes for example the creation of LGTs in India and China to establish linkages to local actors, here, especially ‘dealers’ to sell products to rural customers, and to be able to develop revolutionary products that better meet the demand of these emerging markets. However, with which other actors is GE collaborating? GE’s chief innovation consultant was Vijay Govindarajan, a professor of international business and director of the Center for Global Leadership at the Tuck School of Business at Darmouth, who currently writes a book about RI (GE reports, 2009; Govindarajan, 2010). His support stresses the role of consultants as important R&D collaborators. However, GE’s case gives little information about its external linkages to other ecosystem participants to develop innovations, e.g. local research institutions and suppliers. Hence, it remains to be clarified to what extent GE had to open up its innovations process to facilitate RI. Nevertheless, the fact that GE expanded its business in China and India heavily through establishing research facilities, acquisitions, and joint ventures (Immelt et al. 2009) intensifies the importance of a local embeddedness of subsidiaries to develop radical innovations.
For the second step of RI, the transfer to the developed world, we can learn from GE’s case that R&D subsidiaries need autonomy to innovate from scratch. Furthermore, linkages to HQ were made sure through senior managers, especially to support overseas R&D locations with global R&D resources. This supports the statement of Yahiaoui and Chebbi (2008) that knowledge hybridization, the combination of knowledge from subsidiaries and HQ, constitutes a new practice for transnational innovations. GE’s case further underlines that MNCs struggle with organizational inertia, mainly because managers have internalized the glocalization approach and need to change mindset for a new era, which combines both, glocalization and RI, to stay competitive. We can assume that the intended strong linkages of the LGTs to global units should also ease the knowledge transfer activities but there is still scarcity of information about knowledge capacities. Logically thinking, GE increased its absorptive capacity through intensified focus and valuation of initiatives from China and India. The disseminative capacity of the LGTs also seemed to work fine, as GE could transfer innovations back home successfully. However, there is still need to elaborate on this crucial part with more detailed information.
