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    McKinsey: What Matters: China and India: Taking it to the next level

    Topic: Innovation
    China and India: Taking it to the next level
    By Gordon Orr
    26 February 2009

    China and India will be important centers of innovation in the coming decades. Not only are both nations producing a rising share of key technological innovations, but they are also pioneering innovations in business models that allow their companies to prosper in low-income markets. These new models tend to be capital light while heavily leveraging technology. The companies employing them produce goods and services at surprisingly low cost and use the vast scale of home markets to create new technology standards. These are practices that companies in developed nations will need to watch closely as they attempt to grow within China and India and as they meet new competitors from both countries in global markets.

    There’s no formula for creativity and risk taking but there are conditions that encourage those traits. Many of those conditions are present today in China and India. Start with the basics. When an economy is growing at 8, 10, or even 12 percent a year, the environment for risk taking becomes much more forgiving. Even a moderately good innovation can succeed simply by rising with the tide. For innovations that need scale to pay off, there are few better places than China or India, with their immense populations. New services for mobile phones, for instance, can reach 100 million subscribers within a couple of years. As a result, even lower-margin businesses can generate returns on innovation that exceed those of companies in more developed midsize economies.

    Then there’s the talent issue. Education levels are rising in both countries. China and India have world-class technical universities and produce a steady flow of talent at the top of the world’s academic pyramid. In addition, both cultures reward entrepreneurial risk taking. Innovators in China and India resemble first-generation immigrants to the United States or Europe in their drive and desire to succeed. Their commitment and focus on business execution make them notable entrepreneurs on the global stage. It helps that both China and India allow successful people to retain much of the wealth they create, though both governments expect contributions back to broader society from those who become millionaires or even billionaires.

    Exhibit: Asia's brain surge

    Getting funds to entrepreneurs can still be difficult. China is rich in capital, and larger enterprises have ready access to the banking system. Start-ups can often tap networks of family and friends. The problem is midsize companies, which often need to finance themselves because they fall between the banks and family networks. In India, such self-funding is critical because the pool of domestic capital is smaller. Such constraints do have the benefit of seeding innovations that can flourish where capital is limited.

    Similarly, the fact that the masses have some spending power, but not a lot, is actually a spur to new forms of innovation. Extracting revenues from the hundreds of millions in the emerging middle classes of China and India doesn’t work using business models imported from developed markets—the built-in costs are just too high. So flexible local entrepreneurs are creating new models that bake in low-income levels. ICICI Bank is a good example. Making intensive use of technology, it has created a banking model with capital outlays that are one-tenth those of banks in the developed world. ICICI reaches deeply into India’s rural areas using mobile ATMs and simplified Internet banking. It runs a booming and profitable business in remittances at fee levels that undercut Western Union by 70 percent. Health Management Research Institute (HMRI), meanwhile, uses technology to revolutionize medical services. Paramedics rove through rural areas in vans coordinated by GPS. Routine ailments can be efficiently diagnosed with the help of algorithms; more difficult diagnoses can be provided by remote medical experts via a video kiosk in each van. HMRI can already serve over 50 million patients.

    Activist government policies give a boost to innovators as well. China selects and invests in what it believes are next-generation sectors—biotechnology, electric vehicles, and clean energy. These are markets where China’s domestic demand could lead the world. The government’s goal is to accelerate the market’s development and nurture national champions. In telecom, where the Chinese market is already one of the world’s largest, the government is encouraging national standards that it hopes will eventually define the global industry. Chinese entrepreneurs have set up a range of mobile services, including a homegrown GPS network and a digital TV service with enough heft to begin competing in European and US markets.

    At present, neither India nor China has strong safeguards on intellectual property, though as the ranks of technology entrepreneurs grow, there are signs of improvement. Again, this apparent deficiency has been something of a plus, as it has skewed innovation toward business models that are protected through superior, faster execution rather than patents and licensing fees. The Chinese company Alibaba, for example, combines technology with cheap labor to help its customers—local midsize enterprises—tap international clients. Alibaba moved fast and early to build online services that have kept it ahead of international competitors.

    There are lessons here for multinationals. These innovations are by no means limited to Chinese and Indian entrepreneurs and markets. Outsiders can study these models and transform their own innovation efforts. That’s a good reason to set up a “second home” in China or India. And these innovations won’t remain confined to those countries—many are applicable to the developed world, where there is plenty of demand for cheaper products and services.

    Can India and China sustain this pace and eventually move to the next level of technological innovation? Absolutely. The talent is there, as are capital and effective government encouragement. With stronger protection and rewards for intellectual property—a likely development as international companies begin to license technology from Indian and Chinese entrepreneurs—the stage will be set for the next step forward.

    via whatmatters.mckinseydigital.com


    • 15 May 2009
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