Will emerging markets overtake the Nordics in innovation?

While many consider innovation to be the province of Silicon Valley and other high-tech centers in developed markets around the world, the reality is very different.  A look at where intellectual property is being created gives us some indication that we have to broaden our horizons when we look at new innovations.

By Ajay Krishnan, Roger Edgley, and Laura Geritz

Innovation occurs in developed markets, in emerging markets, and even in frontier markets (pre-emerging markets).  Moreover, innovation isn’t confined to internet companies and other high-tech enterprises,  it’s just as prevalent among health-sciences companies that improve the quality of our lives, and among businesses that bring existing technologies to new adaptations.

Schumpeters gate

Innovation is the force that sustains economic growth, according to economist Joseph Schumpeter. In his 1943 book “Capitalism Socialism, and Democracy”, Schumpeer developed and popularized the concept of “creative destruction”, the process through which existing economic order is disrupted to clear the way for future growth. Schumpeter wrote:

“The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumer goods, the new methods of prodution or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. This process of Creative Destruction is the essential fact about capitalism.  It is what capitalism consists in and what capitalist concern has got to live in.”

in Schumpeter’s view, innovation is like a persistent, gale-force wind.  Companies will either harness it in a positive way or ultimately be destroyed by it.  Innovative companies are important benefactors for society.  They provide the foundation for improving our standard of living.

Innovation is not confined to developed markets

While Schumpeter hailed innovation as a defining feature of capitalism, innovation has more to do with people’s desire to improve their lives.  What may be surprising to some investors is that innovation is prevalent around the world in developed markets, in emerging markets – and even in frontier markets, which are considered the least advanced of all.

Moreover, contrary to popular belief that innovation is best encouraged by “government just getting out of the way”, governments often play important roles in setting priorities and working in partnership with new entrepreneurs and establish players.

The number of patent applications is one gauge of innovation. By that measure, the data my surprise you.

Among the top 10 offices for patent applications, five are in emerging markets. In fact, China is #1, well ahead of the United States and Japan.  The Nordics are not represented at all. Perhaps even more surprising is the diversity of countries in which innovators are applying for patents, and the total number of patent applications by offices in emerging and frontier markets.

When we think about innovation today, Silicon Valley and the greater San Francisco Bay area often come to mind.  But some of today’s social-media, SaaS, cloud computing, and other high tech companies were actually started as much as half a world away.  Whats more, innovation goes well beyond these tech industries.

The growing middle class

In addition to internet based companies, innovation occurs in services that affect the quality of our lives, in health sciences, for example.  Another fertile ground for innovation is in the revolution of a business process, whereby a company uses existing technology in new ways to leapfrog competitors.

Among emerging markets, several countries are especially rich in natural resources.  In addition, most emerging and frontier markets have young and growing populations with consumers increasingly moving into the middle class.

But the growing middle classes in emerging and frontier markets are also being served by more than just commodity exporters and makers of basic consumer staples.  They are also being served by innovative companies. And it’s time to start paying more attention to them.

 

This article was originally posted on Nexchange.