The Hindu Business Line : Why MNCs need to create products for India, in India

The operation of subsidiaries based in emerging markets and conducting research targeted at domestic consumers offer MNCs radically new big-win opportunities, as they will be defining a new segment, and growing it in the absence of competitors. Policy-makers, industry leaders and academic institutes need to work jointly to create and disseminate a list of "dream innovations" that will inspire young scientists to solve important problems, says Prashant Sarin.

A SILENT revolution is underway among the Research and Developments subsidiaries of many global high-technology firms. After establishing bases in China and India and tapping Indian talent to tackle essentially Western problems, the wheel is finally turning full-circle. Information Technology majors are now seeking to tap local customers in emerging markets by developing affordable, relevant solutions for them.

Three-quadrant theory

Multinational NCs initially established subsidiaries in emerging economies to sell their current products and services to a new customer base. As higher GDP growth rates led to enhanced per capita incomes in these economies, global corporations increased their investment levels. Relatively low manufacturing factor costs (even on a PPP basis) and the availability of highly-skilled talent acted as a catalyst.

Combined with mass economies of scale and government policies that encouraged export-led growth since the mid-1980s, China rapidly became the global sourcing and manufacturing hub. Today, Chinese goods cost three to five times less than those manufactured in the West. India has taken a slightly different path. With over 200,000 English-speaking engineers graduating every year, it is now an established world-wide offshoring and software services development base.

Greater exposure to emerging markets and the increased confidence of the MNCs in the ability of their local subsidiaries to carry out complex tasks led to the establishment of locally-based R&D centres. Governments across emerging markets also played an important role; in most cases by announcing favourable tax policies which encouraged the MNCs to invest in innovation locally.

The establishment of over 250 R&D labs by MNCs in China and India since 1995 indicates the success of these initiatives. In the figure, this is represented by the shift of R&D centres from their traditional Western base to emerging market locations (Quadrant 1 to 2).

Despite the locations of R&D subsidiaries in developing nations, their research has mostly centred around meeting consumer demand in Western markets. This is not surprising, for two reasons: First, most of these centres were headed by expatriates and staffed with Western-educated local talent. Second, and more critical, most MNCs did not view demand in these nations as significant enough for them to carry out localised research.

One illustration is GE's John F. Welch Technology Centre in Bangalore, the first and largest integrated, multi-disciplinary R&D lab outside the US. Over 2,200 scientists, researchers and engineers work almost exclusively on GE's global technology initiatives.

But this trend of emerging-market-based R&D labs focussing on Western issues is changing. A number of R&D labs are now working on affordable and locally relevant products and services. The convergence of a number of global trends has aided this shift.

First, the growing aggregate consumer base and increasing per capita incomes in emerging markets represent a latent consumer demand that is beginning to get realised.

Second, the increasing high-skilled employment opportunities now provide a secure base for India's brilliant technologists and engineers and promise many a vibrant future.

Third, immigration issues in the US have led to a disenchantment with the West, and an increasing emphasis on studying domestic problems. This transition to solving problems and creating solutions specifically for emerging markets is as significant a move for global innovation (Quadrant 2 to 3) as the earlier shift (see Figure).

Changing R&D paradigms

The operation of subsidiaries based in emerging markets and conducting research targeted at domestic consumers offer MNCs radically new opportunities. First, inventing solutions tailored to consumers in emerging markets can often represent a "big win" opportunity for MNCs. Harvard professor Clayton M. Christensen refers to this as "competing against non-consumption", pointing to the opportunity that companies derive to define a new segment, and grow it profitably in the absence of competitors.

In 1992, for instance, the absence of quality broadcasting content in India led to an explosion in channels once the cable television industry was liberalised. Today, for most viewers with choice, the state-sponsored Doordarshan would be the last on priority for news.

Second, working in one emerging market provides insights that can be deployed in culturally similar environment. HLL took its learning with shampoo sachets in India and applied it to a number of Latin American markets.

Third, working in the difficult emerging markets context today presents firms a new opportunity to take their innovations upwards and compete in more established Western milieus. Prof Christensen cites the example of Japanese automobile majors such as Toyota and Honda, which gained experience in selling low-cost, high-quality automobiles to demanding Japanese consumers in the post-Second World War era.

After tasting success in the domestic market, they took their products to the US and challenged established players such as General Motors and Ford, with spectacular results.

India's big dream

Harnessing these global trends by encouraging the MNCs to engage in product innovation for local consumers represents a big challenge in India. The strict and disciplined product development culture that many Asian nations, such as Taiwan, Japan and China, excel in is largely absent in India.

Further, the poor research records, endemic to Indian academic institutes, exacerbates this problem. Solving each of these problems will take time but is imperative if India is to take big strides forward. Perhaps, the most important challenge facing India today is the absence of a "big dream".

Policy-makers, industry leaders and academic institutes need to work together to create and disseminate a list of "dream innovations" that will inspire young scientists to solve important problems. In the 1960s, President John F. Kennedy's "man on the moon" programme excited America.

Closer home, the development of Tata Motor's Rs 1 lakh car provides a powerful example of how a well-defined and -publicised research problem can capture a nation's imagination. In this context, R&D subsidiaries have the unique opportunity to leverage their global knowledge base by creating challenging research programmes that "reach for the stars", and help India find a place in the league of nations.

(The author, a Rhodes Scholar at Oxford University, is currently with Hewlett-Packard Research Labs India. He can be contacted at sarin@hp.com)

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