The Spread of Innovation

Why Emerging Economies Can Do More Than Just Copy

William Gibson once quipped, ‘The future is already here — it’s just not evenly distributed’.

So how does the future distribute?

A commonly held view on this is that innovation happens in the western world, and in particular in the U.S., with countries in developing markets just copying what works in the U.S. or companies in the U.S. slowly expanding to those markets.

But is that really the case? Can emerging economies not “innovate” and just copy? My belief is that this is a very simplistic and incomplete viewpoint.

A much better way to think about innovation in emerging markets is as an innovation curve in three stages as described below¹.

  • Stage 1 is copy things that worked in developed markets (“business model innovation”)
  • Stage 2 is technological innovation to improve products for the local market and innovate within the local market
  • Stage 3 is technological innovation to build global products

Stage 1 — Business Model Innovation

Imagine yourself in the shoes of the entrepreneur in an emerging market. You’re in a fast growing but immature market and there are a set of ideas which have been validated in other countries that don’t exist in your country.

Its evident that going after these low-hanging fruit makes more sense than trying to come up with something completely new.

And so the first stage is indeed to copy i.e., take what has already shown some traction in the U.S. or elsewhere and then applying it to the emerging market.

But note that because it involves copying doesn’t mean that there is no innovation involved. Sure, it’s not technological innovation, but often involves “business model innovation” i.e., innovating to adapt the business model or the approach per the nuances of the country.

A good example of this is the system of cash on delivery, which is popular in e-Commerce in markets such as India. When e-Commerce was being “copied” there, businesses realized that consumers predominantly wanted to pay with cash. Credit cards didn’t have high penetration but more importantly were not trusted much, and so they built in “cash on delivery” into their product as a form of accepting payments.

Stage 2 — Local Innovation

The next stage is local innovation. What this involves is modifying or building on top of products that were copied to fit the unique needs of the local market. But this differs from the first phase in that this is legitimately what one might classify as technological innovation and might be ahead of what is in the other markets in the world — except that it is restricted to the local market.

This innovation sometimes surfaces as additional features. And sometimes as completely new products that are needed to solve problems that exist in the country.

Take what Alibaba did in China in the early years when they faced the same problem of trust I mentioned above. To solve it, they essentially created an escrow system for trust. This was the first evolution of a product which then became a mobile payments platform which now has over 500M users. Mobile payments is now pretty much omnipresent in China and far ahead of places like the US.

The below excerpt is from Jack Ma’s Internal Speeches: Trust in Tomorrow:

How did Alipay come about? At that time, I went to a bank, and the bank said ‘we can’t do that [online] because it’s a financial product.’ But if a Chinese company didn’t get into payments, some international company would come do it and we’d end up the victims. When I was at Davos, I went to hear Clinton speak on the power of leadership. I suddenly understood what that meant: boldly doing something you believe in, something that won’t hurt your country or your customers. So I decided to do it, and threw everything into it. If Mr. Zhang went to buy something from Mr. Li but Mr. Li didn’t ship the product, Mr. Zhang could pay the money through Alipay and if he was duped out of RMB 1 million we’d reimburse him RMB 1 million. People thought I was bluffing, but I really had the money there ready for reimbursement. We got the system set up nice and clean, and I wasn’t taking a penny, so it could be inspected whenever. That way, the government would think: well, if you don’t do this, who will?

Another example is Tencent’s WeChat. What started as a messaging app became the world’s first super app which now has over 1 billion users. As one would expect, it lets users message their family and friends and share life moments. But it also lets them order food, book rides, check movie times, pay for items and more. It was the first such super-app at scale in the world and a clear example of the stage 2 local innovation happening in China².

Source: WeChat

Stage 3 — Global Innovation

Stage 3 is technological innovation at the global scale, which essentially means innovating not just within a local market but globally.

As an aside, there is also an intermediate stage between stage 2 and 3 (a stage 2.5 of sorts) which involves companies in more developed markets seeing the success of a company which is innovating locally and seeing an opportunity for that to work in their country and copying it (i.e., “reverse copying”). An example of this is WeChat’s success, predominantly in China, which led to messaging apps elsewhere trying to expand into additional services and becoming super-apps like WeChat.

But Stage 3 involves true global innovation i.e., when a company which was initially in Stage 2 decides to take their offering global³ and innovates on the global scale rather than the local scale.

A couple of examples from China to illustrate global innovation happening in emerging markets are stationless bike-sharing and short video apps which really got started in China.

China was a pioneer in the stationless bike-sharing space, with numerous startups such as Mobike and ofo gaining traction and scale long before these really existed at scale in other countries. As similar startups began to pop up in other countries (Stage 3.0), ofo and Mobike also began to expand internationally, launching in cities around Europe, Australia and the US.

Another example where China is definitely innovating globally is short form video apps. To start, Musical.ly was a Chinese social video app which was available globally immediately, and gained more traction in the US than in China. Seeing its success, Bytedance “cloned” and adapted it for the Chinese market as Douyin. Douyin really took off in China and now has over 150M DAUs despite facing heavy competition in the market. They also then made the app available globally as Tik Tok, which also took off in many markets particularly around Asia. It was the number one downloaded app in the App Store of Q1 2018.

Closing Thoughts

The belief that all innovation happens in the West is an outdated one, and increasingly emerging economies are innovating within their borders.

Additionally as the examples above highlight, China is also inspiring western innovation in many verticals (Stage 2.5 innovation) as well as innovating globally already in others (Stage 3 innovation). Over time, its likely that they will be global innovators in more and more verticals.

Other emerging market economies aren’t innovating globally yet, with most still in the “copy” phase or innovating locally. However, I expect a few such as India and Indonesia to slowly work their way through Stage 2 and potentially become global innovators in certain sectors in the future.


Footnotes

¹ I first came across this concept in Shaun Rein’s excellent book ‘The End of Copycat China’

² Despite having a number of users outside of China, WeChat hasn’t really become the de facto messaging app in other countries globally (though they do have a small user base outside of China mainly comprised of people with friends or family in China), and so I think its a better example of local innovation rather than global innovation for now. However, it is certainly one that other companies in the Western World have tried to emulate, but with limited success so far.

³ Companies may also immediately attempt to innovate globally, but those are more rare.


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