Innovation in Developing Economies

by Michael Czinkota and Ilkka Ronkainen

Innovation in developing economies is evolving rapidly, but still can improve in terms of marketing. Businesses in emerging economies can make profits and can positively affect the livelihoods of people. In the next generation, multinational corporations can expand to vast un- and underserved consumer groups in developing countries. Executives need to redefine their roles and relationships across companies and radically depart from traditional business models through new partnerships and structures.

Research

Businesses need to understand the needs, aspirations, and habits of target populations. For most emerging-market consumers, price is not the determining factor, but the total purchase cost (including transportation cost, time, the burden of carrying purchases, and storage availability). Large U.S. chocolate companies established only a marginal presence in Latin America with their standard American large chocolate bars. In contrast, Arcor and Nacional de Chocolates have grown their businesses by selling more affordable bite-sized chocolates that are available in remote rural stores.

Digital Technology

Due to the economic and physical isolation of poor communities, businesses that provide access to digital technology have the potential to thrive. Cisco partners with a range of global and local partners to sell, lease, or donate $300 million worth of computer products and services to markets worldwide. In Bangladesh, where the average annual income is $200, GrameenPhone Ltd. leases access to wireless phones to villagers. Every phone is used by an average of 100 people and generates $90 in revenue per month—two or three times the revenue generated by wealthier users who own a phone in urban areas. This program has been replicated in other countries, including Uganda and Rwanda.

Financial Services

Microfinance programs have allowed consumers to borrow sums averaging $100 to make purchases without using collateral. The mission of microfinance is to let the poor access financial services and improve their living standards. For example, Te Creemos developed a complete electronic payment solution in Mexico by partnering with MasterCard, which affords small and medium-sized enterprises a micro-business card and a low cost payment method.

Local Solutions

Many emerging consumers do not shop at supermarkets. Nestlé employs local residents with pushcarts who take small quantities of merchandise to kiosks. Unilever is rolling out similar strategies in Kenya, Indonesia, Vietnam and other countries offering five-peso “starter packs” in the Philippines. Others reach out to beachcombers via bicycles. Innovations can start in developing countries first, and disseminate via a trickle up approach.. Pepsi snacks like Kurkure and Aliva from India have attracted attention from the United Kingdom and the United States.

Distribution

In the past, underdeveloped and monopolistic distributing networks of developing countries saw their primary jobs as distributing sales literature, cutting through red tape, and charging invariably high fees. Today, outside competition has forced distributors to add value to what they do. If local conditions do not measure up, companies are willing to use outside captive distribution systems or to appoint their own people in place. Eveready has an extensive network of associates and 15 distributors who support its business in East.

Multinational Commitments

Businesses, governments, and civil societies can join together in a common cause to help the aspiring poor to join the world economy. Lifting billions of people from poverty may help avert social decay, political chaos, terrorism, and environmental deterioration. For example, Procter & Gamble has a Safe Drinking Water program in Kenya through their water-purifying brand PUR that improves access to safe drinking water.  Coca-Cola funds “Slingshot”, a water purification system for communities in need.  Multinational companies can envision a world empowered by equal access to life’s basic needs.

Challenge to Existing Business

Marketers need to convert innovation opportunities in developing countries. Historically, what worked for a peasant in rural Kenya or Colombia had little interest for a sophisticated urban consumer in the West. Now, these opportunities may provide new platforms for growth even in post-industrialized markets. Africa’s prospects have proved alluring to Wal-Mart, which has agreed to pay roughly $2.4 billion to buy 51% of South Africa’s Massmart Holdings, with plans to use the discount retailer for continental expansion. Yum Brands recently said it wants to double its KFC outlets in emerging countries over the next few years to 1,200. Rising consumption will increase the demand for local products, and, given proper support, will trigger domestic growth and lift developing countries and their consumers up to greater economic opportunity and a better life.

Ilkka A. Ronkainen Georgetown School of Business faculty.

Expanding into Global Markets: Direct Investment

Some companies find that they cannot meet their global marketing objectives by continuing to export, so they make direct investments in international markets to gain access to manufacturing facilities, supplies, or labor, among other reasons. They become multinational corporations which the United Nations defines as “enterprises which own or control production or service facilities outside the country in which they are based.” While this definition makes all foreign direct investors “multinational corporations,” large corporations are the key players.

Building and managing operations outside the domestic market requires skills and resources beyond those used for exporting. Multinational firms with subsidiaries and other investments in other countries also deal with issues ranging from local versus headquarters control, to product or service standardization versus customization for individual market needs. At the highest level of marketing globalization, companies integrate thie international and domestic operations into relatively seamless enterprises that have portfolios of nations that they market to with unified strategies.

Putting products into the hands of customers overseas involves some degree of direct financial investment, whether it is done by acquiring assets in other countries or gaining access to another company’s assets through contracts. International marketers invest directly via full ownership, strategic alliances, or joint ventures to create or expand a permanent interest in an enterprise. It typically requires substantial capital and an ability to absorb risk, so the most visible players in this arena are large multinational corporations who invest either to enter new markets or to ensure reliable supply sources.

Foreign direct investment is defined by the United Nations as “enterprises which own or control production or service facilities out of the country in which they are based.” U.S. firms have significant investments in the developed world as well as in some developing countries. It is a major avenue for global market entry and expansion.

The top multinational companies come from a wide range of countries and depend heavily on their international sales, with their original home market accounting for only a fraction of total sales. Some have revenues larger than the domestic output of some countries. Many operate in more than 100 countries and do not even reference “global” and “domestic” anymore. Through their direct investment, these companies bring economic vitality and jobs to their host countries, often paying higher wages than the average domestically owned firms. At the same time, though, trade follows investment, and companies that invest in other nations often bring with them imports that could weaken a nation’s international trade balance.