Disruptive Innovation

Disruptive Innovation . . . in Reverse: Adding a Geographical Dimension to Disruptive Innovation Theory

Simone Corsi and Alberto Di Minin

Based on a literature review on disruptive innovation and innovation from emerging econo- mies, we offer an interpretation of a subset of reverse innovation within the disruptive innovation theory. We argue that the combination of these two theories provides a useful framework to look at emerging economies as sources of new products and technological solutions. Finally, we provide a new categorization of disruptive innovation considering a geographical dimension and future research directions.

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Introduction

In a fast-changing world, where emergingeconomies are constantly increasing their importance in the global economy and where innovation assumes an international dimen- sion, an increasing number of scholars have looked at the phenomenon of innovation in emerging economies. Several authors are investigating in what way these countries are not only recipients (Vernon, 1966) but also sources of innovation (Hart & Christensen, 2002; Immelt, Govindarajan & Trimble, 2009; Kenney, Massini & Murtha, 2009; Govindarajan & Trimble, 2012).

Scholars refer to this trend in different ways, depending on the aspect they focus on, such as ‘disruptive innovation from emerging econo- mies’ (Hart & Christensen, 2002), ‘innovation at the bottom of the pyramid’ (Prahalad, 2004), ‘cost-innovation’ (Zeng & Williamson, 2007) or ‘reverse innovation’ (Immelt, Govindarajan & Trimble, 2009). However, the managerial lit- erature is still lacking both a clear and solid theoretical position and a strong theoretical framework within which a new innovation trend from emerging economies can be read and interpreted (Govindarajan & Ramamurti, 2011). Hence, the aim of this paper is firstly to critically review the literature concerning innovation from emerging economies, and sec- ondly to contribute a rationalization of the related concepts, attempting a reinterpretation

of the concept of ‘reverse innovation’ (Immelt, Govindarajan & Trimble, 2009; Govindarajan & Trimble, 2012), defined as a type of ‘disrup- tive innovation’ (Christensen, 1997).

Building on our review of the existing work (see Appendix A and Table 1), we suggest that the combination of these two frameworks pro- vides a useful scheme to look at emerging economies as sources of new products and technological solutions.

In the last ten years, scholars have started to look at companies that serve those markets in a different way. Glocalization – adapting to emerging markets products developed for advanced ones – is in fact assumed to be par- tially ‘blind’ or ineffective for the purpose of serving emerging market needs, given its ability to reach only the wealthier part of the population. The new challenge of the twenty- first century has been identified in the profit- able development and sale of new products for the mass markets of less affluent populations of emerging economies that are currently not, or only partially, served by multinational cor- porations (MNCs). The innovation manage- ment literature has produced a limited number of studies (Hart & Christensen, 2002; Prahalad, 2004; Immelt, Govindarajan & Trimble, 2009; Hang, Chen & Subramanian, 2010; Govindarajan & Trimble, 2012), largely based on anecdotal evidence, trying to identify new ways of pursuing innovation in emerging economies. Most of these studies build their

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argument, more or less implicitly, on the well- known ‘disruptive innovation’ paradigm as defined by Christensen (1997) and Christensen and Raynor (2003), further derived as disrup- tive innovation in emerging economies in

Prahalad’s seminal work on innovation for the ‘bottom of the pyramid’ (BOP) (Prahalad, 2004).

Given the specificity of the context for and in which these innovations need to be devel-

Table 1. Main Innovation Concepts Related to Emerging Economies (Literature and Examples)

Concept Literature Examples

Disruptive Innovation

Acee (2001); Anthony et al. (2006); Bower & Christensen (1995); Cefis & Marsili (2006); Charitou & Markides (2003); Christensen (1997, 2006); Christensen & Overdorf (2000); Christensen & Raynor (2003); Christensen et al. (2000, 2006); Chesbrough (2002); Corso & Pellegrini (2007); Danneels (2004); Gilbert (2003); Gilbert & Bower (2002); Glazer (2007); Govindarajan (2012); Govindarajan & Kopalle (2006a, 2006b); Govindarajan et al. (2011); Henderson (2006); Johnson et al. (2008); Johnson (2012); Kanter (2010); Kassicieh et al. (2002); Mangelsdorf (2009); Markides (2006); O’Reilly & Tushman (2004); Rafii & Kampas (2002); Sandström, Magnusson & Jörnmark (2009); Schmidt & Druehl (2008); Simanis & Hart (2009); Suzuki & Kodama (2004); Utterback & Acee (2005); Yu & Hang (2010, 2011)

Hard disk drive; digital photography; mobile phone

Disruptive Innovation from Emerging Economies

Hang et al. (2010); London & Hart (2004); Markides (2012); Ray & Ray (2011); Schanz et al. (2011)

Galanz’s microwave; Suzlon’s windmills; Haier’s washing machine

Innovation for the Bottom of the Pyramid

Akula (2008); Anderson et al. (2010); Ansari et al. (2012); Garrette & Karnani (2010); Gino & Staats (2012); Hart & Christensen (2002); Karamchandani et al. (2011); Karnani (2007); Olsen & Boxembaum (2009); Prahalad (2004, 2012); Prahalad & Hammond (2002); Prahalad & Hart (2002); Rangan et al. (2011); Simanis (2012); Wood & Hamel (2002)

Aravind Eye Care’s hospitals; ICICI Bank’s microcredit; Casas Bahia’s retailers

Cost Innovation Williamson (2010); Williamson & Zeng (2004, 2009); Zeng & Williamson (2007)

China International Marine Containers Group’s shipping service; Dawning’s high performance computers

Reverse Innovation

Govindarajan and Trimble (2012); Immelt, Govindarajan & Trimble (2009)

GE Healthcare’s ECG machine; P&G’s honey-based cold remedy; P&G’s feminine hygiene product; Tata Nano

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oped, domestic companies seem to be best placed to pursue them. By virtue of their embeddedness, local market knowledge and low cost approach, domestic companies develop new product solutions for emerging markets that challenge the activities of foreign MNCs. This phenomenon has mostly been referred to as ‘cost innovation’ (Zeng & Williamson, 2007). Indeed, growing attention has been paid to companies from emerging economies and how in going global they threaten western MNCs in the home markets that they have dominated for decades. Responding to this threat is a new challenge for incumbent MNCs and, in our opinion, ‘dis- ruptive innovation’ is a useful way to describe the new trend that has recently been defined as ‘reverse innovation’ (Immelt, Govindarajan & Trimble, 2009). According to Immelt, Govindarajan and Trimble (2009) and Govindarajan and Trimble (2012), since most current and future global economic growth is likely to take place in emerging economies, innovation specifically aimed at responding to these markets is crucial. Indeed, new products developed entirely in emerging markets for emerging markets are likely to disrupt devel- oped markets and open new business oppor- tunities, as shown, for example, by Zeng and Williamson (2007). This phenomenon thus configures a process of innovation that no longer sees developed economies as the locus where new products are conceived, designed and commercialized, but instead takes on the role of the last recipient of innovations devel- oped in and for emerging economies.

This paper builds on the disruptive innova- tion literature and contrasts its analysis with the concept of reverse innovation. We believe we bring two theoretical contributions:

1. Adding a geographical dimension to disruptive innovation. The original specification of disruptive innovation is a theory that seeks to explain dynamics within established markets. However, a geographical dimen- sion needs to be considered to make disrup- tive innovation useful for interpreting situations where the disruptors originate from emerging markets.

2. A new look at disruptive and reverse innovation side by side. Consistent with Govindarajan and Trimble (2012), we emphasize that the concepts of disruptive and reverse innova- tion have an overlapping, though not a one- to-one, relationship. By looking at these two theories side by side, we are able to better clarify similarities and differences. We dis- tance ourselves from the claim that disrup- tive innovation in reverse stems only from an income gap. On the contrary, disruptive

in reverse rests not only on cost advantage in the market segment but also on new characteristics and features of the disrup- tive product originated and tested in a developing country and appreciated in advanced countries.

This paper is organized as follows. In the next section, we lay the foundations of our analysis by reviewing disruptive innovation theory. This will be used as our framework to interpret the other sections that take into account disruptive innovation as considered in the different streams of literature related to innovation in emerging economies. The third section explores the dynamics of innovation at the Bottom of the Pyramid (BOP), while the fourth section investigates the conceptuali- zation of disruptive innovation from emerging economies. The concept of reverse innovation is introduced in the fifth section and inter- preted within the Disruptive Innovation framework in the sixth section. The seventh section provides a new categorization of Dis- ruptive Innovation, considering a geographi- cal dimension. Finally, conclusions and future research directions are presented together with selected research propositions.

Disruptive Innovation

Introduced in 1995 by Bower and Christensen, the concept of disruptive innovation was refined by Christensen in 1997 with his ‘Inn- ovator’s Dilemma’, asking why great compa- nies pursuing innovation in mainstream markets suffer from market myopia and are overtaken by entrant firms introducing prod- ucts based on new, disruptive technologies.

To explain this phenomenon, Christensen distinguishes between sustaining and disrup- tive technologies. The former are technologies that respond to an improvement, radical or incremental, of ‘established products, along the dimensions of performance that main- stream customers in major markets have his- torically valued’ (Christensen, 1997, p. xv). Disruptive technologies, on the other hand, are innovations for existing products but on attributes that differ from those that are mainly valued by mainstream customers. These inno- vations, which initially underperform with respect to the main attributes of sustaining technologies, become disruptive when they reach the same performance as the sustaining innovations on the attributes valued by main- stream customers. At this point, they displace existing technologies and cause, in most cases, the failure of incumbent firms. Christensen describes as an example the evolution of the

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hard disk drive industry between 1976 and 1992. In this market, mainstream customers constantly required improvements in two attributes, total capacity and recording density. The industry and incumbent firms were led by this trend until an emerging segment asked for improvements on different attributes, in par- ticular, the size of drivers. At the beginning, this segment remained marginal and was mainly covered by small entrant firms that could afford to do so by virtue of their rela- tively limited cost structure, but while the products offered gained improved perfor- mance, including the mainstream segment attributes, the market based on sustaining technologies was progressively displaced, causing the failure of incumbents.

In earlier works, Christensen (Bower & Christensen, 1995; Christensen, 1997) refers to disruptive technology only as an ‘innovation that results in worse product performance in mainstream markets’. It is also described as a ‘typically cheaper, simpler, smaller and fre- quently more convenient to use’ version of an existing product.

In an updated version of the concept, Christensen and Raynor (2003) distinguish between ‘low-end disruptions’ and ‘(new- market) high-end disruptions’. The former are those offering lower performance at a cheaper price but no other performance improve- ments, while the latter are described as prod- ucts and services that offer better performance on attributes that differ from those valued by mainstream customers (e.g., the mobile phone, initially low performing in reception, which disrupted the market for home phones).

Christensen also asserts that disruptive technologies should be framed as a marke- ting, and not a technological, challenge (Christensen, 2006; Glazer, 2007). Firms suc- ceeding in disruptive innovations have a strong attitude in interpreting and addressing needs expressed by a market niche or a new market segment. Thus, the challenge that incumbent firms should overcome in develop- ing and responding to disruptive innovations relates to the development of capabilities to forecast market trends and attitudes as well as ‘riding’ new technological trajectories (Rafii & Kampas, 2002; Charitou & Markides, 2003; Suzuki & Kodama, 2004; Corso & Pellegrini, 2007).

Disruptive innovation has been used from the very beginning to discuss innovation dynamics taking place with the entry of new companies in established and developed markets (Chesbrough, 2002). One of the most convincing responses provided by research- ers, albeit widely discussed and doubted (Danneels, 2004), is that these companies

should promote the creation of spin-off enter- prises in order to better serve and interpret emerging markets (O’Reilly & Tushman, 2004; Kanter, 2010; Johnson, 2012). The creation of a separate organization of a smaller dimension with large autonomy allows the problem of resource allocation that is too mainstream cus- tomer oriented to be overcome. Matching the initially small market size to the size of the investment potentially enables the new company to be profitable (Kassicieh et al., 2002; Anthony, Eyring & Gibson, 2006; Cefis & Marsili, 2006; Sandström, Magnusson & Jörnmark, 2009).

Since its coinage, the concept of disruptive innovation has been widely discussed from different perspectives (Christensen, Bohmer & Kenagy, 2000; Christensen, Johnson & Rigby, 2002; Gilbert & Bower, 2002; Gilbert, 2003; Danneels, 2004; Christensen et al., 2006; Henderson, 2006; Johnson, Christensen & Kagermann, 2008; Schmidt & Druehl, 2008; Yu & Hang, 2010, 2011). In particular, Govindarajan and Kopalle (2006a, 2006b) make a clear distinction between low-end and high-end disruptions based on the level of radicalness of disruptive innovations (techno- logically more radical in high-end disruptions, technologically less radical in low-end disrup- tions). The authors also make a clear distinc- tion between innovations that are radical and disruptive and merely radical, stating that radicalness is a technology-based concept while disruptiveness is a market-based concept. Analogously, Markides (2006) draws a clear distinction between different kinds of disruptive innovations: technological, business model and new-to-the-world product innova- tions. From this distinction and from the work of Utterback (2004), Acee (2001) and Utterback and Acee (2005), who recognized the impor- tance of disruptive technologies not in the fact that they displace existing products but in their ability to enlarge existing markets and provide new functionalities, Govindarajan and Kopalle add rigour to an expanded view of disruptive innovation, including both high- end and low-end disruptions and define the concept as follow (2006a, p. 190):

A disruptive innovation introduces a differ- ent set of features, performance and price attributes relative to the existing product, an unattractive combination for mainstream customers at the time of product introduc- tion because of inferior performance on the attributes these customers value and/or a high price – although a different customer segment may value the new attributes. Sub- sequent developments over time, however, raise the new product’s attributes to a level

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sufficient to satisfy mainstream customers, thus attracting more of the mainstream market.

In the examples of disruptive technologies provided by Christensen (1997) and Christensen and Raynor (2003), the new market segment that adopts the disruptive solution belongs to the same market where incumbent companies operate. The emergence of new technologies triggers interest within the mainstream segment where these incum- bents operate, hence rendering access to the disruptive offering (initially not desired) also possible to mainstream customers (Govindarajan, Kopalle & Danneels, 2011).

In conclusion, we can argue that disruptive innovation is a theory that seeks to explain changes and new entries into established markets. The result of disruptive innovation is visible when mainstream customers switch to the new disruptive product that is gaining market share on established markets.

What if the new disruptive solution has been brought to maturity and has triggered interest in markets that are geographically distant and disconnected from established markets? Disruptive innovation theory was not developed, and is as yet too unrefined, to explain this phenomenon.

Innovation at the Bottom of the Pyramid (BOP)

While the disruptive innovation paradigm explores the dynamics originating within the hub of an industry, a new approach was devel- oped to understand what was taking place in emerging economies and their markets (Karnani, 2007; Akula, 2008; Gino & Staats, 2012). This orientation brought scholars to thinking of emerging economies as focal markets to which companies should pay increasing attention and develop a new R&D orientation (Prahalad & Hart, 2002).

Traditionally, MNCs delocalized their R&D- oriented foreign direct investment (FDI) in emerging economies for two main reasons (Gassmann & Han, 2004; Von Zedtwitz, 2004):

• access to local markets, • access to high-skilled research personnel at

a lower cost.

Following these two drivers, most R&D carried out by foreign MNCs in emerging countries consisted in the adaptation of global products to the specific needs of the local market. R&D, crucial for the development of new products, has traditionally been undis-

closed by headquarters (Patel & Pavitt, 1991; Di Minin & Bianchi, 2011), and this is particularly true of R&D internationalization in emerging economies.

The new perspective in the early 2000s was that emerging market potential was not exploited with the previous approach and that a new type of innovation management had to be developed. Companies noted that respond- ing to local market needs with a simple local adaptation of global products developed in their (mainly) western headquarters (glocali- zation) was ineffective in exploiting the entire potential of these growing markets (London & Hart, 2004; Rangan, Chu & Petkoski, 2011).

Prahalad and Hart (2002), and later on Prahalad (2004), introduced the new approach to emerging economies as a source of signifi- cant profit generation through the develop- ment and commercialization of ad hoc products and services for the markets of the poor (Garrette & Karnani, 2010; Simanis, 2012). Prahalad’s approach is expressed in the title of his 2004 book The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits. The author identifies a large opportunity both for local and MNCs operating in emerging econo- mies and provides examples such as ICICI Bank, which provides Indian rural populations with bank credit for small projects (which in turn become profitable and make them able to return the loan with low interest), or Voxiva, which developed a text message-based plat- form for favouring communication between urban and health centres in Peru. Both projects, based on low cost and pricing strategies, faced an experimental stage for the purpose of vali- dating their economic feasibility and soon moved forward, replicating their model in other emerging countries and contexts.

According to Prahalad’s perspective, MNCs serving only the top of the pyramid (the wealthier part of the population) in emerging economies suffer from business myopia in a way that closely recalls the marketing chal- lenge that Christensen’s incumbent firms faced in developing disruptive innovation for new or emerging market niches.

What is of great interest to us is that, although there is no direct and explicit link between these theories, the BOP concept shares some similarities with the disruptive innovation theory (Hart & Christensen, 2002; Prahalad & Hammond, 2002; Prahalad, 2012). It suggests developing products and services for a market segment requesting different attributes than those of mainstream customers (Wood & Hamel 2002; Seelos & Mair, 2007; Anderson, Markides & Kupp, 2010) and, in particular, access to the same technology at a much lower price. In reality, it addresses a

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market that does not yet exist, seemingly con- figuring what Govindarajan and Kopalle (2006a, 2006b) identify as disruptive innova- tion that creates a new market. In our opinion, innovation at the BOP cannot be easily, or entirely, assimilated with disruptive innova- tion theory. We will explain why in the next section, explicitly linking the BOP to the dis- ruptive innovation paradigm.

Disruptive Innovations from Emerging Economies

Parallel to the work on ‘Serving the Bottom of the Pyramid’, a further wave of exploration was initiated by scholars linking the disruptive innovation theory and Prahalad’s non-served markets of the poorest in emerging economies (Hart & Christensen, 2002; London & Hart, 2004).

The argument of scholars applying disrup- tive innovation to explain the success of new products originating from emerging econo- mies is as follows: foreign MNCs develop products for emerging markets and later use them to penetrate the low-end segment of developed markets in the US and Europe, and domestic firms leverage on their cost structure and knowledge of the domestic context to serve local, and later developed, markets (Ray & Ray, 2011; Schanz et al., 2011; Markides, 2012).

To the best of our knowledge, Hart and Christensen (2002) for the first time introduced the link between disruptive innovation theory and emerging economies. Their argument is clearly in line with Prahalad’s work referring to ‘innovation from the base of the pyramid’. The authors propose examples of Asian com- panies that succeeded in introducing disrup- tive innovations in low-income countries, enabling poor people to afford certain types of technological products and generating profits for themselves.

Recently, Hang, Chen and Subramanian (2010) demonstrated four cases of Asian com- panies that, starting from their low-income markets (China and India), developed disrup- tive products. Galanz and Haier, for example, developed ad hoc products for penetrating the Chinese domestic market and responding to specific local needs (a microwave for Galanz and a washing machine for Haier). Once they succeeded in China, they were able to export their product to developed countries serving a market segment that was ignored by incum- bents due to its size, a market segment that was eager for low-cost products with strong energy and room-saving attributes and that did not care about traditional attributes for

those items such as capacity. After a few years of internal and external R&D investment, both companies were able to penetrate also the high-end of advanced economies’ markets, disrupting local incumbents. The success pursued in these markets brought them per- formance improvements on attributes that had at first been neglected and valued by main- stream customers in developed economies. This pushed them to invest globally and to steadily grow in developed economies.

We believe that in both works cited above, the disruptive innovation concept is used in a way that differs from the traditional applica- tion of the concept within established markets in developed economies. The traditionally defined disruptive innovation paradigm (Bower & Christensen, 1995; Christensen, 1997) claims that new products (or services) are considered disruptive when they respond to an ignored and new market segment that is usually small, unprofitable for incumbents and has differentiated needs in terms of product attributes. Could we say that the idea of inno- vation originating in emerging markets pre- sented by Hart and Christensen (2002) is indeed a disruptive innovation? We think this is true only in part, and that three limitations need to be considered in relation to the char- acteristics of disruptiveness mentioned above. In particular, we need to consider (1) the categorization of mainstream and non- mainstream customers, (2) market size, and (3) disruptive innovators (see Table 2):

1. Companies operating in emerging econo- mies have traditionally served those markets adopting a glocalization approach to market segmentation, thus serving cus- tomers that correspond and share similar characteristics to those segments served back in their country of origin or in devel- oped markets. These are their mainstream customers, who might represent the great majority at home but in emerging econo- mies represent only the top of the pyramid. Adopting a marketing perspective instead, as the disruptive challenge requires us to (Christensen, 1997; Danneels, 2004), main- stream customers in emerging markets should be defined as the large part of the population (be it individuals or companies) that cannot afford expensive state-of-the-art technology and that are partly served by local companies that can interpret their needs and respond to them thanks to their cost structure.

2. One of the main challenges that incumbent firms face when developing or responding to disruptive innovations in their markets is that the size of the emerging market with

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different requirements is too small to cover the development costs of new products (Christensen, 1997; Christensen & Raynor, 2003). Indeed, the size of the market does not match the size of the company and its related cost structure as it does in the case of small entrants or spin-off companies. This is not true in emerging economies, where the market served by innovations, as in the cases presented in Hart and Christensen (2002) and Hang, Chen and Subramanian (2010), is much bigger than that served by glocal products, so that the market size is potentially huge, assuming that access to these market segments is feasible.

3. Disruptive innovations in developed econo- mies generally come from a small entrant firm (e.g., a start-up company) that is gen- erated by either a new entrepreneurial activity or a spin-off company from an incumbent firm (Bower & Christensen, 1995; Christensen, 1997; Walsh, Kirchhoff & Newbert, 2002; Christensen & Raynor, 2003). The generation of disruptive innova- tions in emerging economies could be developed by domestic companies that naturally have a cost structure and a market orientation that fits the local environment and by subsidiaries of MNCs that have evolved and gained enough autonomy to develop new products. The case of compa- nies from emerging markets is well described by Zeng and Williamson (2007) who report on how innovations developed by Chinese companies are disrupting global markets by primarily leveraging on new, low cost based, business models. The inno- vative approach of these companies is defined by the authors as ‘cost innovation’.

Reverse Innovation

In the previous sections, we showed how dis- ruptive innovation theory does not adequately fit the description of innovations developed for emerging economies and afterwards ‘exported’ back to developed economies. ‘Reverse innovation’ (Govindarajan, 2009; Immelt, Govindarajan & Trimble, 2009; Govindarajan & Trimble, 2012) is a more suit- able framework that helps us understand this trend. This new line of research emphasizes the role of emerging economies as the new laboratory in the global economy and argues that innovation is less likely to come from, and is adopted in, developed countries first, but is conceived and adopted in emerging econo- mies first to then be introduced to developed markets. It is then ‘exported’ to the developed

economies. These dynamics reverse the inno- vation process as intended in the prior litera- ture and managerial practice. The reasons that support such an inverted process lie in the market growth of the developing countries that are supporting and leading the global economy.

In their 2009 article ‘How GE is Disrupting Itself’, Immelt, Govindarajan and Trimble show how GE is benefiting from its presence in the markets of emerging economies, specifi- cally China and India, to develop break- through innovations that are introduced and successfully commercialized first in develop- ing countries and later, when performance improvements are acceptable, in developed countries. They provide clear examples for GE Healthcare developing and perfecting prod- ucts in both China (Immelt, Govindarajan & Trimble, 2009) and India (Govindarajan & Trimble, 2012) before selling them in those markets first and in advanced ones later on, disrupting existing products in some markets as a result of performance improvements on the attributes most valued by mainstream customers.

The authors stress the importance of local growth teams (LGTs) as new units, independ- ent from their MNC headquarters (HQ), built from scratch in emerging economies. They are responsible for the complete development and commercialization of products leveraging HQ technology but developing completely new offerings that match the market they operate in. While GE Healthcare is a well-known example, there are other cases that present similar innovation paths. Esaote, an Italian medium-sized company that designs and manufactures medical diagnostic systems, is currently sourcing product ideas for the global market from its R&D laboratory located in Shenzhen (Corsi & Di Minin, 2012).

These cases explain how in order to compete in emerging economies, foreign MNCs have to rely on LGTs in order to develop innovations that fit local needs and overcome local constraints. At the same time, they do not neglect the glocalization paradigm in line with which MNCs have to continue to operate to serve high-end markets and build part of the technological knowledge that is essential for the activities of LGTs in emerging economies.

Overlapping Areas between Disruptive and Reverse Innovation

Given the above considerations, the disruptive innovation theory can provide a useful tool for interpreting the phenomenon of innovation

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from emerging economies. As we showed in the above sections, scholars have already iden- tified this opportunity, but we think it needs to be refined and integrated with reverse innova- tion to effectively frame a reversed cycle of innovation. The characteristics that Immelt, Govindarajan and Trimble (2009) and Govindarajan and Trimble (2012) list and illus- trate to describe reverse innovation partly match those described in the previous sections of this paper recalling disruptive innova- tion theory as illustrated by Bower and Christensen (1995), Christensen (1997), Acee (2001), Christensen and Raynor (2003), Utterback and Acee (2005) and Govindarajan and Kopalle (2006a, 2006b). In particular, under specific circumstances reverse innova- tion shares great similarities with the idea of disruptive innovation from emerging econo- mies as illustrated by Hart and Christensen (2002), Zeng and Williamson (2007) and Hang, Chen and Subramanian (2010).

Govindarajan and Trimble (2009) responded to this parallelism themselves following the requests of some readers of their paper who asked for clarification between disruptive innovation and reverse innovation. In one of Govindarajan’s blog posts (30 September 20091), they list a set of conditions that reverse innovation can originate from, stating that the one concerning a lower price offer is the only one configuring it also as a disruptive innova- tion. The same issue is addressed by Govindarajan and Trimble (2012). They thus consider disruptive innovation only from a price/performance point of view, and not as a market widener or as a provider of new functionalities, implicitly stating that disrup- tive innovation can only have a lower price.

We do not believe this is completely true. Referring back to Govindarajan’s works on disruptive innovation, we note that Govindarajan and Kopalle (2006b) define dis- ruptive innovation as ‘a powerful means for broadening and developing new markets and providing new functionality, which, in turn, disrupt existing market linkages’.

Therefore, the focus now lies in the alterna- tive attributes that are offered by the innova- tion in relation to an existing product. These new products are able to penetrate the market starting from early adopters and improve per- formance in the ‘mainstream’ thanks to the experience accumulated in serving the new segment. In line with Christensen and Raynor (2003) and Utterback and Acee (2005), Govindarajan and Kopalle (2006a) define dis- ruptive innovation in the way presented in the second section of this paper and include both new, low-end and high-end attributes to exist- ing products that initially are tempting only to

new customers (thus not necessarily price- focused) or the most price-sensitive main- stream customers, but in developing over time they also gain the attention of mainstream cus- tomers and the market.

In summary, Govindarajan and Trimble (2012) state that reverse innovation has five drivers, named ‘gaps’ (performance, infra- structure, sustainability, regulatory, prefer- ences), but the examples they provide in their work (Immelt, Govindarajan & Trimble, 2009; Govindarajan & Ramamurti, 2011; Govindarajan & Trimble, 2012) stress funda- mentally the income (or performance) gap (Logitech Mouse in China, P&G feminine hygiene product in Mexico, Deere Tractor in India, Harman infotainment system in India and China), and indirectly lead us to under- stand that reverse innovation takes the direc- tion of a potential disruptive effect only when an equivalent income gap can be found isolat- ing a segment of the market in an advanced economy. While we acknowledge that indeed the income gap is a key driver, the emphasis of Christensen’s low-end disruptive innovation is on new markets being created, and new value networks displacing the old ones. Such dyna- mics in reverse-disruptive innovation happen not only when a company from emerging coun- tries enters advanced ones to serve the needs of a less affluent market segment, but indeed dis- ruption occurs when the technological evolu- tion and market experience lead this offering to go from the niche to the main market. In these situations of reverse-disruptive innovations, we indeed identify the following common elements between reverse innovation and dis- ruptive innovation: the same risks of cannibalizations for companies that have previ- ously invested in the same industries for main- stream customers (Govindarajan & Kopalle, 2006a, 2006b; Immelt, Govindarajan & Trimble, 2009), which is also a tool for measuring the potentiality of firms to develop disruptive innovations (Govindarajan & Kopalle, 2006b).

As anticipated by Williamson and Zeng (2004, 2009), Seely Brown and Hagel (2005), Williamson (2010) and Zeng and Williamson (2007) with reference to business models, dis- ruptive innovations are a tool to pre-empt giants from emerging economies that are going global with a new price-performance offering, which is exactly the same purpose of reverse innovation (Immelt, Govindarajan & Trimble, 2009).

LGTs that Immelt, Govindarajan and Trimble (2009) and Govindarajan and Trimble (2012) explain as crucial for the development of innovations for emerging economies mirror the spin-off companies described by Christensen and Overdorf (2000), Christensen, Bohmer and

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Kenagy (2000), Christensen and Raynor (2003) and Danneels (2004, 2006), as the best solution for incumbents that want to compete with or develop disruptive innovations.

We therefore believe that disruptive innova- tion theory can be a rich tool for interpreting a subset of reverse innovation as defined by Immelt, Govindarajan and Trimble (2009) and Govindarajan and Trimble (2012). Adopting this perspective, we believe we can enrich the disruptive innovation theory from an emerg- ing country perspective.

Geographic Dimension of Disruptive Innovation

As discussed in the previous section, it is pos- sible to interpret a subset of reverse innova- tion, and the considerations that follow are limited to this subset, as a particular manifes- tation of disruptive innovation. In fact, Govindarajan and Trimble seem to suggest the same by proposing an uphill flow of reverse innovation to marginalized first and, often, mainstream markets in advanced economies (2012: 22). Can we thus simply generalize the findings and implications of disruptive inno- vation originating from developed countries to situations of reverse innovation?

The answer is no. Such a generalization does not work, since success stories of disruptive innovation originating from developed markets differ substantially from success stories that export successful products back to developed markets that were first introduced in emerging economies. Table 2 summarizes the main differences discussed below:

• Early market: in disruptive innovation theory, the market segment served by the new technology is characterized by early adopters. In reverse innovation, the early market is instead represented by the large part of the population, or BOP, that has no access to the established technology because it is either too expensive or too complex. This is hardly the case with early adopters and developed markets. These differences should lead to completely different market- ing strategies.

• Actors: the small size of the early market in disruptive innovation theory makes spin-off companies or small new entrants the only actors able to serve this market profitably. On the other hand, the vast size of the new market segment to be served in emerging economies allows both local start-ups, foreign MNC subsidiaries and large local companies to make profit from it by exploit- ing economies of scale. The key question is

whether local start-ups will find the com- plementary assets to reach international markets. Conversely, there are examples (see the case of Aravind Eye Care in Prahalad, 2004) of successful disruptors in emerging economies which were not able to expand internationally.

• Expansion: the evolution of disruptive prod- ucts conceived in and for developed markets brings innovative technologies to commercialization in the same markets as the established ones, while disruptive prod- ucts introduced in and for developing economies allow foreign MNCs and domes- tic companies to export their evolved disruptions to mainstream markets in developed countries, configuring a process of reverse innovation.

• Maturation of technology: the technological evolution of disruptive innovations is the same in both cases, but while in disruptive innovation theory this occurs in the same country market, in reverse innovation we see it happening in developing economies and brought to developed economies once the technology has evolved.

• Challenges: the development of a technology on a new trajectory puts new entrants in established markets in competition to reach new technological standards. In emerging economies, the main challenge is the diffi- culty of reaching a vast market that often lacks adequate complementary assets (such as distribution and logistics infrastruc- tures). Furthermore, cultural and institu- tional differences make it difficult for foreign firms to understand and properly respond to market needs.

• Basis of competition/success: in traditional dis- ruptive innovation theory, the ‘battle’ is won by the company that develops the new tech- nology better and faster, satisfying at first the request for new attributes and, along within technological evolution, catching up on the mainstream attributes. In reverse innovation, competition is instead based on the ability to develop a new business model that allows companies to serve a large portion of the market in order to achieve large sales volumes and economies of scale.

Research Propositions and a Research Agenda

In light of the discussion presented in this paper, we can conclude that reverse innovation has the potential to take the form of disruptive innovation that originates not from the same geographical market that incumbent compa- nies dominate, but rather from the markets of

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emerging economies, where a technology/ product has been commercialized to fit the characteristics of those markets, particularly serving the vast bottom of the pyramid.

The disruptive innovation framework pro- vides us with the dynamics to look at innova- tion that originates for emerging economies. However, the challenges, evolution and factors leading to success or failure of reverse innovation are different from those that are relevant when disruptive innovation originates from a developed market. We therefore argue that instead of simply generalizing the find- ings of disruptive innovation to emerging economies, future studies should take into consideration innovations that originate for those markets. We have thus added a geo- graphical dimension to the disruptive innova- tion paradigm, explaining the variables that should be taken into account when consider- ing such an innovation emerging in develop- ing economies.

Given the above considerations we develop four research propositions that we believe may be of inspiration for innovation management scholars and thus fuel future research.

Christensen and Raynor (2003) have illus- trated the importance of spin-out companies as a way to overcome the innovator’s dilemma. Incumbents are often disrupted by new entrants because they are not able to see emerging technologies entering the market and to address new needs while improving also on attributes of the technologies adopted by the mainstream market. The establishment of a new autonomous company that rises from an incumbent firm has the potential to respond to the marketing challenge posed by disruptive technologies and to address a new emerging market. Market myopia can also be found in the case of advanced MNCs that operate in emerging markets, often trying to commercialize only small adaptations of their products previously developed for the advanced markets. Hence, the ordination of a subsidiary operating in emerging markets with autonomy regarding product develop- ment can be an important source of reverse innovation with disruptive potential also in advanced markets.

RP1: Subsidiaries of ‘advanced’ MNCs in emerging economies can act as the spin-off com- panies theorized by Christensen as a way to overcome the innovator’s dilemma.

Scholars should thus focus on organiza- tional and host country factors that may affect subsidiary autonomy as well as its ability to trigger processes of reverse knowledge trans- fer (Ambos, Ambos & Schlegelmilch, 2006). Of particular importance is the role of people

appointed to manage the subsidiary. These managers are in fact vectors of innovation stimuli coming from emerging markets. They thus need to know well both the company culture and its technological endowment in order to optimally interpret the best means for product development. At the same time, they need to have enough authority with their headquarters for the ideas they propose that may diverge from the traditional technological path their company follows to be taken into appropriate consideration.

In order for companies to be able to trigger reverse innovation processes, two essential conditions need to be present: a strong knowl- edge of emerging market needs and business environment and a good technological base. This is not always the case for a single company. Very often an ‘advanced’ MNC has a strong technological base (given by its experi- ence and the quality of its R&D engineers), but lacks a deep knowledge of emerging markets. On the other hand, ‘emerging’ companies know very well their home market but often lack an appropriate technological base given their relatively short history.

RP2: Despite a liberalization trend of emerging economies which allows foreign companies to operate more freely, we will see a new technology-focused generation of joint ventures between ‘advanced’ and ‘emerging’ MNCs.

As in the past, the creation of joint ventures and other forms of interaction between foreign and local firms seem to be relevant. But while in the past foreign companies were legally obligated by host country FDI policies to engage in joint ventures in order to get access to the emerging economies’ markets (see, for example, the case of China described by Long, 2005), this need for cooperation may increas- ingly emerge with the aim of merging comple- mentary competences for developing products that are globally marketable. This potential trend suggests a focus on new drivers of cooperation between foreign MNCs and local firms in emerging economies, as they may diverge from previous ones. In particular, we believe it would be interesting to see how R&D teams of such joint ventures are com- posed and what the dynamics occurring between foreign and local engineers are.

This intensification of interaction between foreign and local firms in emerging economies can be read and extended from an open inno- vation perspective.

RP3: Open innovation dynamics will facilitate the triggering of reverse innovation processes.

Future research should try to understand whether and how open innovation dynamics

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are different in an emerging economy context. Intuitively, ‘advanced’ MNCs operating in emerging markets can benefit from outbound open innovation performed by local compa- nies that are willing to share or sell their product ideas or nascent technologies for developing and selling them worldwide. This could lead to inbound open innovation per- formed by foreign MNCs which source tech- nologies from local firms or universities and research institutions.

Strong intellectual property regimes are required to implement an innovation strategy that is based on an open model. This may be a problem in developing countries since they are shown to have weak intellectual property regimes (IPR) (Zhao, 2006).

RP4: As emerging economies will strengthen their intellectual property regimes, we will see more reverse innovation processes.

Despite the fact that foreign MNCs are worried about their IP protection in emerging economies, recent contributions show how this problem can be overcome in developing econo- mies such as China (Keupp, Beckenbauer & Gassmann, 2009; Quan & Chesbrough, 2010), presenting successful cases of foreign compa- nies that implement R&D activities in China, providing useful tools for overcoming the risk of IP violation. Future research has the oppor- tunity to study how IP strategies of companies operating in emerging markets will evolve along with the evolution of these countries and how these will probably change, passing from having a local perspective to a more interna- tional or global breadth. An evolved patent system would help researchers to investigate even further the reverse innovation processes by using patents to identify innovations origi- nating from emerging economies which are potentially disruptive, as has already been done for disruptive technologies (Pilkington, Dyerson & Tissier, 2002).

In terms of managerial implications, this paper provides companies with a set of basic attributes of reverse innovation with disrup- tive potential. Managers of ‘advanced’ MNCs can thus use these insights to both trigger innovation processes for their own companies, leveraging on their technological basis, or interpret actions underpinned by competitors from emerging economies who are trying to enter foreign advanced markets. Managers of ‘emerging’ MNCs can identify patterns of technology and market development which occurred from an emerging to an advanced market.

As reverse innovation dynamics unfold, we expect to see new business models evolve, new forms of interaction between MNCs and

local partners, as well as new opportunities for entrepreneurs trying to adapt technologies across distant markets and to explore the role of emerging markets as the new laboratory of the global economy.

Note

1. We are aware that an author’s blog is not a strong source but, given the novelty of the topic, the explanation provided in this post is crucial for understanding the concept.

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Simone Corsi (s.corsi@sssup.it) is a post- doctoral researcher at the Institute of Man- agement at the Scuola Superiore Sant’Anna, Pisa, Italy. He has a PhD in Management from the same institution. His research focuses on foreign R&D investment in emerging economies and reverse innova- tion. Simone was one of the 2009 recipients of the Associazione Toscana Cina Insieme Fellowship for his Masters dissertation (‘Relationship Marketing in Chinese Busi- ness to Business’) on Italian investment in China, and he has been Visiting Doctoral student at the Research Center for Global R&D Management at Tongji University, Shanghai. His research interests also include open innovation and disruptive innovation.

Alberto Di Minin is an assistant professor at Scuola Superiore Sant’Anna, Pisa, Italy, and Research Fellow at the Berkeley Roundtable on the International Economy (BRIE). He has a PhD from University of California Berkeley. Alberto works with the Istituto di Management at Sant’Anna, and he is an instructor at the Executive School, International School of Advanced Educa- tion (SIAF). His research deals with the appropriability of innovation. He focuses on open innovation, business models, tech- nology transfer, intellectual property and R&D management. On these topics he has published widely in international journals such as Research Policy, California Manage- ment Review, R&D Management and Journal of International Business Studies.

Appendix A

For our literature review, we used the following procedure. Relying on the Academic Journal Quality Guide (Version 4, 2010) of the Association of Business Schools (Morris, Harvey & Kelly, 2009), we selected Grade Four and Three journals from the following management fields: General Management, International Business, and Innovation (see below for a list of the selected journals). We searched over these journals for papers whose abstracts contained at least one of the following keywords: disruptive innovation, reverse innovation, cost innovation, bottom of the pyramid. We excluded from the resulting articles book reviews and articles whose abstracts contained words composing the keywords put in a different order (hence meaning a different thing).

General Management International Business Innovation

Academy of Management Review, Academy of Management Journal, Administrative Science Quarterly, Journal of Management, Journal of Management Studies, Harvard Business Review, British Journal of Management, California Management Review, MIT Sloan Management Review, International Journal of Management Reviews, Academy of Management Perspectives, Journal of Management Inquiry

Journal of International Business Studies, International Business Review, Management International Review

Journal of Product Innovation Management, R&D Management, Technovation

The search resulted in 44 total papers. Given the novelty of the topic of innovation from emerging economies, such a low number and

concentration of papers in a very limited number of journals is not a surprise. (The papers appeared mainly in practitioner-oriented journals and two innovation management journals. Furthermore, the majority of papers refer to disruptive innovation.) As a further effort, we ran a search using the same keywords over Google Scholar to increase our literature base and especially looking for practical examples. The number of papers grew to 65. The literature we relied on for this paper is schematized in Table 1.

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