Emerging Economies Challenge Western Innovation
Over the past two decades, India has achieved a dominant share of offshore work, giving Western populations angst about the loss of white collar jobs. Yet, as many have argued, perhaps this fear is misplaced as the West retains an advantage in innovation. After all, where are the Indian iPods, Googles and Viagras?
We spent three years researching whether India could transition from being the favored destination for offshored services to a locus of innovation. We discovered that despite substantial innovation taking place in India, much of it has been “invisible.” Take for example, Intel, a company that prides itself on “inspired innovation that’s changing the world." While Intel ensures consumers know they’re using a personal computer powered by Intel innovation, there isn’t any label on the product showing that the innovation originated in India. Here are four types of innovations originating from India that remain invisible:
- Business-to-business products for global markets: GE’s John Welch Centre and Intel’s Indian operations in Bangalore have already answered in the affirmative: “Can India be a platform for generating innovation for the global markets?” These companies are seeking to develop B2B products for global markets in their Indian research and development centers just as they do in their R&D centers in the West. Intel launched its Xeon Processor 7400 seriesin 2008, the first chip wholly designed and developed in its Bangalore center.
- Offshoring of Research and Development Services: Companies like Wipro Technologies deliver IT services to clients abroad and Dr. Reddy’s Laboratory produce generic drugs for the domestic market. These companies, have slowly convinced major multinationals to outsource parts of their product development and R&D processes. In R&D services offshoring, innovative work is delivered to somebody else’s specification. Yet the level of technical sophistication required to do this is substantial, and sometimes everything except the final branding and distribution are taking place in India.
- Process Innovation: As opposed to product innovation, process innovation is about how a product is made and how new products are developed. Process innovation in India is increasingly surfacing in the outsourcing industry because of a phenomenon we call the “injection of intelligence.” The availability of low-cost, high-skilled labor in India has led to overqualified personnel being assigned to relatively routine jobs. This sometimes results in surprisingly effective process innovations even in what were previously considered “low-tech” settings. Ultimately, some of these process innovations at companies such as 24/7 and Denuosource are embedded in products in the United States and all over the world.
- Management Innovation: Perhaps the most invisible of Indian innovations – the global service delivery model – is responsible for the success of the Indian outsourcing industry. It is not a product or a process innovation, but rather a management innovation, a new way of managing globally distributed work. It reconceptualizes formerly physically collocated activities by breaking them up into subtasks that can be done in different geographical locations, and it specifies the necessary means for integrating this work back again. Whether a piece of work can be executed remotely does not critically depend on how simple and standardized it is. Instead, the possibility of remote delivery depends on whether its linkages to other pieces of work are standardized. Further, we found that even when the links between processes are not standardized, some of the masters of the services outsourcing business, such as Infosysand Tata Consulting Services are finding ways to work together out of separate locations as if they were being executed in adjacent rooms.
"As more work moves to China and India, companies in the West are likely to confront what we call the 'sinking skill ladder' problem."
If one takes a step back and thinks about the invisible innovation in India, it has some disquieting effects for jobs in the West. As more work moves to China and India, companies in the West are likely to confront what we call the “sinking skill ladder” problem. What is a skill ladder? The idea that to do highly sophisticated innovative work, you need to have done less sophisticated work at some stage in your career.
Imagine being the partner at a consulting firm without having been an associate, an investment banker without having been an analyst or the head of a clinical research team without having done any “bench-work.” But a problem lies ahead in that Western companies are blocking their talent pipelines from which to promote tomorrow's senior leaders. Unless they have grappled with this question, it seems facile to say that companies in the West can “move up into higher value-added services” and leave the “low end” work to their counterparts in Asia.
In some sense, the problem for managers of companies from the developed world is less complicated: they can move the next rung of their R&D, and even their headquarters, to where it can be done more effectively and efficiently. However, disconcerting questions for policy makers in developed countries will remain.
Nirmalya Kumar is a professor of marketing and Phanish Puranam is a professor of strategy at London Business School and co-authors of India Inside (Harvard Business Review Press, November 2011). They are also co-directors of the Aditya Birla India Centre at the School.