Innovating to excel

Companies are realising the value of investing in R&D innovations in Asian markets. Not just as a source of cheap labour, the real task is to create R&D centres of excellence for emerging markets products & services

As Asia and the emerging markets become increasingly important growth engines for the global economy, technology companies are investing increasingly in R&D and innovation in the region. This, not just to tap growth markets but also to figure out disruptive innovation coming in from these markets.

Earlier, Asia’s emerging markets were growing at staggering speed but with fewer innovations. These markets largely adopted ideas developed elsewhere in the world. Today, the emerging markets are producing significant amounts of innovation. MNCs have recognised the capabilities of the region, which is why many are increasingly investing in R&D to capitalise on the region’s talent, supply chain and proximity to markets.

Asia’s emerging markets are producing innovations for emerging markets, and multinationals are now keen to leverage this to expand their global R&D networks. These are the key findings of a new report, “Coming of Age: Asia’s Evolving R&D Landscape,” from the Economist Intelligence Unit (EIU), commissioned by Mercer. The report is based on interviews with more than 20 senior executives in high-technology R&D positions in Asia. The research suggests that the key to business success in Asia is in understanding the talent landscape, the associated challenges, effective attraction and retention strategies for a niche talent pool across Asia’s diverse economies.

Cost to competency
In the last two decades, R&D strategies in Asia were about finding large pools of skilled engineers with low wages; skills were used to devise cheaper solutions rather than encourage engineers to become innovators themselves. Today, however, it is rare to find firms investing in R&D in Asia solely as a way to cut costs. Companies may have moved to Asia initially to cut costs but today they are harnessing the skills and competencies developed by local engineers. Even the volume and quality of science and research has improved.

Another important factor in R&D investment is that many global firms have recognised that Asia’s nascent corporate landscape has the potential to create highly disruptive innovations. For example, some products designed in these markets have different specifications for various price points, giving rise to highly elegant, reasonable solutions that can go global.

Focus on emerging and global markets
Traditionally, many MNCs used their R&D teams in emerging markets to “localise” existing products and services developed elsewhere by simplifying them to make them more affordable. Today, Asia’s R&D centres are firmly focused on driving innovation addressing both global and local needs. Western technology companies have learned that their local counterparts innovate at greater speed and lower cost. Some commentators have dubbed this process “frugal innovation,” which focuses on the lower-cost nature of emerging market innovation. Interestingly, as multinationals move their R&D activities to Asia, many find that the products are succeeding, both locally and globally.

Right workers, right skills, right location
MNCs are still evaluating their R&D investment budgets for emerging markets in Asia. Given the sheer quantity of graduates produced in China and India, the two countries are attracting the lion’s share of new R&D investment. Within China and India, newer R&D locations are emerging in cities like Bangalore, Hyderabad, Beijing Shanghai, Chengdu and Dalian. Regardless of location, understanding the difficulties in recruiting the right calibre of engineers can be a challenge for R&D managers in Asia. Many companies have found that the demand locally is increasing at an equal — and sometimes greater — pace. Companies also complain that only a small percentage of graduates in Asia have the right skills or education. Of the graduates who do fit the bill, strong demand has caused many companies to resort to rapidly raising wages and aggressively poaching staff.

Future outlook
Asia’s economy is likely to continue its growth momentum compared to other markets around the world. The region will become an even more important customer base for global companies. While tapping into the Asian market as a source of cheap labour will continue to be an important reason, the real task will be to create R&D centres of excellence for emerging market products and services.

Global companies have recognised companies must develop products for low-income customers from scratch given that Asia’s economy is still lower than developed regions.

Asia will not only focus on new ideas for the emerging market, but it will also take the lead for many products and services designed for more developed markets. Already there is much evidence of R&D centres in China and India taking the management role for developing products that are globally uniform, such as web applications. In the coming years, will firms face giant organisational challenges as they move away from R&D structures built on few dominant centres to more distributed global forms. This push toward a “global brain” that draws on R&D resources from all over the world – and especially from Asia – will require major surgery and restructuring. While companies keep investing in R&D in mature markets, the challenge is to create an integrated corporate brain that draws the best R&D capabilities from around the world. Thankfully, a lot of the capabilities will come from emerging Asian markets.