Lead markets play a crucial role in the global diffusion of innovations. Innovative firms actively seek access to such markets whilst policy makers, especially in Europe, have attempted to foster lead markets by concerted policy measures. Below, Rajnish Tiwari and Cornelius Herstatt suggest that the conventional wisdom on the emergence and functioning of lead markets needs a rethink to better reflect the changing dynamics in the global economy, and argue that dynamic economic growth in largely unsaturated markets and increasing technological capabilities are letting new lead markets emerge in the developing world.
Is it a coincidence that a bulk of software innovations originates in the United States or that many world-class automobile products have their roots in Germany? Or, that the Scandinavian nations led the cellular revolution in the 1990s? At least scholars of innovation management do not seem surprised by such innovation patterns, for all these countries can be considered “lead markets” for the respective industries and technologies.
A lead market, in short, characterises a country where an innovation design is first widely accepted and adopted, triggering global diffusion.1 Renowned management scholars Christopher A. Bartlett and the late Sumantra Ghoshal have posited:
“In most industries, a few key markets lead the industry’s evolution. They are often the largest, most sophisticated and most competitive markets in which the nature of impending global changes is first mirrored. Results of competitive battles in such markets usually have a great deal of influence on the future world-wide competitive positions of firms.”2
High per-capita purchasing power of domestic customers in lead markets creates the necessary financial muscle to support high-costs research & development (R&D) efforts, while the presence of highly sophisticated customers, that are willing to pay for new and ever better products and services, acts as an inducement for firms to keep innovating. Active engagement in such markets, from firms’ point of view, is therefore of crucial importance. Furthermore, setting up innovation centres in lead markets can reduce market uncertainty. Policy makers work on creating an advanced regulatory framework hoping to get a head-start for the domestic industry in an attractive field expecting employment generation.
Conventional wisdom suggests that lead markets almost invariably exist in economically advanced nations that are endowed with, in addition to the factors mentioned above, a highly developed physical and institutional infrastructure. In recent years, however, a series of disruptive and potentially game-changing innovations (“frugal innovations”) has emerged out of rapidly growing economies in the developing world, most notably India and China. India with a host of impressive innovations in diverse industries such as healthcare, pharmaceuticals, space and automobiles, is regarded as being at the forefront of innovation activities emanating from emerging economies.3 But it is certainly not the only emerging economy to produce such innovations: Brazil’s success with ethanol and China’s contribution to GE’s portable ultrasound machine and many others are now well-known examples.
In recent years, a series of disruptive and potentially game-changing innovations (“frugal innovations”) has emerged out of rapidly growing economies in the developing world, most notably India and China.
Frugal innovations are characterised by their affordability, robustness in dealing with infrastructural deficits, and (at the very least) “good enough” quality in a volume-driven market. They are often motivated by resource constraints; forcing firms and users to think out-of-the-box and create solutions that can circumvent infrastructural limitations. The spark triggered by such innovations, in many instances, tends to jump outside the geographic borders of the domestic market; often to other developing nations with similar socio-economic conditions, and in some instances, and increasingly so, also to industrialised countries. Some authors go so far as to suggest that “the newly affluent customers in China and India are changing the direction of the stream of ideas once more – particularly in business”.4
Many global firms in the actual practice are recognising these emerging opportunities and setting up innovation hubs with regional/global responsibilities for certain products and product categories in countries like India and China. However, there persists an apparent mismatch in the actual business practice and the theoretical model. The founding works for the lead market theory were laid around the turn of the 21st century.5 Much water has flowed down the Ganges, the Yangtze, or the Amazon in the past decade and a half. Today’s world, in many ways, is not the same as it was at the turn of the century. Many of the factors responsible for economic growth in the West, e.g. entrepreneurial initiatives, technological advancement, and international embeddedness by the means of trade, can be observed at work in many developing nations.
The bygone decade has witnessed a palpable shift in the centre of economic gravity. While non-developed economies accounted for around one-fifth of the world economic output in 2001, their share had nearly doubled to 39% by 2013, and is expected to cross 41% by 2019.6 Similarly, per-capita income in the emerging and developing economies, in terms of purchasing power parity, doubled from $3,288 in 2001 to an estimated $7,308 in 2013, and is expected to cross the mark of $10,000 by 2019. This economic growth has some crucial implications for innovation management, as is illustrated below using an example: The subscription base of cellular telephony in India has risen from 6.5 million in March 2002 to more than 893 million in January 2014. This implies that the providers of mobile telephony and data services, developers of mobile commerce applications, and the handset makers have received access to a gigantic market, which (a) has less per-capita financial resources at its disposal, but at the same time (b) is more open to new technological and business model innovations for a typical customer who is less likely to own a personal computer or to have a fixed-line Internet access. Therefore, he or she, in general, is more inclined to use applications based on the mobile Internet in comparison to scepticism often witnessed in more affluent nations.
Challenging the dominant logic
The changes of the previous decade have been so massive and fast-paced that the scholarly discourse in the confluence zone of globalisation and innovation has struggled to keep pace with them. Today the conventional wisdom on lead markets is challenged from three sides:
Large and growing economies, such as India and China, are endowed with huge, unsaturated markets, whose size could justify large R&D efforts despite thin profit margins; especially so because these nations often enjoy cost advantages and have a large workforce of skilled professionals.
Globalisation has reduced the need for reinventing the wheel. Today, technologies can be traded almost like commodities. Technological collaborations can be forged across national and international boundaries reducing costs of in-house product development.
The increasing level of disposable income in developing economies is creating aspirations for consumption. Products that the new, emerging consumers are seeking in an inter-connected, globalised world are those that are comparable with ones in the advanced economies. The level of prevalent disposable income, however, often does not allow such customers to purchase the higher-end products, leading them to seek products with good-enough quality, affordable price and an attractive brand value.
“To succeed in India, you need a product which costs 30% of the global price and offers 95% of the performance”, says the managing director of a renowned and successfully operating German auto component supplier in India. The R&D head of a successful carmaker seconds: “It’s about the aspirations of the youth in India. They want everything; they know everything; but they are not prepared to pay extra!” Not surprisingly, such aspirations are proving a challenge for traditional lead markets that are not always well-equipped to provide impetus to a consumers who wants to use similar, if not the same, products; has aspirations; but not yet, a very high purchasing power.
A look at India’s passenger car industry provides a good example for this. Demand for passenger cars in India is largely concentrated in the segment of small cars (Micro, Mini, Compact and Super-compact cars) which account for 86.6% of all passenger cars sold in India. Companies from the automobile lead market Germany have, however, concentrated on selling top-end premium and luxury cars. As a result, they dominate the miniscule top-range segment but have little presence (2.3%) in those segments that are the largest in size and the fastest in growth (see Figure 1).
Amongst all leading automobile manufacturing nations India has the highest share of small cars in the passenger cars sold. This intensity of demand in a large and growing market has attracted practically all major global car-makers to invest in India and develop country-specific models. Many global firms such as Suzuki, Hyundai and Ford have set up global hubs for small cars in India to benefit from economies of scale and scope. As a result India has emerged as a key exporter of hatchback cars that are sold under varying brand names and technical specifications across the whole world. Thus, India can be described as a lead market for small cars.
Industries with economies of scope and knowledge-based sectors seem to be more promising fields for developed country lead markets.
Our study comes to the conclusion that even a developing country endowed with an open, globally-integrated economy can emerge as a lead market for a certain category of products. Basic factors of lead market potential are depicted in Figure 2.
The two major conditions for the emergence of a lead market in a developing country are:
The size of the potential demand in the domestic market should be large enough to sufficiently offset the disadvantage created by the low per-capita income;
The country should be endowed with significant technological capabilities that allow substantial parts of product development process to be performed locally. This is a major departure from the current model where technology is seen as a non-crucial factor owing to similar technical capabilities of all advanced nations.
A lead market in a developing country seems to emerge if the product does not require path-breaking, high cost research; or if the innovation process can be contextualised in global innovation networks to reduce market and technological uncertainty. Proactive identification and use of existing technologies in various fields (analogies) is also a critical success factor. A developing country lead market, therefore, often complements and not completely replaces the existing lead market, as a great degree of interconnectedness between German and Indian automotive sectors, especially in the component supplier industry, reveals.
Furthermore, local technological capabilities appear to play a crucial role; not only for cost reasons but also because of the “social embeddedness”. Only those product developers, who have their own, first-hand experience of customer needs and mind-set in resource-constrained environments, can conceptualise and design a product that meets the aspirations of the potential consumer.
Our study could identify the role of policy as a crucial instrument in the development of an industry and inter alia of a lead market. Prevalent policy conditions in the post-Independence India helped create a competitive small car industry. On the other hand, erratic policy measures such as retrospective amendments in tax law continue to act as a barrier for a functional and sustainable lead market. In developed countries it would be recommendable to avoid fiscal incentives for industries where economies of scale are of critical importance. Manufacturing-intensive industries should be ideally not targeted for development by means of subsidies; as their competitive advantage is often based on a weak fundament and breaks down once government support is withdrawn. The recent experiences of the photovoltaic industry in Germany illustrate this point quite tellingly.
Industries with economies of scope and knowledge-based sectors seem to be more promising fields for developed country lead markets. Nevertheless, collaborations should be sought and formed with potential lead markets in developing economies to compensate one’s own weak cost structure in manufacturing. A win-win situation could be strived for, by tapping “sticky knowledge” present, and being created, in those markets.
1. Beise, M. (2001): Lead Markets: Country-Specific Success Factors of the Global Diffusion of Innovations. Heidelberg, Physica-Verlag.
2. Bartlett, C. A. and S. Ghoshal (1990): Managing innovation in the transnational corporation, in: C. A. Bartlett, Y. L. Doz and G. Hedlund (eds.): Managing the Global Firm. London, Routledge: 215-255.
3. Tiwari, R. and C. Herstatt (2012): “Assessing India’s Lead Market Potential for Cost-effective Innovations.” Journal of Indian Business Research 4(2): 97-115.
4. Silverstein, M. J., A. Singhi, C. Liao and D. Michael (2012): The $10 Trillion Prize: Captivating the Newly Affluent in China and India. Boston, Harvard Business Review Press.
5. For a literature review see: Tiwari, R. and C. Herstatt (2014): Aiming Big with Small Cars: Emergence of a Lead Market in India. Heidelberg, Springer.
6. IMF data. Projections for 2019 are based on World Economic Outlook published in April 2014.
7. Authors’ illustration based on Society of Indian Automobile Manufacturers (SIAM) data.
8. Source: Tiwari and Herstatt (2014, p. 206).
About the Authors
Dr. Rajnish Tiwari is a Senior Research Fellow and Prof. Cornelius Herstatt the Head of the Institute for Technology and Innovation Management of Hamburg University of Technology in Germany. A focus area of their ongoing research concerns globalisation of innovation and the growing role of emerging economies. In their research they have often challenged existing dominant logic and proposed practice-oriented solutions for an effective innovation management in globally operating firms. Their recent, very well received study on the emergence of lead markets in developing economies and its implications for innovation management has been published under the title “Aiming Big with Small Cars: Emergence of a Lead Market in India” (ISBN 978-3-319-02065-5) by Springer International Publishing. This article draws on some core insights of that book.