A 2005 report in the McKinsey Quarterly outlines the threat to western multinational corporations from “innovation blowback” — the sharply elevated competition MNC’s will face as they increase their market presence in developing countries. The authors’ analysis rightly indicated that the idea of easy gains across the “bottom of the pyramid” is giving way to a more balanced recognition of the pitfalls and opportunities facing well-established firms as they attempt to crack markets in the developing world. I predict that even though they may recognize and plan for innovation blowback, the challenges to western companies of gaining market supremacy in the largest emerging economies will become more difficult, not easier, over the next ten years.
There are three underlying reasons that bottom of the pyramid markets will not yield easily to new tactics from western companies. First, deeper shifts taking place in the landscape of technology will continue to chip away at the innovation gap between competing firms from developing and developed nations. Second, local politics and culture will become more, not less, important in consumer preferences. Lastly, there are clear signs that developing nations are working together to deliberately decouple themselves from dependence on western economic power.
The Double-Edged Sword of Moore’s Law
China’s biggest producer of computer processors can already reach etching sizes of only 90 nanometers, only 45 nm behind the most advanced western producers. And as the costs of memory continues to plummet around the world, small and powerful mesh network devices will become easier to design and manufacture, and will position squirrely companies to effectively challenge western companies in the developing world. Early signs of this displacement potential can be seen in the story of cellphones versus the “One-Laptop-Per-Child” project. At the same time that digerati were pushing developing nations to adopt the OLPC model to help bootstrap the developing world into the information age, the cellphone quietly accomplished the bulk of the work, without the fanfare or the awkward business model. Simply put, the cellphone providers quickly adapted their original business model while the Intel and Microsoft-backed OLPC effort had to craft a new product and an awkward plan requiring a 1-million minimum laptop order.
This sort of entrepreneurial developing-world business model — built on the declining cost of components and the continued growth of open source communities — will grow explosively over the next 10 years. Just as Mo Ibrahim broke open the African cellphone market, the future breakthroughs in the BOP space are not guaranteed to the multinational giants. In many situations, the best option will be instead to seek out and acquire the strongest local companies.
The World is Not Flat
Pankaj Ghemawat rightly points out, in his book Redefining Global Strategy, that national borders still matter…a lot. I know from firsthand experience the depth and ubiquity of skepticism that American and other western companies face. In Chile, for example, even as people were drinking Coca-Cola or eating Nestle ice cream treats, they regularly reminded me that these weren’t Chilean brands, and there was a tangible resentment of that fact. A significant percentage of customers around the developing world are passionate about wanting to buy national, and are just waiting until there is an affordable alternative from “one of their own.” Celtel, again, is an example of this persistent anti-western advantage – Mo Ibrahim built a brand that was distinctly African, and quickly grew it into a titanic telecom company that out-maneuvered huge contenders from around the world.
The persistence of controversial American foreign policy, and perceived European complicity therein, will continue to mitigate against market land grabs for western companies. And as social networking technologies allowing local culture to become more robust, expect more sharp divides to emerge in opposition to homogenizing versions of globalization. Rapid communication can amplify political backlash, and can cut into the bottom line when, in the minds of increasingly connected BOP consumers, the actions of western governments are conflated with western brands on the shelves.
South-South Collaboration
On a related note, but perhaps even more worrisome for western brands, there are signs that the developing world is quickly and stealthily organizing itself to decouple from western economic power. In The Beijing Consensus, former foreign editor for Time magazine Joshua Cooper Ramo argues that the Washington Consensus is increasingly seen as a failed project in the developing world, and that Beijing is effectively filling the moral and political power vacuum left behind. He points to the types of ‘asymmetric power projection’ strategies that China is pursuing to win the hearts and minds of the developing world, including mega-development projects, multilateral economic development treaties, and far-flung direct investment in nations regularly passed over by the west.
And China is not the only country looking to chart its own course. Newly forged scientific cooperation agreements between Brazil, India, and South Africa point to a strongly independent scientific community in the global south. Pacts have been signed that will share research into biotechnology, AIDS, and energy. And Venezuelan and Russian petrodollars are flowing into medical research in Latin America and nanotech venture capital in Russia, respectively. If they bear fruit, all of these research agreements will steepen the entry for western companies into the biggest of the developing markets.
