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Innovation For – and From – the Second Bottom Billion

A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Master of Law and Business (“MLB”) Degree

Mark Ashurst July 22, 2011

12,248 words (excluding footnotes) Supervisor 1: Prof. Dr. Holger Ernst

Supervisor 2: Prof. Dr. Peter Witt

Innovation For – and From – the

Second Bottom Billion

A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Master of Law and Business (“MLB”) Degree

Mark Ashurst

July 22, 2011

12,248 words (excluding footnotes)

Supervisor 1: Prof. Dr. Holger Ernst

Supervisor 2: Prof. Dr. Peter Witt

Innovation For – and From – the Second Bottom Billion 2

ABSTRACT

E. F. Schumacher‟s predictions of technology transfer to poor countries, which failed

to materialise in the 20th century, are occurring in new forms in the 21st century.

Rising demand in India and China is driving a new generation of “Appropriate” or

“Intermediate” technology for the “Second Bottom Billion” of global consumers. The

high rate of patent applications in China is a function of the “Spillover” knowledge

diffused across global supply chains, in contrast to the low rate of patenting activity in

India. In the solar power industry, Chinese cost leadership in the production of

photovoltaic cells has made little impact in reducing the the cost of “off-grid” electricity

in India. Multinational enterprises are a conduit for technological change, but market

size and intensity of competition are the critical drivers of innovation in developing

countries.


TABLE OF CONTENTS

ABSTRACT 2

LIST OF ABBREVIATIONS 4

INTRODUCTION 5

Schumacher, revisited 5

Innovation for the poor 7

Innovation for the second bottom billion 8

I. THE BOTTOM OF THE PYRAMID 11

The global middle 11

The second bottom billion 12

Distribution of Manufacturing Value Added 13

II. INNOVATION AND INTELLECTUAL PROPERTY 17

A tale of two patent systems 17

A safe haven? 19

IP and the Indian services boom 21

Chint vs. Schneider 23

III. OUTSIDE THE TRIAD 25

Enabling Innovation 27

Varieties of Innovation 28

Entrepreneurs, not Innovators 29

Technical Change 30

Disruptive cost innovaton 33

Spillover effects 33

Schumacher in the 21st century 34

IV. THE SOLAR INDUSTRY 34

China‟s Golden Sun policy 36

Evergreen Solar 38

Selco India 39

CONCLUSIONS 41

BIBLIOGRAPHY 46


LIST OF ABBREVIATIONS

Acronym Explanation CAGR Compound Annual Growth Rate

ICT Information and Communications Technology

IP Intellectual Property

ITC Induced Technical Change

MNC Multinational Corporation

MNE Multinational Enterprise

MVA Manufacturing Value Added

NGO Non-Governmental Organisation

OECD Organisation for Economic Cooperation and Development

PCT Patent Cooperation Treaty

PV Photovoltaic (Cells)

R&D Research and Technology

SIPO China National Patent Office

TRIPS Trade-Related Aspects of Intellectual Property Rights

WTO World Trade Organisation

Note: All $ values are in US dollars.


INTRODUCTION

Schumacher, revisited

Innovation comes in many forms, all difficult to define. Innovation may be

concentrated in products, often in the form of an inventive step; or in processes, as a

consequence of improved coordination or efficiency. Historically, innovation has been

categorised as either systemic – that is, „push‟ innovation driven by the supply of new

knowledge or technical expertise, or demand-led „pull‟ innovation – in response to the

needs of consumers or industry. In Japan, management thinking has distinguished

big jumps in innovation – kaikaku, from incremental steps – kaizen. If the term itself

has multiple meanings, a useful starting point is to distinguish inventions from

innovative acts.

For E.F. Schumacher, the German-born economist who proposed “appropriate” or

“intermediate” technologies for industrial development in poor countries, the defining

feature of innovation was entrepreneurship. “He characterised the act of

entrepreneurship as involving the innovation of invention,” writes Raphael Kaplinsky,

a long-time scholar of the global movement for intermediate technology (2009, page

18). Schumacher‟s thinking was informed largely by his experience in India, although

he wrote widely on themes of industrialization, development and large-scale

organisation. My sense that aspects of this work remain relevant to understanding

new patterns of innovation in the 21st century was an initial motivation for this thesis.

Schumacher‟s famous book, Small is Beautiful, was published in 1973 with the

provocative subtitle: “A study of economics as if people mattered”. Although critical of

many assumptions of neo-classical economics, his ideas were in no way anti-

capitalist. For example, his proposal for a new discipline of “Buddhist economics”

argued that the allocation of labour should preserve an optimal balance between

production and consumption in the lives of individuals, rather than calculated to

achieve maximum productivity (1973, pages 38-47). Yet he saw the importance of

innovation as a force to transform economic life – whether in small-scale businesses,

entire industries or ultimately as a driver in larger economic cycles.


For Schumacher, the capacity to sustain technical change was the most important

attribute of capitalism. Without that, the command economies of Eastern Europe

were collapsing even as he wrote. At its most potent, Schumacher recognised that

innovation unleashed the “creative destruction” described in Schumpeter‟s classic

text, Capitalism, Socialism and Democracy (1942). Schumacher incorporated this

notion into an ethical critique of over-consumption, waste and environmental

damage. Kaplinsky notes that Schumacher‟s belief in the radical potential of creative

destruction is made explicit in his reference to “a Schumpeterian motor” which drives

innovation and entrepreneurship (2009, page 19).

Innovation for the poor is once again a fashionable concern among global agencies,

policy makers and corporate leaders. In a speech to the World Economic Forum in

Davos in 2008, Bill Gates called for a new “creative capitalism” to harness self-

interest and profit incentives in the service of the poor. Gates wanted “an approach

where governments, businesses and non-profits work together to stretch the reach of

market forces so that more people can make a profit, or gain recognition, doing work

that eases the world‟s iniquities”.1 In this statement, Gates‟s thinking is remarkably

close to Schumacher‟s appeal, forty years before – almost, it is tempting to suggest,

as if nothing had changed.

What has changed, in the intervening period, is the striking eastward shift in the

balance of global economic power. It has become a truism to say that the future is

Asian. In a report for the Brookings Institute, a US think tank, Kharas and Gertz

forecast that “by 2015, for the first time in three hundred years, the number of Asian

middle class consumers will equal the number in Europe and North America.” 2

Increasingly, the allocation of global resources will be directed towards this “Global

Middle”. China has become a manufacturing base to the world. India is the global

hub of a services revolution in business processing and information technology – and

also the world‟s largest producer of generic drugs. This diffusion of skills and

technology is in itself a Schumpeterian motor to power new kinds of innovation.

1 Gates, B. (2008, January 24). Speech to the World Economic Forum. Transcript retrieved from http:

http://www.microsoft.com/presspass/exec/billg/speeches/2008/01-24wefdavos.mspx 2 Kharas, H. & Gertz, G. (2010). The New Global Middle Class: A Cross-Over from West to East.

Retrieved from http://www.brookings.edu/papers/2010/03_china_middle_class_kharas.aspx

http://www.microsoft.com/presspass/exec/billg/speeches/2008/01-24wefdavos.mspx

http://www.brookings.edu/papers/2010/03_china_middle_class_kharas.aspx


For the second bottom billion of the world‟s population, the lowest echelon of this new

global middle class, all hopes of prosperity rest on innovation. As Schumacher

hoped, rising productivity from technical change has reduced poverty in China and,

more slowly, in India. That much is consistent with Schumacher‟s predictions. The

new alignment of economic actors, however, is far removed from Schumacher‟s

proposal for small scale, labour-intensive production for the immediate local market.

Innovation for the poor

Detailed patterns of innovation in China and India can be difficult to discern.

Innovation is sometimes led by outsiders – as has often been the case with the

outsourcing of business process to India. Alternatively, fierce competition within a

domestic market can drive innovation – as is evident from the high levels of patenting

activity in Chinese industry. Increasingly, the distinction between local and global

drivers of innovation is blurred by the outsourcing of manufacturing and production. In

the re-distribution of skills and know-how, insiders and outsiders are thrown into close

proximity.

Innovation for “the global middle” is a more complex process than simply replicating

technologies or products from established markets. At firm-level, most innovation is

an incremental process of adapting goods and services to satisfy (or create) demand.

Ettlee suggests that “disruptive or new to the world innovations” account for only

between 6% and 10% of all innovation.3 Small adaptations occur as firms attain a

deeper understanding of their customers‟ preferences and behavior. Nokia, for

example, installed more powerful loudspeakers to low cost handsets sold in Ghana

and Morocco, where communal listening is common. In an instance of reverse

innovation, the same technology was added to top-of-the-range smartphones to

enable group social networking on the move.4

In fast-moving consumer goods, the capacity of global brands to adapt to local

cultures and tastes is dependent on input from subsidiaries or research. By

introducing small innovations to standardized goods such as soap or packaged food, 3 Ettlee, J. Managing Innovation. Cited by Zeng and Williamson (2007, page 13)

4 Cudahy, G., Ellis, J. & Nunes, P. (2010, February). Why less is the new more. Outlook 2010, 1 page

6. Retrieved from http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Outlook_ Less_is_new_more_Innovation.pdf

http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Outlook_%20Less_is_new_more_Innovation.pdf

http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Outlook_%20Less_is_new_more_Innovation.pdf


large conglomerates such as Unilever, Proctor & Gamble or Nestlé are able to move

them “down” or “up-market” – according to data from local research and marketing

hubs. Sales of Maggi noodles, a brand sold for 20 US cents per packet in rural India

and Pakistan, increased five-fold in France when Nestlé introduced a Halal-branded

variety during Ramadan. In an instance of reverse innovation from low-income Asian

markets to more affluent segments, Maggi noodles in Australia and New Zealand

contain less salt, no oil and no monosodium glutamate.5

Global brands are the work of global companies – and of course the most visible

aspect of globalisation. Yet the rules of engagement vary between markets. “At the

bottom of the pyramid” – in the phrase popularised by Prahalad – different market

segments are “like a kaleidoscope. No single view illuminates the total opportunity”

(2005, page 6). Neither geography nor demographic criteria adequately describe

them; hence, Nestlé distinguishes “emerging markets” from “emerging consumers”, a

group defined as the next one billion prospective first-time buyers of branded food.6

The question of how, and if possible then for how long, western multinationals can

capture the new mass markets is fiercely contested.

In his book, The Fortune at the Bottom of the Pyramid, Prahalad described a

“fortune” in profits awaiting multinational companies in poor countries. His argument

is polemical, and written from a conviction that MNEs can and should focus their

commercial acumen on poor countries. Yet Prahalad‟s most prescient contribution

may be to alert foreigners to the liabilities of established multinationals in new

markets. A consistent message of his book is that MNEs need to understand the

“ecosystems” of local economies. Schumacher articulated a similar conviction when

he coined the term “appropriate technologies”.

Innovation for the second bottom billion

My motivation for this paper was prompted by a chance coincidence. In 2007, I

attended a public lecture by Paul Collier, a former World Bank economist, to mark the

publication of his book, The Bottom Billion. Not long after, I participated in a seminar 5 Cudahy, G., Ellis, J. & Nunes, P. (2010, February).Ibid. Page 7.

6 Don Sull‟s blog (2010, July 19). Reverse Innovation from Emerging Markets. Financial Times.

Retrieved from http://blogs.ft. com/donsullblog/2010/07/19/reverse-innovation-from-emerging-markets/ #axzz1Sn8Mg8RR


at which Kaplinsky discussed the legacy of Schumacher. On reflection, it occurred to

me that Schumacher‟s ideas would be little help to people in chronic poverty, but they

were an illuminating perspective on the role of companies, both local and MNEs, in

societies where living standards are improving.

The following sections assess the factors which enable, or obstruct, innovation in the

fastest-growing consumer markets of the developing world. Section One reviews the

economic and demographic traits of the “second bottom billion” of the world‟s

population. By charting the global distribution of manufacturing value-added, I will

demonstrate how the diffusion of new technological and manufacturing capacity is

occurring in the same areas.

Section Two compares patent activity in China and India, as a measure of innovation.

In spite of different legal and institutional frameworks, the patenting systems in each

country are shown to be consistent with their industrial characteristics. These

differences explain, in part, the varieties of innovation that each country has

sustained.

Section Three explores innovation in an historical and theoretical context. The

potential for innovation in the lives of the “second bottom billion” is assessed with

reference to the Global Innovation Index published by INSEAD and the Innovation

Top 1000 compiled by Booz & Company, a consultancy. These findings inform a

personal critique of Schumacher and Prahalad.

Section Four surveys the solar power industry, and manufacturers of photovoltaic

(PV) cells in particular. The participation of western companies in China‟s global

dominance in PV manufacturing has enabled a process of reverse innovation to

Europe and the United States.Brief case studies of Evergreen Solar and Selco India

contrast the impact of low cost PV manufacturing in China with the provision of

affordable off-grid electricity in India – and beyond.

In conclusion, I assess different varieties of innovation in China and India in the

context of Schumacher‟s ideas. The role of MNCs as a conduit for the technological

change is weighed against the significance of local factors such as market size and

intensity of competition in the creation of innovative capacity in developing countries.


1. THE BOTTOM OF THE PYRAMID

The global middle

No generally accepted definition exists of a global middle class. A recurring difficulty

is the variance in incomes and cost of living between regions – a calculation which

demographers have yet to agree. But the fact of a broad cohort of people, neither

rich nor very poor, distributed across the globe – is self-evident. Their ranks are

growing faster than at any point in history. Muhtar Kent, chairman and chief executive

of Coca-Cola, estimates that “Between 800 million and a billion people will enter the

middle class between 2010 and 2020 – the greatest economic shift in history”.7

This paper concerns the impact of innovation on people at the bottom of the global

middle. They are a large subset of a far larger group: the “global middle”. Kharas

suggests a “rough definition” for the global middle adopting the OECD countries‟

criteria of households which spend between $10-$100 per person per day, adjusted

for purchasing power parity. The ceiling of $100 is high, given that the average global

daily income per person is certainly less than $10 and probably substantially below

that figure. Kharas defines the upper limit as “very rich…that group of households

that does not worry about how much they spend or the price of goods and services”

(2011, page 1).

Within this broad middle, the livelihoods of different groups in different regions are

changing rapidly. The World Bank forecasts that by 2030 about 1.2 billion people will

earn between $10-$20 per day, up from about 430 million in 2010. One effect of the

upward economic trajectory of these billion-plus populations is that the lower ranks of

the global middle are becoming more geographically concentrated. About two-thirds

of those 570 million new entrants to this group will be Chinese or Indian. 8

The balance of new purchasing power is shifting. From 2000 – 2010, for example, the

fastest growth in households with annual income of $5,000-$15,000 was in

Kazakhstan, Romania and Russia. These can be termed the “middle” ranks of the

7 Kent, M. (2011, May 25). Interview with Marketing Week. Retrieved from:

http://www.marketingweek.co. uk/sectors/food-and-drink/online-exclusive-the-global-trends-that-changed-coca-cola/3026713article 8 World Bank, Policy Research Working Paper 4816. Page 1. Retrieved from http://www-

wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2009/01/12/000158349_20090112143046/Rendered/PDF/WPS4816.pdf

http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2009/01/12/000158349_20090112143046/Rendered/PDF/WPS4816.pdf




global middle. By 2010, this group spanned more than half of households in these

countries. According to the International Monetary Fund, the purchasing power of

developing economies will overtake that of advanced economies by 2014 – as the

distribution of new wealth shifts further to the East and the South. About 306 million

new households entering the “middle” of the global middle class will be Chinese or

Indian.

The rising prosperity of emerging Asia follows a half-century of rising incomes in the

advanced industrial regions. In OECD countries, the number of people with middle

class living standards and higher more than doubled from 1960-2010: from about 400

million to more than 900 million (Sumner, 2010a). Like their counterparts in OECD

countries, new entrants to the global middle are eager consumers, increasing

demand for global resources and skills. Their rising consumption is an opportunity to

build strong domestic markets for goods and services.

Among new households with annual income of $5,000 - $15,000, 79.6% or 488

million are forecast to be in “emerging” Asia.9 China, forecast to overtake the United

States as the world‟s largest economy with 18.4% of world GDP by 2017, will be the

leading contributor to this segment – the lower middle part of the new global middle.

India, forecast to become the world‟s third largest economy with 6.2% of world GDP

by 2017, will be home to the next largest component. How – and for how long – the

impressive economic growth rates in China and India are sustained will depend

largely on their ability to produce the goods and services necessary to expand those

domestic markets.

Innovation plays a central part in the modernisation of any economy. Without the

technical change required to improve productivity, recent economic gains from

manufacturing growth (China) and information technology services (India) will be

vulnerable to slowing consumption in advanced industrial countries. For many global

companies, meanwhile, the markets at the bottom of the pyramid are assuming

priority. Coca-Cola, for example, expects to double its revenue within 20 years by

focusing on new urban consumers: “People are moving off the farms and into the

cities. Think of it this way – for the next several years, an urban population the size of

New York will be created every 90 to 100 days,” said Mr Kent.

9 Emerging Asia is a category excluding the industrialised nations of Australia, Japan, Korea and New Zealand.


The second bottom billion

The second bottom billion are the poorest subset of approximately 80% of the world‟s

population who have participated in the uneven prosperity of the past half-century.

The term exists – in so far as it can be said to exist at all, among demographers –

only because of the much better known ““bottom billion”, a phrase coined by Paul

Collier in his book of the same name. My own interest in this second billion was

prompted by the chance coincidence of a lecture by Collier with a seminar on the

legacy of Schumacher by Kaplinsky. It occurred to me that innovation was likely to

have a greater impact on the prospects of the second poorest billion people in the

world than the bottom billion.

As a demographic and consumer group, it is helpful to define the second bottom

billion by what they are not. Their economic trajectory diverges from the bottom

billion, the 20% of the world‟s population who survive on less than $1.25 per day.

After two decades of unprecedented economic expansion, the standard of living of

the bottom billion remains mired in poverty, while the livelihoods of the other 80% of

the global population have become steadily – albeit unevenly – more prosperous.

(Collier, 2007)

The second bottom billion live on substantially less than $5,000. They are better off

than the very poor, but still at the outer margin of most assessments of the global

middle. The Brookings Institute, a US think tank, estimated that more than 2.6 billion

people lived on $2 - $13 per day in 2010, of whom 60% were in Asia. At the bottom

of this cohort are the second bottom billion. Most are in China and India. Probably, to

synthesise other definitions of the global middle, at least two-thirds will come from

these countries. A small minority outside Asia are mostly in Latin America.10

The relatively concentrated distribution of the second bottom billion contrasts with a

more fragmented picture for the bottom billion. Misleadingly, the title of Collier‟s book

refers not to the poorest billion people on the planet but to the entire population of 58

countries trapped in a cycle of poverty. Most of these countries are African. Many are

failed or post-conflict states. But only a minority of their citizens are among the

10

Kharas, H. & Gertz, G. (2010). The New Global Middle Class: A Cross-Over from West to East. Retrieved from http://www.brookings.edu/papers/2010/03_china_middle_class_kharas.aspx

http://www.brookings.edu/papers/2010/03_china_middle_class_kharas.aspx


poorest billion people on the planet.11 Subsequent research by the Institute for

Development Studies, a department of Sussex University in the UK, found that only

23 per cent of the poorest billion people live in fragile low income or post-conflict

states.

The global poverty problem has changed. In the past, poor people lived in

poor countries but now there are around 960 million poor people, or a „new bottom billion‟, living on under $1.25/day in middle-income countries, and most

of these are in stable, non-fragile, middle-income countries. This new bottom

billion accounts for 72 per cent - almost three-quarters - of the world‟s poor. Only about a quarter of the world‟s poor – 370 million people or so − live in the remaining 39 low-income countries, which are largely in sub-Saharan Africa.

In the 21st century, most of the world‟s poorest people live in countries on an upward economic trajectory. They are the people left behind. This has important implications

for the second bottom billion. In one sense, it is a measure of rapid economic

transformation: The Economist noted that “the change reflects the success of developing countries in hauling themselves out of misery”.12 In another sense, the

incidence of chronic poverty is a constant reminder of the hardships to which they

could yet return. This insecurity is a defining characteristic of life for those emerging

from the bottom of the pyramid in upwardly mobile economies such as China, India,

Pakistan, Indonesia and Nigeria – all rated middle-income by the World Bank.

The distribution of Manufacturing Value Added

Industrialised countries remain the world‟s largest manufacturing economies, but new

growth in manufacturing is heavily weighted towards developing countries. The

United Nations Industrial Development Organisation reports that developing

countries„ share of manufacturing value added – a measure of wealth created by

industry – almost trebled between 2000-2010, from 10% to 32% (UNIDO, 2011). The

upward trend continued throughout the global financial crisis of 2008 and survived

the slowdown in world trade in 2009 – a period when the economies of both China

and India continued to grow strongly. Manufacturing growth in developing countries

11

Sumner, A. The new bottom billion. Retrieved from http://www.bond.org.uk/pages/the-new-bottom-billion.html 12

The Economist (2010, September 30), Measuring Global Poverty: Whose problem now?

http://www.bond.org.uk/pages/the-new-bottom-billion.html

http://www.bond.org.uk/pages/the-new-bottom-billion.html


has been the main driver of global prosperity – and a petri dish for new forms of

innovation.

The relationship between MVA and innovation is largely tangential. Most analysts cite

technological clusters, such as China‟s Special Export Zones, as a locus for

cooperation between companies which produce different components in a single

supply chain. Among MNEs, a discernible trend of devolving R&D functions closer to

manufacturing hubs is evident from annual surveys compiled by Booz & Company for

the Global Innovation Index (Jaruzelski and Dehoff, 2010a). Among developing

countries, this concentration is most noticeable in China and India. Bruche suggests

that “taken together, Beijing and Shanghai and Bangalore/Pune/National Capital

Region represent 60-80% of all MNE R&D work“ (2009, p3).

Clusters support the cross-fertilisation of ideas, and may in certain instances evolve

into a platform for “open innovation“. For example, the codification of knowledge in

high technology sectors such as telecommunications or information technology

enabled Chinese manufacturers of mobile phones to develop handsets tailored to

China‟s huge domestic market. Zeng and Williamson report that in 1998, sales of

handsets in China were dominated by three MNEs – Motorola, Nokia and Ericsson –

with a combined market share of 80%. In 2000, Chinese companies led by Ningbo

Bird, Amoi, TCL and Konka had secured a market share of just 8%. In subsequent

years, local brands domninated the Chinese market, with a 55% share in 2003, and

soon became suppliers of customised handsets to the leading global networks.

(2007. Page 47).

In a notably bold forecast, Knowledge@Wharton, a global business briefing, expect

more than nine out of every ten people in the global middle (OECD criteria) will be in

Asia.13

In 2000, developing countries were home to 56% of the global middle class,

but by 2030 that figure is expected to reach 93%. China and India alone will

13

Knowledge@Wharton. The New Global Middle Class: Potentially Profitable -- but Also Unpredictable, published July 9, 2008. Retrieved from http://www. knowledge.wharton.upenn.edu/article. cfm?articleid =2011


account for two-thirds of the expansion, with China contributing 52% of the

increase and India 12%.

In numerical terms, some 2.5 billion Asians will become middle class within the next

20 years. That prediction is contingent on sustained economic growth, especially in

manufacturing – with all its attendant risks. Competition for resources, especially

food, will intensify. Dependence on fossil fuels places industry at risk from volatile

commodity prices: a significant motivation in China‟s new scramble for resources

around the globe, most visibly in Africa. Slowing economic growth in industrialised

countries poses a threat to Asia‟s global exports, emphasising the importance of

strong domestic markets. Yet the early indicators are encouraging.

Table 1 shows the comparative importance of MVA in both countries, relative to

regional and global averages.

Table 1. Comparative MVA growth Average Annual Real Growth Rates in Manufacturing Value Added (%), 1995-2009

Annual MVA per Capita (US$), 1990, 2000,2009

Average Annual Gross Domestic Product Growth (%), 1995-2009

Source: Adapted from UNIDO 14

14

Retrieved from datastream at: http://www.unido.org/statistics

MVA

95-00

00-05

05-09

Per cap

1990

2000

2009

GDP

95-00

00-05

05-09

China 9.5 11.1 12.2 $100 $303 $754 8.5 9.6 10.7

India n/a 6.9 6.6 n/a $63 $99

Developing

Countries

5.2 6.7 7.4 $170 $252 $399 4.3 5.3 6.3

Developed

Countries

3.4 1.8 -0.1 $3483 $4234 $4271 3.0 2.1 0.8

World (All) 3.7 3.9 2.0 $809 $943 $1029 3.2 2.8 2.1


Developing countries„ MVA growth has consistently outpaced GDP growth, at least

1995, even while the contribution of MVA to the larger economy in industrial countries

has contracted. It is in this context coincidence of rapid industrial expansion with

rising incomes and a burgeoning consumer market are often described as an

unprecedented opportunity.


II. INNOVATION AND INTELLECTUAL PROPERTY

Patent applications are an indirect measure of innovation. At best, they are a globally

comparable measure of inventive activity. Intellectual property (IP) is aN unreliable

predictor of commercial success, and no guarantee of consumer demand. In the fast-

growing consumer markets of China and India, national statistics reveal a gulf

between both the total numbers and the rates of growth of patent applications. In

broad terms, India is ten years behind China. The total number of patent applications

to the Indian Patent Office in 2007 was on par with the comparable figure for China in

1997.15

A tale of two patent systems

Patent activity reflects both institutional factors and the nature of a country‟s

dominant industries. Systems for IP protection and enforcement vary substantially

between states. High levels of patent awareness among Chinese companies are

consistent with their dominant position in manufacturing. China, the saying goes, is

the world‟s factory. A Chinese patent for a product which can be manufactured

profitably only in China can secure an effective global monopoly. The Chinese Patent

Law adopted in 1992 was motivated by the growing strategic importance of IP to the

country‟s economic growth.

On recent trends, China will surpass the US by 2012 to become the world‟s busiest

territory for patent activity, measured by patent applications filed.16 The boom in

manufacturing and high technology has generated an exponential increase in

patenting activity. Domestic companies, Huawei Technologies and ZTE Corporation,

lead the trend. Among foreign applicants, most are Japanese and South Korean

companies. In 2006, Samsung Electronics was the highest-filing foreign applicant,

followed by Matsushita. Among European companies, only Philips and Siemens

ranked among the top 10 applicants.

15

Sawyer, G. (2009, January). Patenting Landscape in China and India. Evalueserve Reports. Retrieved from http://www.bpcouncil.com/uploads/ Evalueserve-Patenting-Landscape-in-China-and-India-Jan%2020%2009.pdf 16

Ibid. Evalueserve (2009, page 4)

http://www.bpcouncil.com/uploads/%20Evalueserve-Patenting-Landscape-in-China-and-India-Jan%2020%2009.pdf

http://www.bpcouncil.com/uploads/%20Evalueserve-Patenting-Landscape-in-China-and-India-Jan%2020%2009.pdf


Chinese Patent Law (PCT) regulates three categories of IP protection: Invention,

Utility Model and Design. The shorter 10-year protection for Utility Models in China is

not subjected to substantive examination, and consequently is granted more quickly

than other patents. A 2008 survey by Evalueserve, a global research company,

reported the average time for a patent pending in China varied from 5.8 months for

Design patents to 22.8 months (Invention). The average waiting time for Utility Model

applications, the largest class, was 8.5 months. 17

India‟s patenting regime has evolved at a slower pace, largely in response to

successive international treaties. Indian courts play an insignificant role in patent

regulation and enforcement. No system of Utility Model patents yet exists, while a

different legislative history protects designs under a separate Industrial Designs Act.

Evalueserve reported the ratio of pending applications per examiner at the Indian

Patent Office (IPO) was marginally lower than in the Chinese bureaucracy, although

processing of patent applications remained comparatively slower. In 2008, the

average waiting time for all classes of Indian patents was three to five years. 18

Table 2 compares the IP landscape in China and India, on both an absolute scale

and by global ranking.

17

Figures for 2008, cited by Evalueserve Research.

18 Evalueserve reports 284 patents per examiner at SIPO, compared with 206 at the IPO.


Table 2. Patenting and Intellectual Property Systems in China and India, 2010 Figures show the country score on a scale of 1-100, from national statistical data.

Rank shows the country position relative to all countries.

Source: Adapted from Global Innovation Index (Jaruzelski & Dehoff, 2010)

A safe haven?

The scramble for patents in China has widened the scope for dispute, error and

“junk” applications – in particular for Utility Model protection. Because the protection

afforded by Utility Models is restricted to 10 years, applicants‟ claims are exempted

from substantive examination. Among foreign critics anxious to defend their

proprietary technology and systems, China is routinely criticised as “a safe haven” for

counterfeiters and IP thieves.

The rate of NEW applications has outpaced official efforts to expand the institutional

capacity of SIPO, China‟s national patent office. The combined headcount of SIPO‟s

national and provincial offices spans about 2,000 patent examiners. Despite plans to

double the number of patent examiners, recruitment and training of new officers will

lag the rapid growth in applications. While local and national branches of SIPO

manage the early stages of patent disputes, courts are becoming more involved in

settlements. Philip Brooks, a litigation strategy consultant, notes that he trend of

China Score 1-100 (Rank)

India Score 1-100 (Rank)

Legal & Investment Environment

Regulatory Quality 46.2 (83) 44.3 (86)

Rule of Law 45.3 (72) 55.7 (57)

Gross R&D Spending, % GDP 29.3 (24) 16.0 (38)

Strength of Investor Protection 50.0 (70) 60.0 (34)

Patent & Trademark Applications

PCT Patent filings with foreign investor,

%

8.0 (68) 13.3 (56)

Domestic resident patent app./bn GDP 100.0 (3) 10.7 (54)

PCT resident patent app./bn GDP 17.5 (28) 4.4 (44)

Domestic resident utility model app./bn

GDP

100.0 (1) - China only -

Domestic resident patent app./bn GDP 54.7 (9) 22.9 (44)


increased litigation contrasts with a gradual but sustained fall in patent litigation in the

United States.19

Further reforms in patent law, and the need for more effective administration, are

emphasised in China‟s “Tenth Five Year Plan”. SIPO‟s English language website

states the importance of patent protection “adapted to the development of

international economy and socialist market economy”. In Beijing “government speak”,

the website signals official recognition of the case for further liberalisation and reform.

With economy development as the core work, develop the work closely with

structure adjustment and industry technology updating, make patent work an

important component of national innovation system. Greatly promote the

utilization of patent information resource, create and procure more patent

rights legally, form products and business with self-dependent intellectual

property; while maintain the good work of SMEs' patent work, create a batch

of big enterprises and business groups owning self-dependent intellectual

property, prominent key products and strong core ability. Take measures to

accelerate the industrialization of patent technology. 20

The relative availability of Utility Modelswithout substantive examination of an

applicant‟s claims has created a quandary for Chinese policy makers. Utility Models

are the most sought-after form of IP in China – and attractive to administrators

because of the shorter processing period. For unscrupulous companies, they may

also constitute an open invitation to flout the law. IP thieves who discover a valuable

foreign technology can apply simultaneously for utility model and Invention patent

protection in China. If the patent is rejected on examination, the utility model is

sufficient for a thief to steal or mimic a known proprietary technology for up to ten

years – long enough, perhaps, to discover another and repeat the process.

The vulnerability of foreign companies can also be seen as a test of their integration

into Chinese society. In 2011, Peter Williamson – co-author of Dragons at Your Door

(2007) – was commissioned to survey China‟s IP regime by the UK patent office. In

an interview, he suggested that MNEs such as IBM and Siemens, which have

19

Retrieved from http://www.brooks-consulting.com

20 Cited in “Main Targets and Tasks of the „Tenth Five-year Plan‟ for National Patent Work (abstract)”. Retrieved from http://www.sipo.gov.cn/sipo_English/laws/developing/200904/t20090414_ 450778.html

http://www.brooks-consulting.com/

http://www.sipo.gov.cn/sipo_English/laws/developing/200904/t20090414_


operated in China for 20-30 years, benefit from “a long history and big, deep

organisation. That makes staff more loyal and reduces IP leakage”. He described

China‟s IP legislation as technically robust, but lacking adequate enforcement: “All

the legislation is there, but the courts don‟t have enough people that know the law.

There aren‟t enough lawyers to help you –and in some (lower) courts, IP is not a

priority.” 21

IP and the Indian Services Boom

Judicial intervention in India‟s patenting system is a rarity. While the rate of growth in

applications to Indian Patent Office has increased, overall patenting activity is

substantially less than in China. Indian nationals are much less likely than foreigners

to apply for patents. About 80 percent of Indian patent applications are filed by

foreign residents. Ananth Narayan, technology officer at Selco Solar, a renewable

energy company in Bangalore, attributed the relative absence of patenting to the

boom in outsourcing and contract work:

It is in the nature of outsourcing that you work for other people Patents will

come at the next level, when you are working for yourself. It is a reflection of

the level of the maturity of technology.22

Several of the largest Indian companies are conspicuous by their greater patenting

activity outside India – a possible symptom of the lack of innovative activity targeted

at the domestic market. 23 India produces 22% of the world‟s generic drugs, yet the

country suffers from a scarcity of generic medicines to treat common local illnesses.

(See Section 3 for a more detailed discussion of this issue).

Analysis of 87,245 patent applications published by the Indian Patent Office from

2005-2007 found most applications were from pharmaceutical and business services

companies. Foreign companies with expanding IP portfolios in India included

Qualcomm (2nd), Bayer (3rd) and Philips Electronics. Among Indian multinationals,

Hindustan Lever, an Indian subsidiary of Unilever, was ranked fifth, narrowly ahead

21

Interview by Mark Ashurst, with Professor Peter Williamson. July 19, 2011. 22

Interview by Mark Ashurst, with Ananth Narayan. July 20, 2011 23

Fenwick & West LLP. (2004, October). Intellectual Property Strategy and Best Practices in China and India Life Sciences Business Transactions. Retrieved from http://www.fenwick.com/docstore /publications/corporate/ip_strategy_&_practices.pdf

http://www.fenwick.com/docstore


of Honda, Microsoft, Samsung, Pfizer and BASF. Only 22 of the top 200 filers were

“pure-bred Indian entities” – including nine pharmaceutical companies and six

research institutes.24

Information Technology is widely credited as a key driver of India‟s sustained

economic growth over at least the past decade. Yet its record of patent applications

reveals “115 times less” patenting activity by Indian IT companies than by their peers

in the pharmaceutical sector. Table 3 shows the comparative ratio of IPO patent

applications for selected Indian technology companies between 2005-2007.

Table 3 Patent Applications by Indian Information Technology Companies By Revenue 2005-2007

Company

Revenues 2005-07 (US$ million)

Patent App╆s Published by IPO, India

United States, Published Patents App╆s

Revenue per IPO Patent Application

Tata Consultancy 9647 35 8 276

Wipro

Technologies

7975 0 0 n/a

Infosys

Technologies

7664 29 22 264

Satyam Computer

Services

3836 2 10 320

HCL Technologies 2814 1 0 2814

Source: Adapted from Evalueserve Research

The lack of patent activity implies, but does not reflect a lack of innovation in the most

globalized sector of Indian industry. “Most of the innovations at these firms not being

patentable subject matter according to the Indian Patent Law,” suggested George

Sawyer, analyst at Evalueserve.25 If proof were needed that patenting activity is an

imperfect measure of innovation, India‟s booming services industry provides a

graphic illustration.

24

Evalueserve Research, cited by Sawyer, G., page 8. 25

Sawyer, G. XXXX


Outsourcing of business processes and ICT to India by global companies is possible

only as a result of significant process innovation in India. Yet the country‟s IP system

– inherited during the colonial era, with legislation based on British precedents under

the Common Law system. Indian patent law was drafted primarily to protect products

and design. Moreover, the information technology sector is heavily dependent on

English-speaking human capital, a competitive advantage derived from history and

the education system. Among dominant IP companies only Tata Consultancy

Services, with links to the Tata engineering dynasty, and Infosys Technologies

operate an active patent portfolio.

In summary, the differences between patent regimes in China and India are

consistent with the general features of each economy. Competitve advantage in

Chinese manufacturing is increasingly vulnerable to weaknesses in the IP regime,

hence the growing role of the judiciary. In contrast, innovation in India‟s services

sector is so far largely unrelated to IP claims, with the emerging exception of ICT

technologies.

Chint vs. Schneider

In the growing archive of patent litigation in China, one case warrants mention here a

cautionary example of the use and abuse of IP claims as proxies in a larger battle for

corporate control.

Chint vs. Schneider involved almost 20 legal actions throughout the 1990s brought in

Europe by Schneider, a French MNE. The European litigation was followed by

retaliatory action in China by Chint, a leading Chinese manufacturer and distributor of

electrical components for industry and residential use. The case highlights

circumstances in which a lack of capacity in patent administration can be abused,

and raises questions of the competence of lower courts in particular to evaluate

complex technical claims. These are likely causes for the rise in patent litigation in

China.

Both companies were involved in production of mass market, low cost electrical

components. Their patent rights were deployed as ammunition both for and against

the expansion plans of French multinational Schneider in China. Schneider brought


cases against Chint in Germany, Italy, France and other European states to allege

infringement of its patented switch technology. At the same time, following several

attempts by Schneider to acquire control of Chint, the Chinese company alleged

patent infringement by Delixi Electric, a joint venture between Schneider and China‟s

Delixi group in November 2007.

The details of the Chint‟s claims involve alleged infringement of its Chinese utility

model for a “fast-closing contact mechanism” (FCCM) used in miniature low voltage

circuit breaker units – essentially, an alternative to the traditional fuse. Xu Zhiwu,

legal counsel for CHINT, acknowledged the case followed successive proposals from

Schneider "to acquire 80%, 51% and 50% of the CHINT equities in 1994, 1998 and

2004, which were all rejected by CHINT".26

In defence, Schneider counter-sued for patent infringement of its own patented

technology, a similar circuit breaker – the “C60” – registered for protection in France

in 1991. The device had been widely manufactured in China since the mid-1990s. An

improvement patent including the FCCM mechanism – the “C65” – was obtained by

Schneider in France in 1996. The following year, in late 1997, Schneider‟s joint

venture business in China filed for Chinese patent protection for the improved device,

claiming a priority date for the invention of December 23, 1996. Chint counter-sued,

alleging that the FCCM mechanism encroached on the utility patent for its own FCCM

product. The plaintiff (Chint) described its action as the “number one case of patent

infringement in China”.

A first judgement by the Intermediate Court of Wenzhou found in favour of Chint,

awarding damages far above the authority of a regional court. The case was

remanded on appeal to a higher court, but remains unresolved amid doubts

concerning both the corporate objectives of the litigants and the integrity of the

judicial process. In 2007, then EU trade commissioner, Peter Mandelson, sided with

Schneider when he raised the issue at a high-level EU-China summit: "I regard the

Schneider case as a test case of the level playing field in China on intellectual

property protection that we want to see," said Mr Mandelson.27

26

Xu Zhiwu, quoted in China IP magazine, January 2008. Retrieved from http://www.chinaipmagazine.com/en/

journal-show.asp?id=258 27

China IP magazine, January 2008. Retrieved from http://www.chinaipmagazine.com/en/journal-

show.asp?id=258

http://www.chinaipmagazine.com/en/%20journal-show

http://www.chinaipmagazine.com/en/%20journal-show


III. OUTSIDE THE TRIAD

The global distribution of innovation is following, with some time lag, the

decomposition of supply chains in previous decades. Most R&D activity remains

concentrated in a “triad” of industrialised regions in North America, Europe and

Japan. Outside this “triad”, R&D activity by MNEs was previously confined to highly

specialised technological sectors such as microchips in Taiwan or computer

hardware in Israel.28 The migration of skilled technicians from developing countries

tended to deplete their intellectual capital, while enhancing that of industrialised

regions – the so-called “brain drain”. Yet since about 2000, China and India have

emerged as leading destinations for R&D outside the triad.

This trend is the outcome of two, parallel processes which can be defined,

respectively, as innovation which is either internal to firms, or external. Offshoring by

companies which invest abroad in proprietary R&D facilities is internal. Outsourcing

of R&D to specialist suppliers is external. However, both contribute to the innovative

capacity of developing regions, in particular through the formation of high technology

clusters and other sectoral specialisation. In a survey of 50 companies in 2007 by

Booz & Company, the industry with the highest level of R&D investment outside the

triad was computing and electronics. Although 70% of R&D spending in the sector

originated in the US or Japan, only 40% of spending took place in those countries.29

While the diffusion of R&D across the global networks of MNEs gained significant

momentum only since about 2000, two “pioneering” investments by technology

companies can be seen as notable exceptions which pre-empt the subsequent trend.

In the mid-1980s, Texas Instruments, the electronics manufacturer, established a

research facility in India. Soon after, Motorola engaged Chinese R&D in the early

1990s, ahead of rivals (Bruche, 2009).

Table 4 shows the regional distribution of R&D spending, by Compound Annual

Growth Rate (CAGR).

28

NB: With the exception of Israel, a rival technology hub but characterised by greater specialization and a much smaller market than China or India. 29

Jaruzelski, B., Dehoff, K. (2011) “Global footprint challenges of the top innovative industries”. Global

Innovation Index 2011, p100


Table 4. R&D Spending Growth Rates by Region, 2009

“R&D decreased in North America and Japan and flatlined in Europe; the rate of

spending growth decelerated in the rest of the world. China and India were the

outliers where spending growth accelerated.” (Jaruzelski & Dehoff, 2010)

Source: The Global Innovation 1000; Bloomberg data, Booz & Company analysis.30

30

From Jaruzelski & Dehoff (2010). How the Top Innovators Keep Winning. strategy=business, 61. Page 9, Exhibit 7. Retrieved from http://www.booz.com/media/file/sb61_10408-R.pdf

http://www.booz.com/media/file/sb61_10408-R.pdf


Enabling Innovation

The degree of innovative activity in a country can be an indirect measure of

comparative advantage. Jaruzelski and Dehoff (2010) monitor seven broad

categories for the Global Innovation Index compiled by Booz & Company.

Table 4 shows factors which enable or deter innovation. The right-hand column

highlights my selection of component criteria most relevant which differentiate the

innovative capacity of emerging markets.

Table 5. Enabling Factors for Innovation

Key Indicators (Jaruselski & Dehoff) Relevant Criteria (my emphasis)

1. Institutions Political stability, Regulatory environment, Rule of Law, Business environment, Tax.

2. Human capital and research Education, Science and Engineering graduates, Research spending, Research institutions, Migration inbound/outbound.

3. Infrastructure ICT use, E-participation, Energy output, Trade and Transport, Capital formation.

4. Market sophistication Access to credit, Legal Rights, Market Capitalisation, Value of stocks traded, Venture capital, Intensity of competition.

5. Business Sophistication Knowledge intensity, Cluster development, R&D financed abroad, PCT patent filings.

6. Scientific Outputs Knowledge creation, Domestic patent applications, New business creation, Royalty and Licence Fee receipts.

7. Creative Outputs Domestic resident trademark applications, Business models, Culture consumption, Exports of creative goods and services.

Source: Adapted from Jaruzelski and Dehoff, Global Innovation Index 2011 31

The number of research centres created by MNEs in India and China increased by

more than ten-fold from 2001-2008 (Zinnov, 2009). From fewer than 100 in each

country, China was home to about 1,100 R&D centres for MNEs by 2008, compared

with 780 in India.32 The type of facility has tended to be consistent with the different

31

Retrieved from: http://www.globalizationindex.com 32

Zinnov (2009). R&D Globalization: The China Chapter. Bangalore: Zinnov, cited in Bruche, G.

http://www.globalizationindex.com/


comparative advantages in each country, namely manufacturing in China and

services, ICT and pharmaceuticals in India.

In the following sub-sections, I will locate these recent trends in the context of some

key concepts in innovation theory over the last half-century.

Varieties of Innovation

The productivity effects of technology change over time. In a classic 1957 study,

Robert Solow showed that the growth effect of new capital is more valuable than

growth from old capital. His finding challenged a core assumption of neo-classical

economics: namely, that the productivity effects of all capital are equal. By

demonstrating that investment is subject to human and technical constraints, Solow‟s

work introduced the concept of “fixity” to the study of innovation. (Kaplinsky 2009,

page 7)

Fixity in products and processes limits the scope for entrepreneurship and

innovation.33 It is a consequence of structural restraints on the capacity of, whether

from the external environment or from factors within the firm. In the postwar decades

of European industrialisation, innovation was propelled largely by advances in

science and technology. This has been termed “Mode 1” innovation – so-called for

the “push” factor of advances in traditional scientific disciplines. Innovation by

incremental changes to undifferentiated products was also a consequence of relative

scarcity of resources in an emerging consumer society.

The consequences of rising prosperity and surplus became visible in the nature of

changing nature of innovation from the 1980s onwards. Companies began to

compete by offering more choice to consumers. More products were made available

in a variety of finishes and functions, with options for mass customization. More

interaction with users became routine. In high technology sectors, innovation

frequently involved collaboration between multi-disciplinary teams brought together in

response to particular problems. This kind of innovation, driven by the “pull” factor of

33

Kaplinsky, R. XXXX CK.


a specific market or consumer demand, would become known as “Mode 2”

innovation. 34

Entrepreneurs, not innovators

Mode 1 and Mode 2 are useful tools to describe the varieties of innovation outside

the triad of industrialised regions. For example, India‟s generic drugs industry is a

stark example of failure to evolve from Mode 1 innovation, rooted in scientific and

technological knowledge, to more experimental Mode 2 innovation premised on

inventions within the firm or intra-industry cooperation. Perhaps because generic

drugs are essentially copied – or depending on your perspective, “stolen” –

technology, the scientific knowledge required to produce them has not evolved by

experimentation. Indian generics companies are often entrepreneurial – and intra-

industry competition is often fierce, but they are not innovative.

By copying technical processes to produce generic copies of other companies‟

inventions, Kaplinsky argues that the generic drugs industry is incapable of

innovating “appropriate” low-priced medication for the Indian market (2009, page 11).

The development of a powerful pharmaceutical industry…has done much to

provide cheap generic drugs to the world, but historically embedded in a Mode

1 framework, it has done little to address the needs of the poor in India. Thus,

investment in R&D for new drug development in India is heavily oriented to the

needs of rich consumers in the West, much as it is in large Western based

MNCs. This bias extends to India‟s S&T-based innovation system as a whole,

which largely fails to invest in science in relation to needs of the poor.

Other sectors of Indian industry, notably in software and engineering, innovate by

virtue of very different business models. Prahalad cites the example of Godrej, a

company which developed a washing machine adapted for frequent power cuts: the

machine remembers the point in the wash cycle before the interruption, and resumes

the wash from that point when power is restored. Other Mode 2 innovations include

“unforeseen adaptations of technology”, such as the use of SMS messaging by 34

Gibbons, M; Camille Limoges, Helga Nowotny, Simon Schwartzman, Peter Scott, & Martin Trow (1994). The new production of knowledge: the dynamics of science and research in contemporary societies. London: Sage.


Indian farmers to monitor crop prices at the Chicago Board of Trade. (Prahalad 2005,

page 11)

However, a stark contrast between Chinese innovation and Indian innovation is

discernible. The rapid growth in R&D activity by MNEs in both countries follows from

quite distinct corporate strategies. In the view of Bruche, “the bulk of R&D offshoring

to India is so far mainly asset seeking, designed to take advantage of India‟s large

and growing low cost intellectual infrastructure”. In contrast, most activity by MNEs in

China is “primarily market and customer oriented” – a trend encouraged by the

Chinese government‟s offical policy of trading market access for technology (Bruche

2009, page 3).

Technical Change

Increasingly, technical change is emerging from a process Type 2 innovation,

prompted by the cross-fertilisation of knowledge and intense pricing pressure. The

main drivers of Type 2 innovation have in effect been transferred from advanced

industrial nations to industrializing mass markets. Pavitt‟s “Taxonomy of innovation”

(1984) identified four patterns of industrial innovation:

1) Supplier-dominated, driven by developments in the supply chain.

2) Scale-intensive, driven by increased production.

3) Specialized suppliers, sector-specific innovations.

4) Science-based, driven by high-technology advances in R&D.

The factors which make China a factory to the world span all four of Pavitt‟s

categories. Rather than concentrate on one type of innovation, competitive pressure

and cost reduction has induced technical change. MNEs such as Siemens or IBM

manage their innovation strategy to combine specialization and technological

knowledge with economies of scale at every point in the production cycle.

Process innovation has been an important dimension of India‟s leading position in the

global market for business services. Yet a far higher proportion of Chinese

companies are engaged in Mode 2 innovation than is common in India. Zeng and

Williamson report that 57% of high technology exports from the Special Economic


Zones around Shenzhen is based on intellectual property owned by Chinese firms.

Companies which prosper in the fiercely competitive Chinese market to become

TNCs have already come through “a baptism of fire” (2007, page 16).

In the space of ten years, efficiency gains propelled the value of Chinese exports of

high technology goods and services from $6bn in 1995 to $218 billion in 2005.35

Unlike earlier industrialization projects in Japan or Korea, China‟s economic

liberalisation policy from 1978 to the present did not provide special protection for

infant industry against outsiders. Chinese companies had to compete on cost.

Disruptive Cost Innovation

Large, low income markets are a particular stimulus to innovation. Where consumers

are highly price sensitive, the demand function in markets for consumer goods is

highly elastic. Manvinder Singh Banga, chairman of Unilever‟s Indian subsidiary

Hindustan Unilever, suggests that many routine assumptions about product

development in industrialised economies no longer apply:

Very often in business you find that people do cost-plus pricing. They figure

out what their cost is, and then they add a margin and figure that‟s their selling

price.What we have learned is that when you deal with mass markets, you

can‟t work like that… You have to work out what people are going to pay.

That‟s my price. Now what‟s my target margin? And that gives you your target

cost – or a challenge cost. Then you have to create a business model that

delivers that challenge cost.36

A notable consequence is that the influential Product Lifecycle Theory, devised by

Raymond Vernon in 1966, is far less able to explain the lifecycle of consumer goods

for the 21st century. Product Life Cycle theory explained the migration over time of

innovative high-priced products into low margin export markets. Disruptive cost

innovation has turned this model on its head, “disrupting the game whereby

established global competitors maximize their profits along the product life cycle by

35

Figures from http://www.uschina.org 36

Banga, S. Quoted in “Hindustan Unilever: Lifebuoy soap”. Case study by Murch M., Reeder K., pp253-4 CK XXXX STYLE in Prahalad, Ibid.

http://www.uschina.org/


only slowly migrating new technology from high-priced segments towards the mass

market” (Zeng & Williamson 2007, page 1)

In my own work as a journalist in Africa, I witnessed an equivalent process triggered

by the introduction of Global Standard for Mobile (GSM), a digital standard for mobile

telephony in the early 2000s. For the first time, consumers without bank accounts or

credit records were able to purchase pre-paid airtime. The mass market fuelled

demand for wider network coverage and affordable services, prompting

manufacturers to develop an array of low cost handsets. Prahalad (2005) cited the

example of Myriad Group, which produces basic software applications to support on-

screen data functions such as weather or market prices on mobile phones in regions

with limited internet access. By 2010, Myriad Group software was installed on two

billion mobile handsets worldwide.

Expanding network coverage in the largest territories was a catalyst for innovation in

the business model for new infrastructure. Instead of selling capital equipment to

network operators, hardware suppliers entered into licensing deals to install and

maintain telecommunications infrastructure in return for a share of prospective

revenues per user from the network operators. This model compels all industry

participants to share technical knowledge. As Zeng and Williamson observed, “slicing

and dicing of the global value chain” requires a system of codified standards “to

regulate interaction between components”. As more cost-effective local companies

find innovative ways to drive down costs, foreign suppliers can be “replaced step-by-

step, one module at a time” (2007, page 47).

Cost-cutting innovations in Asia are a variety of the disruptive innovation famously

described by Christensen (1997). In low income markets, where pricing is the first

condition for market entry, cost becomes the focus of innovation. From fashion to

shipping containers, the fastest-growing markets are characterised by more variety at

low prices. Simply stated,

Before: Price – Cost = Profit

After: Price – Profit = Cost

This simple shift has profound implications for the Experience Curve, a concept

developed by the Boston Consulting Group in the 1970s. The Experience Curve is an


expression of a product‟s potential earnings as a function of market growth rate and

relative market share, Traditionally, mature industries benefit from economies of

scale over time. In the 21st century, innovation from low-income markets has

reversed this pattern. Economies of scale are achieved much earlier in the lifecycle of

a product.

Outsourcing and joint ventures are the favoured strategies of western MNEs keen to

exploit the cost innovations in the markets at the bottom of the pyramid. Yet it

remains an open question whether foreign companies are sufficiently equipped to

accrue the “fortune” promised by Prahalad. Kaplinsky contends that “Prahalad‟s big

flaw is to see this as an opportunity for northern MNCs acting in their own interests”.

(2009, page 20). As Christensen found, the natural tendency of dominant companies

is to focus too much on core markets: “The logical, competent decisions of

management that are critical to the success of their companies are also why they

lose their positions of leadership.”

Spillover effects

The gradual evolution of modular supply chains, from the 1980s onwards, obliged

companies to focus on core competencies while outsourcing other components of

production. In a historical context, this may come to be seen as a short-term

phenomenon within larger cycles of corporate strategy: other approaches such as

vertical integration or portfolio selection may reverse the trend over time. Yet the

positive effects of outsourcing by MNEs has brought lasting benefits to host

countries. This diffusion of knowledge and technical capacity, beyond the borders of

a firm or even industry is sometimes known as “Spillover”.

Spillover effects from outsourcing share some of the characteristics of Mode 2

innovation. At best, they are a catalyst for cooperation and problem-solving – the

basis for collaborative processes and, ultimately, for “open innovation”. The global

diffusion of manufacturing value has the potential to create new entrepreneurs at the

fringes of Asia‟s manufacturing and technology clusters. In this scenario, spillover

may have the effect of compensating for deficits such as education or training. At

best, rising education budgets funded from higher tax revenues will expand the


knowledge base in science and technology, thus restoring the knowledge base for

Mode 1 innovation.

Schumacher in the 21st century

Almost 40 years after publication of Small is Beautiful, the legacy of Schumacher‟s

ideas on policy or industry is hard to discern. The diffusion of technological

knowledge from industrialised nations to poor countries has followed a very different

trajectory to Schumacher‟s prescriptions. His suspicion of the “almost universal

idolatry of gigantism” seems to have underestimated the importance of economies of

scale in manufacturing – although scale was an important theme for Schumacher.

His interest in technology transfer and adaptation was primarily concerned with

boosting domestic consumption. Exports were a low priority. The characteristics he

ascribed to “appropriate technology” in the 1970s – cheap (low capital), simple

(sustainable), suitable for rural communities and local materials – bear no relation to

the industrial processes of Chinese manufacturing, or the exponential capacity of the

information technology which underpins the services revolution in India (1973, p154).

In most low and middle-income countries have improved, economies have grown

without assistance from his prescriptions.

In other respects, however, Schumacher was well ahead of his time. He over-

estimated the entrepreneurial capacity of poor countries – a mistake which no visitor

to China or India would make in 2011. He wanted governments, development

agencies and big business to cooperate in technology transfer to emerging

economies – a call taken up, in the new century, by Prahalad and Gates. Most

important of all, Schumacher‟s work articulated an ethical critique of key strands of

neo-classical economics. His call for an alternative economics, “as if People

Mattered”, prefigured much subsequent critique of market failure in the years since

2008.


IV.THE SOLAR INDUSTRY

The solar power industry spans many of the new global linkages which are re-

shaping the world economy. It is an evolving high technology, with potential to

support countless low-end applications – from light bulbs for rural school children to

sewing machines for village entrepreneurs. Industrialised nations, already committed

to reducing carbon emissions, have created a wide, albeit limited, variety of subsidies

to encourage renewable fuels as green alternative to dependence on fossil fuels.

More affordable solar power is inevitable, given time. The “tantalising fact”, writes

Ardavan Oskooi, a scientist at Massachussetts Institute of Technology, is that

enough sunshine falls on the surface of the earth in a single hour to power the

energy needs of all humanity for one year.37

With some imagination, it is possible to conceive of solar power as a solution to the

practical, industrial and strategic needs of governments and industry around the

world. The sector‟s dominant technology is the photovoltaic (PV) cell, a thin film or

wafer of processed silicon which converts photons from sunlight into electricity. Mass

production of PV cells was pioneered in the 1960s by Sharp, the Japanese consumer

electronics manufacturer. Subsequent improvements in the efficiency of solar energy

conversion were achieved in the United States and Europe, where solar power

generation is found mainly in households and the construction sector. In 2000,

Germany passed a renewable energy law, Emeuerbare Energien Gesetz, to promote

new solar installations. The law‟s distinctive feature is subsidised feed-in tariffs for

solar power sold to electricity distributors.

By 2009, the comparative advantage of lower processing and material costs in China

had spawned more than 400 PV manufacturers - including Suntech, RTK and Yingli,

the world‟s biggest producers. The combination of falling prices with improving rates

of energy conversion might qualify as a textbook example of the benefits of Chinese

cost innovation. PV cells are the most expensive component in solar panels, and the

most significant obstacle to achieving cost parity between solar and other forms of

37 Oskooi, A. (2010, September 15). Entrepreneurship Trends in Solar Energy & the MIT Perspective. MIT Entrepreneurship Review. Retrieved from http://miter.mit.edu/article/ entrepreneurship-trends-solar-energy-mit-perspective

http://miter.mit.edu/article/%20entrepreneurship-trends-solar-energy-mit-perspective

http://miter.mit.edu/article/%20entrepreneurship-trends-solar-energy-mit-perspective


electricity. Although cost parity is not yet in prospect, the following case histories

examine the prospects for a virtuous circle of technical innovation, cost innovation

and – ultimately –grassroots innovation in solar technology.

China’s Golden Sun policy

In July 2009, the Chinese government announced its Golden Sun policy, a renewable

energy law to promote large-scale, state-funded solar power generation. China

accounts for between 50%-70% of global production of PV cells, yet the contribution

of solar power to China‟s national generating capacity has been negligible. Besides

PV manufacturing, China is also the world‟s largest investor in renewable energies

and clean technology – including turbines and wind power.38 None of these

technologies are urgently needed by consumers, of whom about 97% have access to

electricity via the grid.

The Golden Sun policy commits China to reduce fossil fuel emissions from coal-fired

power stations, in line with commitments under the Kyoto Protocol. In stark contrast

to these official targets, weak environmental controls have enabled unscrupulous

companies to derive unfair advantage by polluting their local environment. Many

Chinese PV companies also produce large volumes of polysilicon, a compound used

in earlier generations of solar cells. Competitors have alleged that Chinese firms

drive an illegal advantage from dumping silicon tetrachloride, a toxic by-product of

polysilicon, which is expensive to dispose of safely.

Pollution caused by silicon tetrachloride has blighted the lives of villagers in areas

where solar companies have dumped waste. In Gaolong, a densely populated region

of Hainan province, villagers accuse China‟s booming solar industry of contaminating

vast tracks of land. “No grass or trees will grow in the place…It is like dynamite. It is

poisonons, it is polluting. Human beings can never touch it,” Ren Bingyan, a

professor at the School of Material Sciences at Hebei Industrial Province, told the

38

Research and Markets (2010). Deep Research Report on China Solar Power System. Retrieved from

http://www.solar-pv-management.com/solar_news_full.php?id=72806


Washington Post. Although illegal, Chinese authorities proved unable or unwilling to

stop the dumping for more than nine months.39

Effective regulation is no less important to the prospects of a domestic renewable

energy industry. The first large-scale initiative to introduce subsidies for domestic

solar power generation – the “Golden Sun Demonstration Project and Solar

Photovoltaic Building Demonstration Project“, launched in 2010 by the National

Energy Board – became mired in controversy. Yuan Ying, an investigative journalist,

reported that state funds were fraudulently used to bail out 10,000 companies hit by

falling export prices in the wake of the financial crisis. Instead of subsidising power

production, Yuan accused building contractors of inflating the costs of materials and

components.

Investors are not much deterred. In 2010, annual investment in China‟s renewable

energy industry reached a new record $48.9bn, an increase of 28% on the previous

year.40 The scale of public and private funding follows a recognition that China is well

positioned to create a viable domestic solar generating industry. The decisive factor

will be the implementation of producer subsidies for large scale solar generating

plants – a phenomenon not yet seen in western countries.

Xue Liming, chairman of Zhong Hai Yang Energy Technology Company which has

invested in new solar generating capacity for Beijing, cautioned that solar power

production would become profitable only when a feed-in tariff was in place: “I do not

know who we should sell the electricity to. I do not know who will pay for it or what

the price of electricity will be.” 41 If successful, PV power plants in China will be an

important source of renewable energy - and a pioneering step towards scaling up

what has been a niche technology. Given the wide available of access to electricity

via the grid, this is one instance of emerging Chinese leadership which is unlikely to

create new opportunities for “off-grid” or other appropriate technology dependent on

solar power.

39

Cha, A. (2008, March 9) “Solar Energy Firms Leave Waste Behind in China”. Washington Post. 40

Nichols, W. (2011, July 7). Wind leads global green energy investments to record $211bn. Business Green. Retrieved from: http://www.businessgreen.com/bg/news/2084122/wind-leads-global-green-energy-investments-record-usd211bn 41

Ying, Y. (2011, April 14). Burned by the sun. China Dialogue. Retrieved from http://www.chinadialogue.net/article/show/single/en/4232

http://www.businessgreen.com/bg/news/2084122/wind-leads-global-green-energy-investments-record-usd211bn


http://www.chinadialogue.net/article/show/single/en/4232


Evergreen Solar

As recently as late 2008, Evergreen Solar, a PV manufacturer in Massachussets,

sold its American-built „String Ribbon solar cell“ panels for $3.39 per watt of

generating capacity. Two years later, aggressive cost-cutting had driven down

production costs to $2 per watt – a substantial achievement by the US company, but

not good enough to sell. Evergreen‟s panels sold at a loss, for $1.90 per watt. The

average retail price charged by Evergreen‟s Chinese competitors was $1.60, with

production costs estimated at $1.35 or less. 42 In March 2011, Evergreen closed its

US plant and shifted production to a new joint venture facility in Wuhan, central

China.

The steep drop in world prices for PV panels was not the only reason to move.

Besides the lower cost base, Evergreen‟s joint venture partner Jiawei Solar brought

access to concessionary financing from state banks. Its own partnership with the

Wuhan Donghu New Technology Development Zone Management Committee, an

agency of the provincial government, helped to secure a long lease on a purpose-

built industrial site. The region‟s respected university would supply the factor with

qualified technology graduates. The combined effect of these competitive

advantages is evident from the new plant‟s target manufacturing cost of $1 per watt

by the end of 2012.43

In an interview, Richard Chleboski, vice-president of strategy and business

development, said Evergreen had no choice but to transfer its core R&D function to

the Wuhan plant: “Lots of technology is accruing there, (on) to the existing

technology. With suppliers – the people that we do business with – it‟s very

competitive. They are requesting materials. We need to integrate, and to modify

processes“. He said that the spillover effects were evident throughout the industry:

“This knowledge is diffused beyond our plant – it‟s not intentional, it‟s what happens.“ 42

Bradsher, K. (2011, January 14). Solar Panel Maker Moves Work to China. New York Times

43 Osborne, M. (2009, May 1). Evergreen Solar shifts manufacturing future to China, targets US$1/W in 2012. Retrieved from: http://www.pv-tech.org/news/evergreen_solar_shifts_manufacturing_ future_to_china_targets_us1_w_in_2012

http://www.pv-tech.org/news/evergreen_solar_shifts_manufacturing_%20future_to_china_targets_us1_w_in_2012

http://www.pv-tech.org/news/evergreen_solar_shifts_manufacturing_%20future_to_china_targets_us1_w_in_2012


Evergreen had previously built factories in Germany where its management gained

prior experience of technology transfer, while Jiawei had worked with “a lot of

western equipment providers“.

The inherent risk to the companies„ intellectual property was “very difficult for a

western company of our scale,“ Chleboski explained. Evergreen had developed a

“multi-tuned protection strategy“ which followed from the nature of its technology. Its

manufacturing process enabled the company to determine whether other

manufacturers had copied its technology. However, the company policy was to seek

patent protection in the US and Germany, its key markets: “We tend not to file (patent

applications) in China as a rule. We tend to file in market countries not manufacturing

countries“. 44

This account of improving PV technology in Wuhan is consistent with other theories

of innovation by MNEs in developing countries. While China attracted record

investment in renewable energy in 2010, the comparable figure in Europe fell 22% to

$35 billion. The balance of innovation in solar technology has shifted. Udo Steffens,

president of the Frankfurt School of Finance and Management, predicted that

investments in the developing world would “open up new markets as first-mover

investors facilitate a range of new business models and support entrepreneurship in

the developing world."45

Selco India

At least 300m Indians – one in four of the population, and more than half of villagers

in the most remote rural areas – have no access to electricity at home. Selco India, a

Bangalore company founded in 1995, is a pioneer of “off-grid“ solutions for the poor.

The company describes itself as a social enterprise, providing “customised solutions

based on end-user needs“. That means designing durable, affordable solar energy

systems for a market where average per captita income is about $60 per month.“In

that kind of situation, cost is everything,“ said Ananth Narayan, manager of Selco„s

44

Telephone interview by Mark Ashurst with Richard Chleboski, July 19, 2011 45

Nichols, W. (2011, July 7). Wind leads global green energy investments to record $211bn. Business Green. Retrieved from: http://www.businessgreen.com/bg/news/2084122/wind-leads-global-green-energy-investments-record-usd211bn




Incubator Lab, which handles experimental projects with local governments, NGOs

and microlenders.46

Selco‟s strategy has been to work with India‟s microlenders to spread the costs of

repayment, typically over a period of six months to two years. Although solar power is

cheaper than kerosene, the most common source of lighting in off-grid homes, the

capital cost of PV technology would be prohibitive for Selco‟s customer base. To

contain costs, the company designs, manufactures, installs and maintains solar

systems for an all-in price. A typical unit will have generating capacity of 10-40W,

with an average lifespan of 15 years. Quality components are important, given the

financial commitment. Solar panels comprise about 60% of the material costs.

Battery, wiring, mounting units, and other comoponents make up the balance.

Grassroots technology of this kind transform lives – most of them, with an average

income of about $2 per day of solutions, among the Indian component of the world‟s

second bottom billion. Yet in spite of steadily falling prices for PV cells, China‟s global

dominance made no difference to Selco‟s business. Solar panels imported from

China were 20% cheaper than PV cells from Tata-BP, an established Anglo-Indian

joint venture, but no Chinese PV producer operated in India, making it difficult to

keep a check on quality. “Chinese imports compete on cost reduction and energy

efficiency. They look attractive on paper, but it is hard to enforce warranties. There is

scope for innovation,“ Narayan said in an interview.

A larger problem was sourcing electrical inverters – a device which converts solar

energy into alternating electrical current for household appliances. Only two models

were available in India: a reliable but expensive German variety, designed primarily

to feed solar power into Germany national grid rather than a village hut; and an

Indian model which was cheap to buy, but expensive to maintain. These were early

days for the global diffusion of China‟s disruptive impact on the solar technology

industry. “There is scope for innovation,“ said Narayan.

That innovation, when it comes, is likely to be from Taiwan via Germany. In the

course researching this paper, I found that Taiwan – an established producer of

46

Interview with Ananth Narayan, by Mark Ashurst. July 19, 2010


semiconductor and liquid display panels – had emerged from the 2008 slowdown as

the world‟s second biggest PV manufacturer. In late 2010, Delta Electronics, a giant

Taiwanese conglomerate, entered the solar inverter market by buying the Swiss

subsidiary of German solar company, Solon. As part of its international expansion,

Delta will begin production of solar inverters in Chennai, the industrial hub of India‟s

Tamil Nadu state, for export to the high-income markets of Germany and

Singapore.47 If the new plant also supplies Selco, its Indian customers will be among

the first beneficiaries of reverse innovation, via Taiwan, of leading edge solar inverter

technology.

47

http://greenworldinvestor.com/2011/03/03/solar-inverters-in-india-to-be-domestically-produced-by-delta-electronics-in-chennai/


CONCLUSION

It is difficult to contemplate the future without some sense of nostalgia. When I began

work on this thesis, I hoped it would bring some measure of reassurance about the

sweeping economic changes that are radiating outward from China. It was not a

personal anxiety that motivated me: a desire to understand the mechanisms which

propel innovation is scarcely compatible with for the future. Instead, I hoped to reach

a clearer sense of ways in which the liberalization of Asian economies will improve

the lives of real people. This was not a utopian longing for a happy ending to the

economic turmoil of 2011. Market economies need losers as much as winners.

Rather, I wanted evidence that the combined effects of China‟s manufacturing boom

and India‟s services revolution would result in some net utility.

In choosing the little known (and slightly creative) cohort of the second bottom billion,

I hoped to skew the odds of a happy ending in my favour. This explains my interest in

Schumacher‟s concept of “appropriate” technology. In writing this thesis, I have

begun to conceive of the term in a wider sense than is commonly assumed.

Appropriate need not describe the strictly practical value of objects and inventions for

people who survive on a few dollars a day. Although not conclusive, there is sufficient

evidence in this paper to claim that appropriate technology is any form of technical

change that will enhance the lives of others. In this sense, the old slogan that “What‟s

good for General Motors is good for America” might hold good for the emerging

multinationals of the South. China‟s first comparative advantage is the intensity of

itsmarket competition – at every corner of Porter‟s famous “Diamond”.

Innovation for the second bottom billion is not only about labour-saving devices or

cheap cellular phones. Instead, I submit that the term appropriate technology can be

applied to any category of innovations which make fragile economies stronger. Solar

power is an obvious example, certainly. Clean technology, off-grid electricity and

solar powered mobile phone chargers are inherently useful – and likeable: for the

purposes of this paper, they may even be too easy to like. More stringent criteria can

be gleaned from Schumacher‟s provocative subtitle. Innovation that affects

competitive advantage should not be measured only by its efficiency or productivity.

Technical change defines markets – and markets define people. Innovation that


pushes the boundaries of market structures is a practical enactment of “business as if

people mattered”.

Whether we like it or not, people are economic actors. We depend on markets to

trade, and companies to leverage knowledge and resources. The second bottom

billion of the population may have a little more in the way of assets than the billion

underneath them – but what the market gives, it can also take away. Every time we

fear domination by big companies, we should consider their utility in international

markets. The role of MNEs in the global diffusion of knowledge and innovation is at

once more important than ever before – and fraught with new risks.

Bruche warns that the evidence for spillover effects in manufacturing and technology

clusters is inconclusive (2009, page 3). While that may be true for any particular

industry or cluster, the ever-expanding mobility of ideas and capital are difficult to

trace. If the radar for detecting spillover effects from MNEs reaches far enough, it will

eventually detect– for the first time – a high quality inverter in a household solar

system in rural India. This will become possible – ultimately – only because of the

global reach, and relentless cost innovations, at Delta Electronics in Taiwan.

New TNCs, and the second-tier MNEs, perform a vital function in the diffusion of

innovation. As competitors to the giants, but also as the targets and participants of

corporate mergers, joint ventures and licensing deals, they are a conduit for

technology transfer. The new crop of emerging market multinationals are in

themselves a Shumpeterian motor, forcing the pace of technical change.

In China and India especially, the environment for innovation is evolving rapidly. As

new industries push further back down the Experience curve, innovative companies

such as HUAWEI or Yingli are the architects of new ecosystems – to use another

phrase from Prahalad. The second bottom billion may never have heard their names,

but they too are a part of this ecosystem.

This thesis has reminded me of what I already knew, but easily forget. Namely, that

the people who sell washing powder by the handful, or recharge mobile telephones

from old car batteries on the side of the road, have a direct stake – albeit invisible – in

the conversion efficiency of a PV cell or even the distribution networks for Coca-Cola.

No company exists in isolation. Emerging markets require companies to combine


diversified distribution systems with centralised controls, each one a new strata in the

ecosystem of a market. Craig Mundie, chief technology and strategy office at

Microsoft, is surely stating the obvious when he asserts that the “Bottom” and the

“Middle” of the pyramid are his company‟s “biggest, long-term opportunity”. 48

In summary, Schumacher‟s predictions of technology transfer to poor countrie are

emerging in new forms in the 21st century. Rising demand in India and China is

driving a new generation of “Appropriate” or “Intermediate” technology for the

“Second Bottom Billion” of global consumers. If Schumacher underestimated the

crucial function of MNEs in facilitating this process, it may have been because the

extraordinary effects of disruptive innovation were not then apparent.

In the first decades of the 21st century, questions of size remain an issue of

legitimate concern for mid-sized companies – and, among neighbouring states, the

least developed countries (LDCs). In emerging markets, size matters. Large markets

are important, for their reach – and also for the efficiency gains which follow from

intensity of competiton. For smaller states, regional integration is critical to improve

trade flows, thus creating an environment suited to the diffusion of innovation. In the

fragmented supply chains of East Asian manufacturing, countless thousands of small

companies occupy niche sectors suited to their market and capacity. The fact

remains, though, that big companies are best able to drive new products back down

the Experience curve. Those which fail to do so, will inevitably watch their rivals do it

first.

The questions of how best to foster innovation have important implications for

international development, foreign aid and the role of international agencies. This

thesis has barely touched on the lessons from the Chinese or Indian experience for

other developing regions, and these warrant further investigation.

My final thoughts concern Africa, where I worked as a journalist from the late 1990s.

As governments across the continent auctioned licences to operate mobile phone

networks, I witnessed first hand the transition from analogue mobile phones to the

new GSM digital standard. Within months, the incumbent peri-urban analogue

networks were replaced by nationwide – and soon, pan-African – digital coverage.

48

Mundie, C. Letter from Microsoft, reproduced in C.K. Prahalad, The Fortune at the Bottom of the

Pyramid…XXXX


The price (and size, and weight) of handsets fell rapidly from the $1000 half-bricks

used on the analogue network, to near-weightless accessories available for a few

dollars. Multinational network operators with shares traded on the capital markets of

Frankfurt, London and New York replaced the heavily endebted networks licensed to

well-connected generals or relatives of the president.

The downstream benefits of this liberalisation are too numerous to list here. Health

clinics sent SMS messages to improve the compliance of HIV-positive patients

prescribed awkward combinations of the first generation of anti-retroviral tablets.

Virtual cash transfers between mobile phones brought low-cost financial services

within reach of people often with no bank account or credit record. A World Bank

study estimated multiplier effect of every dollar invested in telecommunications, to be

six dollars of new wealth was created in downstream industries. Certainly Africa –

including that small part of it within the second bottom billion – was much better for

the innovation of GSM mobile telephony. Yet I am reminded as I write by what I have

since learned about the larger processes which enabled Africa‟s mobile revolution.

The greatest innovation was China‟s sudden ascendancy in the global supply chain

of mobile components, against fierce competition from western MNEs including

Motorala, Nokia and Siemens. The real innovation at that time was in the pooling of

codified knowledge, and the “slicing and dicing of the global value chain“ – a kind fof

growth hormone for the new crop of today‟s high tech multinationals. All that

happened, and is happening still, in Asia.

*


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