Polycentric Innovation: The New Global Innovation Agenda for MNCs

Recently I delivered a talk a the Council on Foreign Relations titled “Managing the New Trajectory of Global Innovation” explaining why and how multinationals must revamp their Western-centric innovation strategy in order to effectively leverage global ideas, talent, and markets.

In our increasingly multi-polar world characterized by the inexorable rise of emerging markets like Brazil, China, and India, I believe multinationals (MNCs) must abandon their ethnocentric innovation model — which concentrated all their R&D resources in the West. Instead, MNCs must embrace a “polycentric” innovation model in which R&D capabilities are distributed globally to swiftly seize regional opportunities and yet are integrated into a loosely-coupled global innovation network to drive creative synergies on an international scale.

This polycentric, networked innovation model is vital for MNCs if they wish to succeed in emerging markets like India. Why? Because as Shiv Shivakumar, CEO of Nokia-India points out: “Merely thinking of growth happening in emerging markets won’t help a MNC grow in those regions.” Translation: these markets won’t emerge out of nowhere. The onus is on MNCs to first shape emerging markets before they could profitably serve them.

The best way for an MNC to shape (and lead) a market is by building up more local R&D capabilities and cultivating a vibrant local partner ecosystem so it can systematically design and market locally-relevant offerings. But that requires shifting MNCs’ center of R&D gravity from the West to the East.

But polycentric innovation isn’t just about scaling up your R&D operations in countries like India and China only for the sake of serving local markets. The next step after that is to import frugal innovations like mobile banking services first deployed in emerging markets into home markets in Western nations where consumers — still reeling under the recession — are clamoring for affordable yet high-value goodies. As such, I see an MNC that adopts the polycentric innovation model evolving through four successive stages of maturity:

• Stage 0: At this stage, the MNC’s R&D operations are mostly concentrated in the West. While the MNC operates in emerging markets, their local units are primarily sales and marketing functions.
• Stage 1: Here the MNC starts shifting some of its R&D work to low-cost countries like India that offer plenty of high-quality scientists and engineers. However, this local talent is primarily used to design and develop solutions for Western markets. The Indian IT outsourcing phenomenon epitomizes Stage 1.
• Stage 2: The MNC recognizes the massive potential of emerging markets and delegates more responsibilities to local units in emerging markets which initiate and manage their own R&D projects to cater to local needs. But the P&L responsibilities for new product lines launched in emerging markets remain held by senior execs located in Western headquarters.
• Stage 3: The MNC starts networking R&D activities in emerging markets with the rest of their global network in order to cross-pollinate ideas for new products and business models across multiple regions. The P&L responsibilities for new product lines gradually shift to emerging markets.
• Stage 4: At this ultimate stage, the R&D hubs in emerging markets are given a global remit as they now own the P&L responsibilities for the global design and rollout of new products. Senior execs physically located in India and China are now in charge of global business units and entire divisions.

Having closely studied the innovation models of several multinationals in recent months, I would say that 30% of Fortune 500 firms are still ‘stuck’ in Stage 0, while 40% have already leaped into Stage 1, while 20% have braved their way into Stage 2. As such, I believe that only 9% of multinationals are at Stage 3, whereas merely 1% or less has made it all the way to Stage 4. I would peg Microsoft to Stage 2 and IBM to Stage 3, while Cisco and Nokia are comfortably sitting in Stage 4.

Where’s your firm on this continuum?

Speaking of the shift of (R&D) gravity from West to East, I will be attending the World Economic Forum’s India Economic Summit in New Delhi on November 8-10. This Summit, which marks the 25th year of the World Economic Forum’s engagement in India, is themed “India’s Next Generation of Growth.” During those three days I will be blogging daily on his site about the exciting business and socio-cultural trends that are reshaping India in the 21st century. Hope to see you here!