Why “Reverse Innovation” matters

Innovation: probably the buzzword of the decade.

Everyone enjoying any semblance of success attributes it to innovation, the ability to think out of the box and come up with something previously unimaginable, something so brilliant that it topples the old world order and supplants it. Forget reinventing the wheel - this is about inventing our way to hyperspace travel.

That’s the version of innovation we’re all familiar with, the version that involves creating the previously non-existent and also the version that is focused on the ingenuity of Silicon Valley’s engineers. From the iPhone to Tesla to Netflix - these stand as the shining examples of old concepts and convention turned on their head.

Much less known are the innovations that take a concept and make it an order of magnitude better, faster and more efficient. For example, take the process used to manufacture integrated circuits on silicon, Electron Beam Lithography. The process was first made commercially viable in the 1970s by IBM, rightly credited as the “inventor” and initial innovator of EBL processes. Yet as the decades went by, node sizes started to shrink, allowing increasingly dense integrated circuits to be produced, but the shrinkage was driven by technological advances led first by the Japanese, then the Koreans and the Taiwanese. Today, the cutting edge of semiconductor manufacturing is a tight race between Taiwan’s TSMC and South Korea’s Samsung Electronics, with the initial inventor IBM falling off the list as of 3 technological generations ago.

Other examples can be found across other sectors and countries: where the French pioneered shared publicly available bicycles (Vélib), the Chinese took it to the next level with Mobike and Ofo; where the US pioneered Uber, the Indonesians created GoJek (Motorbike taxis); where the English invented vending machines (in the 1880s!), Alibaba built a vending machine for cars.

On that point, we’ve also learnt that the first known “vending machine” was a coin operated holy water dispenser invented by Hero of Alexandria in first century Roman Egypt, who invented (and improved on) some pretty amazing devices for his time.

(https://www.smithsonianmag.com/science-nature/old-world-high-tech-141284744/)

Therein lies the question: if one takes an existing invention and improves it by some creative means, is it still innovation? Or “just an improvement”?

We think that to call step-change improvements in technology “just an improvement” is to understate the extent of innovation, the equivalent of playing down Thomas Edison’s many inventions as simply “applications” of what Benjamin Franklin discovered. Turns out that Franklin wasn’t even the one who truly “first” discovered electricity. The point here is that very few innovations happen in isolation of existing knowledge.

What makes things even more interesting in our current world is that the volume, scale and importance of incremental innovation in the “emerging” world is gradually catching up with the developed world, what we like to call “Reverse innovation”.

Reverse Innovation is fascinating as a concept for various reasons.

Firstly, it challenges the notion that “copycats” cannot be innovators - finding a new, better way of doing something old must be as much an innovation as defining a new industry. Otherwise, Henry Ford would just have “improved” on horses, and washing machines and dishwashers would be mere “improvements”.

Secondly, it challenges the notion that innovation “flows” from developed to developing markets, quite like the hand-me-down system of economic growth, where the frontier of development is in “developed” markets, and the rest of the world follows. We know that this isn’t true: from smartphone/mobile adoption to cashless payments to shared mobility to online/offline service integration - many emerging markets like India, China and Indonesia are adopting new technologies and infrastructures in earnest, sometimes as a result of necessity, and iterating them into much better, much more robust versions of what they were handed. For that matter, Kenya’s Safaricom could’ve been said to have pioneered mobile payments via its M-Pesa system, launched in March 2007, 4 months before even the first iPhone was released.

This is also the case for “soft” products like content: for example, Poland is building itself into a global player in computer games with award winning releases like The Witcher 3 from Polish developer CD Projekt trumping “classics” from the likes of Ubisoft, Activision Blizzard and Electronic Arts, formerly the creme de la creme of computer games.

The accelerating pace of catch-up being played across the traditional east-west/north-south divide also shows up in patent filing figures released by the World Intellectual Property Organisation (WIPO), with China topping the charts for international patent filings:

*Source: WIPO Patent Cooperation Treaty*

So while the US is still the world leader in terms of the stock of patents and innovations, the rate of catch-up, aka the flow, by the rest of the world, whether patented or otherwise, suggests that transformative progress will not necessarily be led by the Silicon Valley. If this continues, the catch-up will be an eventuality.

In fact, devoid of the inherent legal protections accorded by patent laws, entrepreneurs and innovators in emerging markets have to battle not only the problems they seek to solve, but also their peers who relentlessly compete away any trace of supernormal profit, even to the point of making losses to outlast the competition. Innovation driven by the need to survive is forced to iterate harder, faster and better, in an accelerated cycle of upgrades and improvement. And while one can debate the merits of (mainly Chinese) state-sponsored “innovation”, the ability to mobilise huge swathes of a giant population to creativity, just by the law of large numbers and the outsized returns from any successful “unicorns”, makes sense at a country level. Think of the country as a VC firm and things fall into perspective.

As such, the obvious graduates from this school of hard (potentially fatal) knocks are the Chinese internet (and now AI) giants, but look beneath the surface, across all industries and regions, from computer games to defence contractors, from Brazil to Turkey to India to Indonesia, and there are abundant examples of companies which innovate tirelessly, even to the point of setting new standards for the “developed” world to match up to and hopefully learn from.

That’s Reverse Innovation in action. And it’s just getting started.