Innovating for Asian emerging markets will help diversify our economy

by George Abonyi, David Abonyi. Originally published on Policy Options
March 11, 2021

Canada’s exports and foreign investments are the least diversified among the world’s major economies despite substantial efforts by governments of all stripes. They remain limited to a narrow range of markets and products dominated by the U.S., by natural resources and by large firms. Adoption of advanced technology by Canadian firms has also lagged, particularly by small- and medium-size enterprises (SMEs) in spite of a variety of policy initiatives.

Innovating for Asian emerging markets can contribute to building a more robust Canadian economy by diversifying products and markets, and by enabling the adoption of new technology. This requires a more granular understanding of these markets and a demand-responsive approach to innovation, supported by digital technology.

Different perspective on Asian emerging markets

Global recovery is being led by Asian emerging economies, particularly ASEAN countries, India and China. They will grow significantly faster than advanced economies of the U.S. and Europe. Asia will provide more than half the expansion in global consumption by 2030.

While the people who live in these countries have high aspirations, most will be lower-income for years to come, although with significant buying power. The growth in spending in Asian emerging markets will be driven by lower-middle income (the equivalent of about $6,000 to $31,000 per year) and lower-income households (under $6,000). These constitute a huge “second tier” market, much of it located in secondary cities and towns and rural areas.

Substantial opportunities await firms that can tailor products and business models to the specific needs and conditions of these markets, particularly as consumers in these markets show a growing preference for “local” over “global” products. This requires extensive consumer engagement for innovating products and services to meet local needs, tastes and conditions.

Demand-responsive innovation

Innovation policy usually focuses on advanced science and technology, and leading-edge research and development (R&D), targeting the technology frontier to create high-value products. This is essential for strengthening domestic productivity and international competitiveness. However, it continues to be a challenge for Canadian firms, especially SMEs, despite considerable efforts by successive governments.

Based on our work at Bangkok’s Sasin School of Management, we suggest an alternative but complementary approach. It is user- and market-driven, and aims to address the unmet needs of the majority of Asian emerging market consumers in the second tier. The appropriate innovation approach, consistent with pioneering research by Canada’s International Development Research Centre on appropriate technology, creatively embraces local constraints as the basis for developing and commercializing new products and business models.

Appropriate innovation is more within reach of smaller firms. For example, existing technologies may be adapted in novel ways to local consumer needs and market constraints. Resulting products may also be adjusted to serve global niche markets (reverse innovation), particularly in a more frugal and value-conscious post-COVID world.

India’s Vortex Engineering designed an automated teller machine (ATM) to meet the constraints in rural and semi-urban areas, such as unreliable power and high illiteracy levels. It is solar-powered, using only 10 per cent of the energy of a conventional ATM; generates much less heat, eliminating need for continuous air conditioning; and uses a fingerprint identification system. Costing less than half of conventional ATMs, it is now used in Asia and Africa.

Embrace Innovations, started by Stanford students from field work in Asia, produces baby incubators that are small, light, inexpensive to transport and can be sanitized in boiling water. They cost the equivalent of $31, compared with as much as $31,000 for traditional incubators, and are now distributed globally. The company also markets related products in the U.S. using unique technology for Little Lotus swaddles and sleeping bags to keep babies at an ideal temperature for sleep.

Canadian startup Jigsee Inc. developed video streaming for older cellphones and unreliable networks in emerging markets. Product development was done in Ottawa, and market development in India. Jigsee was later acquired by India’s Vuclip, the world’s largest independent mobile video and media company.

Appropriate innovation is also for big firms. GE developed in India and China market-responsive, user-friendly electrocardiogram machines to meet local income, infrastructure, financing and service constraints. Related products found niche markets in U.S. and Europe, leading to the global initiative GE Healthymagination for under-served marginal communities.

Central to appropriate innovation is interaction with local consumers at early stages of product development, which is essential for understanding specific needs and constraints. This is especially important for Canadian firms in unfamiliar Asian markets. Commercialization also involves addressing constraints of these markets, such as “last mile” distribution.

Digital technology can play an important role in supporting appropriate innovation, especially for SMEs. An example is additive manufacturing, such as 3D printers, targeted under Canada’s Industry 4.0 initiatives. It involves adding layer upon layer of materials to make a product. Inputs can include plastic, metal or concrete. This process is also leading to the development of new materials. Products range from consumer goods to medical devices, auto parts and aerospace.

Additive manufacturing supports market-responsive innovation, particularly for SMEs. Product prototypes can be created quickly, with information from potential users. These can be immediately market-tested and refined. Existing technology and products may be adapted to local needs and constraints, or entirely new products generated. Production can take the form of mass customization by linking 3D printers, then be marketed through e-commerce.

Initiatives to support an appropriate innovation strategy

Diversifying Canada’s exports, as well as the adoption of advanced technology, are long- standing but challenging government priorities, especially for SMEs. A focus on demand-responsive innovation for Asian emerging markets, linked to digital technology, can complement existing programs of trade development and new technology adoption. A number of initiatives can help implement this strategy.

Financial incentives for funding R&D should be expanded from laboratories to markets. This includes support for early-stage, product-related interactions with potential consumers in Asian emerging economies. Support is particularly important for development and testing of product prototypes and adapting existing technology to local user needs and constraints.

Establishing a network of SME resource centres can accelerate digital technology adoption. These can reduce costs by sharing technology, as well as facilitate collaboration through the exchange of ideas and experience. Similar centres are proposed in the Canadian government’s Economic Strategy Tables. Successful examples exist in Europe and Singapore. In Taiwan, they serve as industry incubators and accelerators for product development and exports.

These centres should combine technology with market-related support. This involves providing granular information on specific market segments and customer categories, and market-entry options, as well as preparing firms to tackle possible trade barriers. By demonstrating achievable export possibilities with clear payoffs, linked to advanced technology such as 3D printers, such centres can also accelerate adoption of digital technology.

Facilitating alliances of Canadian firms with foreign partners is a key role of Canada’s Trade Commissioner Service. Appropriate innovation for Asia’s second-tier markets would suggest expanding to unconventional partners – in particular, market-oriented social enterprises. These can offer product credibility, local knowledge and market reach,  particularly in Asian emerging economies where social innovation and commercial success may be closely linked.

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An appropriate innovation approach, focused on Asia’s fast-growing emerging markets, supported by digital technology, can add an important dimension to Canada’s trade and technology strategies. It is also more within the reach of most Canadian firms, particularly SMEs. This could lead to significant benefits for Canada and for Asian consumers in under-served second-tier markets.

This article first appeared on Policy Options and is republished here under a Creative Commons license.