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Reverse innovation's big impact for consumers

Posted by Chad O'Connor  December 18, 2012 11:00 AM

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For most of the last two centuries innovations have flowed from rich countries to poor countries, but in the coming decades we are likely to see innovations also flow in the opposite direction, from poor to rich countries.

If “reverse innovation” sounds counter-intuitive, it is. One can readily understand why poor countries will embrace innovations from rich countries. It is no surprise, for instance, that demand is booming in emerging economies for smartphones, washing machines, cars, and the like.

But why would rich countries want innovations from poor countries? To focus on one important reason: there are many more poor people in rich countries than one might expect, and they’re looking for every way to stretch their purchasing power.

In the US, the number of people below the poverty line is at record levels, and many more are being squeezed by stagnant or declining incomes. More than fifty percent of college graduates are unemployed or underemployed and living at home.

Innovations from poor countries are just what the doctor ordered for such consumers.

Take, for instance, the idea of microfinance, which uses novel methods to make affordable micro-loans to poor borrowers. The innovation was pioneered by Grameen Bank of Bangladesh, but it is just as useful in channeling funds to the inner-city poor in rich countries. In fact, Grameen America, with four branches and $56 million in loans, does just that, and it is being joined by big banks like Citigroup, which launched its microfinance business in 2005.

Multinational companies like Unilever and Nestle discovered that the poor in emerging economies could not afford to buy standard sizes of coffee, toothpaste, or shampoo, but loved single-serve sachets priced at pennies per packet. Guess what? In the aftermath of the 2008 financial crisis, Unilever discovered that the same approach worked well with millions of recession-ravaged consumers in Greece, Spain, and the US.

Or take the example of telephone service in India, where 95 percent of users have low-cost prepaid plans in which they top-off balances in tiny amounts, because they live hand to mouth. According to the Wall Street Journal, more and more Americans are cancelling service with high-priced providers like Verizon and AT&T and switching to prepaid plans with no long-term contracts or minimum usage requirements. Today, almost one in four US users is on a prepaid plan!

These examples illustrate the beginnings of reverse innovation. Think of all the products and services where value-conscious US and European consumers might welcome the low-cost and innovative solutions adopted in poor countries.

For instance, consider wireless banking of the kind pioneered in Kenya, which would require no minimum balance, low transaction costs, and eliminate the need for brick-and-mortar branches and ATMs? Or car-sharing and ride-sharing solutions of the kind inspired by Zimbabwe that are gaining in popularity in California? Or inexpensive healthcare based on telemedicine, specialization, and low-cost medical devices of the kind pioneered in China and India? Or low-cost education that leverages distance-learning and other technologies to drastically lower the cost of going to college?

Reverse innovations will likely disrupt many US industries in the years to come—and low-income citizens will be the better for it.

Ravi Ramamurti is D’Amore-McKim School Distinguished Professor of International Business and Strategy, and Director of the Center for Emerging Markets at Northeastern University.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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