Asian innovation rests with scaling up

An economist’s century-old idea might be the key driver in the next iteration of Asia’s economic innovation.

Since World War Two, Asia’s economic success has been driven by a business model that relies heavily on networks of businesses and influential families. But this model — which concentrates power in the hands of relatively few and relies on connections over education or effort — could slow Asia’s development through the next century unless it adapts and innovates.

Short of a radical transformation to a more competitive and popular capitalism — a feature of the Western world — Asia’s scope to innovate within its existing  business model depends on how one defines innovation.

If, by innovation, we mean the discovery of something new, such as a new technology, product or business model, then Asia may not be well-placed to lead the next century.  But if we mean an economy driven by scaling up new discoveries into a big mass market — something that big, established firms do well — then there is no need to worry.

Asian corporations are perfectly positioned to continue excelling at the scaling up stage of innovation: the region has plenty of big firms with strong brands and distribution pathways to mass markets.

A century ago, economist Joseph Schumpeter pointed out that successful innovation is essentially a coupling process that requires the linking of two distinct activities: the discovery of a new product or service idea and its initial testing in the market that, if successful, creates a new market niche and the scaling up of this discovery into a mass market.

Chux created a new market niche when it invented the disposable diaper in 1935. In 1961, the idea transformed from a small niche to a mass market when Procter & Gamble entered the competition with its own disposable diaper called Pampers. Both of these activities are, in their own way, innovations. But in most cases the same firm cannot perform both activities well: one type of firm is good with discovery (in this case, Chux) and a different type of firm is good with scaling up (Procter & Gamble).

Small start-up firms are good with discovery because this activity requires agility, flexibility, risk-taking and a culture of experimentation — traits that small firms possess in abundance. By contrast, big established firms are good with scaling up because they have the money, knowledge and influence to develop economies of scale, build trust with consumers and get legislative support from the government.

With this playbook, big firms usually end up scaling up new markets. They allow small start-up firms to undertake new discoveries and, when the time is right, move in, acquire the discoveries of others, and use its considerable resources and connections to scale them up and create huge new markets.

Through this model, big Asian firms can use their vast resources, political clout and monopoly positions to scale up ideas of pioneering firms, whether these pioneers are based in Asia or not. It is not a model that can produce many inventions or pioneering firms, but it is perfectly suited for firms aiming to scale up the ideas of others.

Asia is well suited to this — just  look at the success of this model over the past 50 years. As long as Asian companies continue to focus on the scaling up portion of innovation, there is no reason to believe that this model will not continue to produce success.

Costas Markides is Professor of Strategy and Entrepreneurship at London Business School where he holds the Robert Bauman Chair in Strategic Leadership.

Originally published under Creative Commons by 360info™.

Editors Note: In the story “Asian capitalism” sent at: 05/05/2023 13:51.

This is a corrected repeat.