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Putting innovation into reverse

Companies from the developed and the developing world face threats from growing “green” protectionism. John Elkington looks at how one corporation hopes to address the problem.

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The great American inventor Thomas Edison said: “Restlessness is discontent and discontent is the first necessity of progress.” He added: “Show me a thoroughly satisfied man and I will show you a failure.”

Now the company he founded, General Electric (GE) – the world’s largest manufacturers of clean-energy products – is far from satisfied. John Krenicki, the company’s vice-chairman and chief executive of its energy business, recently issued a warning about protectionism practised in the environmental sector by countries like China, India and, yes, the United States. Krenicki said that those who use climate change as a justification for protectionist forms of “green industrial policy” are playing an “extremely dangerous” game. And it is a game, he added, that is spreading around the world.

He spotlighted the “Buy American” provisions in this year’s US economic stimulus package as an example of the trend. “Everybody wants this production in their country,” he observed. “But energy production depends on scale, so unless we get the [trade] barriers down we will never be able to deploy these technologies fully.”

One way in which countries are trying to get a lock on green technology markets is by insisting on a certain percentage of local content in the relevant products, but GE stresses that this both drives up costs and does little to create new jobs—because the real employment opportunities tend to be not in manufacturing but in the related service sectors.

Even more worrying for companies like General Electric, however, was a statement made by India’s prime minister Manmohan Singh late in October, in which he called for a review of intellectual property rights for green technology. Referring to the bitter battle fought between developing countries and pharmaceutical companies over the provision of anti-retroviral drugs, Singh insisted that green technologies should be treated as a “global public good”.

The possibility that countries like India will use the same arguments with climate change that they have used with HIV/AIDS will be ringing alarm bells in boardrooms around the world. Once again, companies will argue that Singh’s approach will undermine the incentives for companies to innovate at precisely the time when innovation is becoming critically important. The fact that Singh’s comments were promptly echoed by Xie Zhenhua, vice-chairman of China’s top economic planners the National Development and Reform Commission, can only have intensified developed world concerns (see chinadialogue’s video podcast, “Talking tariffs”).

No doubt some of this can be attributed to political leaders and government manoeuvring for advantage ahead of December’s COP-15 climate conference in Copenhagen. And governments often send one message to their publics and another behind closed doors, but the implied threats to the global economic order are clear.

Meanwhile, GE has spotted an even more fundamental trend in relation to the future of innovation – and globalisation. There is a sea-change coming in global markets, write Jeffrey Immelt, GE chairman and CEO, and co-authors in Harvard Business Review. For decades, companies like GE have sold modified western products – including green and clean technologies – to emerging markets. Now, Immelt and his colleagues say, they are trying to pre-empt the emerging market giants by putting the process into reverse.

What does this mean? The argument is that over the last couple of decades, globalisation has been informed by a glocalisation strategy, through which developed world companies develop new technologies and products in their home markets and then distribute them worldwide, making some adaptations to suit conditions in local markets. The benefits for global companies are clear: they use their global scale to drive down costs and maximise market share. This strategy worked well when developed countries accounted for the bulk of the global market, but that it is no longer the case.

By contrast, Immelt and his colleagues argue that companies like GE must now disrupt their own businesses, and learn the art of “reverse innovation”, which involves developing products in countries like Brazil, China and India, and then distributing them globally. By using local growth teams (LGTs), global businesses aim to shift commercial power to where future market growth is likely to be found. The secret of success will be to build new offerings from the ground up. “Given the tremendous gulfs between rich countries and poor ones in income, infrastructure, and sustainability needs,” Immelt’s team argues, “reverse innovation must be zero-based.”

It’s not simply old assumptions that will need to be challenged. “Zero-based innovation doesn’t happen without zero-based organisational design,” they argue. Companies like GE are finding that their hiring practices, reporting structures, titles, job descriptions, norms for working relationships and the power balances between different internal functions – all of which have evolved to meet the needs of glocalisation – must be changed.

GE reports that it now has more than a dozen local growth teams in China and India. “In the midst of a severe global recession, GE’s business in China will grow 25% this year,” Immelt’s team notes, “largely because of LGTs. It’s way too early to declare victory, however. Progress has been uneven. While some businesses – notably health care and power generation and distribution – have taken the ball and run with it, others have been less enthusiastic.” And while GE’s research-and-development centres in China and India have increased their focus on the needs of developing countries, “the vast majority of their resources are still devoted to initiatives for the developed ones. So there is still a long way to go.”

It will be fascinating to see – as this restless, discontented century wrestles with giant challenges like climate change, water scarcity, biodiversity loss, poverty and pandemic risks – how leading companies in countries like China, India and Brazil respond to claims that their hard-won technologies and products should be treated as global goods. You don’t have to be a genius to predict that growing numbers of them will add their weight to the argument that intellectual property rights are crucial in any healthy global economy.


John Elkington is co-founder of SustainAbility and of Volans. His personal website is http://www.johnelkington.com.

Homepage image: General Electric's main offices in New York City. Photo by loop_oh

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