Unleashing the power of innovation in emerging markets

Innovation in emerging markets is no longer about applying technologies and techniques from developed economies to play catch to the levels of productivity, income and wealth that took centuries to achieve in the United States or Europe.

Instead accelerating innovating is becoming a driver of growth. Our panellists in the ‘Emerging Markets: Innovation Unleashed’ webinar discuss what is underpinning the fast pace of innovation and how it is evolving.

Many emerging markets countries have a strong track record when it comes to innovation. China has overtaken both the United States and Japan in the number of patents being awarded and for many years, Russia has exceeded the number of patents won by Germany and the UK, while India has recently surpassed them as well.

“Innovation has also shaped consumption patterns in Asia and China,” said William Yuen, associate director of investment at Invesco in the Asia Pacific region.

Yuen has put this down to the rapid adoption of the Internet across Asia. Enormous opportunities have opened up for companies wanting to create innovative products for a digital consumer audience.

On the back of this wave small social media platforms, digital payment platforms and entertainment companies have been turned into mega companies.

But the concept of innovation expands much wider than technology and the Internet. Yuen explained companies are not just innovating for digitalisation, rather research and development has evolved and other consumer broad themes have emerged that are driving change and creating investment opportunities. These include premiumisation, experience, urbanisation and wellness.

“A lot of the spending nowadays is no longer just about getting things done or day-to-day survival,” said Yuen. “It is a lot about experiences.”

As consumers demand more, companies are converting existing products into more sophisticated ones to get a higher margin for the return on their businesses.

To find the companies disrupting the market, Bhvatosh Vajpayee, director of equity research at Invesco specialising in emerging market equities, pointed out there are four major ways investors could do this.

First is to look at the scale of the market. For example, India, South East Asia and Latin America have large pools of consumers. Second is to understand how user adoption and developmental gaps can create leapfrog opportunities.

Third is to find localised solutions as countries differ widely on adoption curves and regulations. Lastly is examining local talent and ecosystems. In China, India and Russia local talent pools in science and engineering are particularly strong.

“Every country, every region is very idiosyncratic,” said Vajpayee. “The one lesson that we have learned over the last few years is do not take the template from one country and try to fit it in some other country.”

Innovations were also driving the adoption of ESG principles at the country level and at a sector level.

“These address decarbonisation, clean water and sanitation, climate change mitigation and digitalisation of course,” said Claudia Castro, director of fixed income research in the Invesco global debt team

For example, as gas demand fades over the next decade, Russia will potentially have a problem as its pipeline capacity becomes redundant, pointed out Castro. Carbon capture and storage facilities have been looked into as a solution to this. 

Speaking about the trend of ESG related innovation, Castro said: “We will not see it reversing, but accelerating.” Climate change is a global issue and countries need to recognise it at a local level. 

“You have issues of infrastructure damage, displacement of people, food insecurity from disruptions from climate,” said Castro. “It is really important you have local solutions as well.”

The above article was drawn from ‘Emerging Markets: Innovation Unleashed’ session held on 30 June 2021.  Please click to watch the session.