Asia's Reverse Innovation Trend

In recent years, the rate of acquisitions of local Asian firms by multinational companies has generally increased, particularly in China. This has happened across many industries such as industrials, medical devices and consumer staples. In many cases, if the multinational firms are not acquiring an entire company outright, they are taking a controlling stake, rather than a minority stake as a passive shareholder.

The obvious reason for these mergers and acquisitions (M&As) is to gain access to local Asian markets. Setting up an extensive distribution network in countries in Asia that may have poor infrastructure can be a lengthy and costly process. Thus, many multinational companies take a shortcut by acquiring a local company with an established regional distribution network.

But a less obvious factor is that multinational companies want access to local technology and research and development (R&D) resources. This might seem counterintuitive. Multinational companies, in many industries, typically own the most advanced technology, while local Asian firms are generally trying to catch up to them. The competition is often such that multinational companies sit at the high end of the market while locals sit at the low end. Over the years, however, multinational firms have sought to capture that missing chunk of the market, particularly at the mid- to low-end range of emerging Asian countries. Increasingly, such larger international firms have been thinking of ways to “move down” the market. Meanwhile, local companies, not content to remain at the low end, have been “moving up” the market.

To attack the mid- to low-end market segment, some multinational companies used to try to simplify their higher-end products offered in the U.S. or Europe. This approach has largely failed because a ground-up product development approach is often needed to target local markets.

Therefore, multinational companies have started to acquire local companies in Asia outright, which tends to be more cost-effective than taking the time to grow an Asian arm of business. The most successful M&A deals seem to have been those in which local companies have largely been left alone to operate as usual, rather than those that are subject to many directives from U.S. or European headquarters.

Furthermore, the technology gained from these acquisitions may be used not only in the particular local market in which it was found, but also in other emerging markets. The practice of “reverse innovation,” or the flow of new ideas and products from less developed to more developed economies, may now be occurring more frequently. In this way, companies in Asia may be beginning to shed their long-standing reputation as copycats, and their creative impact may increasingly be felt worldwide.

© Matthews Asia

© Matthews Asia

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