Reversing the Innovation Process - from Emerging Markets to the World

For decades, developing countries relied heavily on low-cost labour to attract foreign investment. Factories sprouted in special economic zones, producing textiles, electronics, and consumer goods for wealthier markets. But this model, while useful in early development, has limits. As wages rise and automation becomes cheaper, cost advantages begin to erode. The next phase of growth must come from higher productivity and innovation, not just lower prices.

China offers a clear example. It began by assembling for others but has since grown into a centre for high-tech manufacturing, green energy, and electric vehicles. South Korea followed a similar path, moving from basic goods to global leadership in electronics and automotive sectors. These transitions were not automatic. They were the result of strategic policy, focused investments, and a shift in national ambition. Other emerging economies hoping to avoid the middle-income trap will need to pursue similar trajectories: build skills, adopt technology, and move beyond labour cost as the core of their value proposition.

What sets some emerging markets apart is their ability to innovate under constraint. Reverse innovation - the development of products and services for local needs that later find global relevance - shows how limited resources can drive powerful breakthroughs. In India, healthcare providers have pioneered models that dramatically reduce the cost of surgery and diagnostics without sacrificing quality. These systems now influence cost-saving efforts in more advanced countries struggling with bloated healthcare budgets.

China’s portable ultrasound machines, initially designed for rural clinics, are now used in Western ambulances and emergency rooms. In both cases, innovation was driven not by abundance, but by scarcity. Where infrastructure was lacking, businesses built leaner, more efficient alternatives. These innovations succeed not in spite of constraints, but because of them.

Yet such innovation needs the right ecosystem. Governments play a central role in building this environment. Policies that support local entrepreneurship, protect intellectual property, and invest in research can help promising ideas scale. Indonesia’s startup ecosystem is a case in point. Gojek, a homegrown digital platform, addressed local mobility challenges and has since expanded into financial services and regional markets. Its success, however, did not happen in isolation. In fact, Gojek emerged from a context that encouraged experimentation and provided a platform for scale.

As emerging markets open up to global capital and competition, protecting local innovation becomes even more important. In many sectors, local firms are dwarfed by foreign multinationals with deeper pockets and global reach. Without deliberate policies to support domestic companies, promising ventures may struggle to survive.

Smart policy design can prevent this. Governments can set conditions for technology transfer, require local employment in high-skilled roles, and ensure fair taxation of foreign companies. It is often misunderstood that such measures are protectionist. They are, for most instances, enablers of fair competition and domestic capability building. Vietnam, for instance, has done this effectively by linking foreign investment to local supplier development, thus gradually strengthening its industrial base.

Meanwhile, strengthening domestic capabilities also requires investing in human capital. Education systems must adapt to prepare workers not only for basic employment, but for roles that demand critical thinking, creativity, and leadership in an innovation-led economy. Technical and vocational pathways can help align academic learning with real industry needs, especially when developed in collaboration with the private sector.

Emerging markets are uniquely positioned to help redraw the global innovation landscape. Success today is less about copying established models and more about offering original, scalable solutions from within. Reverse innovation has shown that game-changing ideas can originate in regions long overlooked by mainstream investors and policymakers.

To lead this transformation, these economies must look beyond cost advantages and move toward systems that cultivate indigenous innovation with global relevance. Those that do will not only accelerate their own development but also help shape the future of innovation itself. As Prof. Ramamurti noted, the next wave of innovation will emerge from multiple fronts. And the breakthroughs coming out of India, China, and Southeast Asia are already setting that momentum.