MADRID – Over the past decade, emerging markets have become the global economy’s main growth engine. According to HSBC, 19 of today’s emerging-market countries will be among the world’s 30 largest economies in 2050, and they will be more important than the current OECD countries.

Emerging markets have already captured 40% of world GDP and 37% of global foreign direct investment. And, while OECD countries continue to stagnate in 2011, emerging markets are growing strongly. China this year jumped ahead of Japan as the world’s second-largest economy, while India attracted a record $80 billion in FDI, double that of 2010. Brazil’s Petrobras, already one of the world’s largest petroleum companies, had a record-setting $67 billion IPO last year.

These economies’ growing wealth is attracting a rising number of OECD multinationals. In Asia, the middle class now represents 60% of the total population (1.9 billion people). China became the world’s top car market in 2010. The world’s richest person is from Mexico. And rapid economic growth is occurring in an environment of small deficits, low debt, and controlled inflation.

But there is another, quieter revolution bringing companies from OECD countries to emerging markets: disruptive innovation. On one hand, emerging-market multinationals are excelling even in high-value-added and technology-intensive sectors; on the other hand, firms from OECD countries are increasingly re-importing innovation from emerging-market companies.

According to the United Nations, there are roughly 21,500 multinationals based in emerging markets. Some, such as the Mexican cement company Cemex, the Indian IT outsourcing firm Infosys, and the Chinese battery manufacturer BYD, are already leaders in their sectors. The main suppliers to the world’s telecoms companies are found in China, where Huawei is now head to head with Sweden’s Ericsson. In 2008, Huwaei registered more patents than any other company in the world, and finished second to Japan’s Panasonic in 2009.

In the telecommunications sector, there are now a half-dozen emerging-market multinationals in the global top ten. Brazil’s Embraer revolutionized airplane manufacturing with a business model that others have imitated. India’s Tata sells cars for 75% less than its European competitors. China’s Mindray has developed medical equipment at 10% of the cost of its Western competitors. Kenya’s Safaricom is transforming the market with its M-Pesa mobile-banking service, just as Indian outsourcing multinationals such as TCS and Wipro have done.

Even the digital world is being affected by emerging-market growth. Facebook could have been Latin American: one of its founders is Brazilian. The Chinese Internet group Tencent Holdings is the world’s third largest in terms of market capitalization ($45 billion in 2011). Its top financial shareholder is another emerging-market multinational, South Africa’s Naspers. The two companies invest in start-ups together – not in California, like Google, but in emerging markets. In 2010, they invested $700 million in Russian Internet giant Mail.ru. Russian Digital Sky Technologies (which owns Mail.ru) is present in key US Internet start-ups such as Facebook, Zynga, and Groupon.
These emerging-market multinationals are not only disruptively innovative; they are also massively frugal, making them lethal competitors. And they are rapidly climbing the value chain: in 2010, according to Booz & Company, South Korea’s Samsung became one of the world’s top ten companies in terms of R&D investment. Israel has launched more than 4,000 start-ups – ranking second in the world in the number of companies quoted on the NASDAQ.

As a result, reverse innovation by OECD multinationals is now common practice. Indeed, the OECD Fortune 500 multinationals now have nearly 100 R&D centers based in emerging markets, mainly in China and India. GE’s R&D center in India is the company’s biggest worldwide. Cisco spent a billion dollars on another one in India. Microsoft’s largest outside of the US is in Beijing. IBM now employs more people in India than in the US, and Germany’s Siemens has based 12% of its 30,000 R&D engineers in emerging Asia.

To grasp the speed of this global rebalancing, consider that in 1990, more than 95% of R&D was carried out in developed countries; a decade later, the developed countries’ share had dropped to 76%. Today, emerging markets account for 40% of the world’s researchers. As a report from UNESCO recently highlighted, China, which now spends more than $100 billion annually (2.5% of GDP) on R&D, is on the verge of surpassing the US and Europe in terms of the number of researchers. In 2010, 40% of all Chinese university students were studying for science or engineering degrees, more than double the share in the US.

Emerging-market countries will not only claim the lion’s share of global growth in the coming decade; they will also increasingly be the source of disruptive and frugal innovation. By 2020, the geography of innovation, in addition to that of the wealth of nations, will have undergone a massive rebalancing process.

Javier Santiso is Professor of Economics at ESADE Business School and Director of the ESADE Center for Global Economy and Geopolitics (ESADEgeo).

Copyright: Project Syndicate, 2011.               www.project-syndicate.org