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Innovation Models

Author: Adam Segal, Maurice R. Greenberg Senior Fellow for China Studies
March 11, 2011
The Economist

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The distinction between incremental and disruptive innovation is analytically useful but artificial, as the distinguished debaters admit. Understanding the models may give us a better grasp of what Google and Toyota have done, but modern economies require both and, in ideal conditions, they coexist in a virtuous feedback cycle. But if you are a European, Japanese or American policymaker concerned about national competitiveness, where do you put increasingly scarce resources?

To answer, we must shift our gaze from Japan and the United States and look to China and India. China and India are already putting pressure on the incremental model and hope to compete in the future in disruptive innovation. For the advanced economies, the greatest hope for long-term competitiveness lies in disruptive innovation.

Chinese and Indian firms are already competing in incremental innovation. As several studies have shown, informal networks of Chinese producers, assemblers and suppliers cut the cost of motorcycles that were based on, and largely stolen from, the big Japanese producers. Chinese firms broke down the Japanese designs into numerous components with only rough design specifications and then numerous independent suppliers improvised the manufacturing of the parts and lowered costs.

Indian companies adopted a similar pragmatic, boot-strapping approach to capability-building in their own highly competitive markets. A number of Indian commentators have noted that Indian companies operate within an ecosystem of jugaad innovation. Taking its name from the low cost and locally manufactured vehicles used in villages, jugaad implies improvisation, inventiveness and ingenuity. Confronted by inadequate infrastructure and opaque regulations, Indian companies have developed new business processes and products that give them a competitive advantage, especially in developing markets.

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