Redefining Innovation in Emerging Economies: New Insights for International Business Strategy

Introduction: The Catching-Up Imperative

Innovation in emerging economies is fundamentally shaped by the persistent challenge of catching up with advanced economies. Unlike their developed counterparts, firms and policymakers in these markets must simultaneously close technological gaps, upgrade organizational capabilities, and reconfigure institutional frameworks—all while navigating resource constraints and volatile environments. This is not merely a matter of adopting existing technologies; it demands a multi-level transformation that spans firms, industries, and national innovation systems.

The imperative to catch up has never been more urgent. As global value chains become more fragmented and digital technologies reshape production, emerging economies risk falling further behind if they rely solely on imitation or low-cost manufacturing. Instead, sustained catching-up requires building endogenous innovation capacity. This involves reconfiguring relationships between public research institutes, universities, local suppliers, and multinational enterprises (MNEs). The process is inherently messy, path-dependent, and context-specific—yet patterns emerge when analyzed through a interdisciplinary lens combining international business (IB) theory with innovation and development studies.

[IMAGE: Graph showing GDP growth or innovation index trends in emerging economies vs advanced economies, with a clear upward trajectory for emerging markets.]

Beyond Technology: The Broad Definition of Innovation

A common misconception equates innovation solely with technological breakthroughs—new products or processes emerging from R&D labs. In emerging economies, however, innovation is far broader. It encompasses organizational improvements (e.g., new supply chain configurations, lean management practices), transactional innovations (e.g., novel payment systems, cross-border partnership models), and adaptations that recombine existing knowledge from diverse sources.

This perspective aligns with the seminal 2021 JIBS article by Anand, McDermott, Mudambi, and Narula, which argues that innovation in catching-up contexts is fundamentally a process of recombination. Local knowledge (tacit practices, cultural insights, institutional routines) is combined with imported knowledge (international standards, advanced technologies, global best practices) through collaborative networks. The recombination occurs across multiple channels: joint ventures, university-industry partnerships, supplier relationships, diaspora networks, and even informal knowledge sharing.

For example, a Chinese electric vehicle manufacturer may integrate German battery management algorithms with local manufacturing flexibility and government-supported charging infrastructure. The result is not merely a copy of foreign technology but a unique innovation that suits local conditions—and may later be exported. Similarly, Indian pharmaceutical firms have recombined global drug discovery methods with low-cost clinical trial capabilities and robust regulatory navigation skills to create affordable generic drugs with global reach.

[IMAGE: Diagram illustrating the recombination process: arrows connecting 'local knowledge' and 'imported knowledge' to a central 'recombination' node, leading to 'organizational innovation', 'technological innovation', and 'transactional innovation'.]

Redefining Firm-Specific Advantages (FSAs)

Traditional international business theory, particularly the eclectic paradigm, treats firm-specific advantages (FSAs) as proprietary assets developed internally—such as proprietary technology, brand equity, or managerial expertise. These FSAs are then leveraged across borders to overcome the liability of foreignness. In emerging economies, this assumption breaks down.

Anand et al. argue that FSAs in catching-up environments are co-shaped by the broader innovation ecosystem. Domestic public and private actors—government research institutes, industry associations, local universities, state-owned enterprises, and even informal networks—collectively influence what capabilities firms can develop and sustain. A local firm's FSA is not merely internal; it is embedded in relationships with these actors. For instance, a Brazilian agribusiness company’s ability to innovate in tropical crop genetics depends on partnerships with EMBRAPA (a public research corporation) and access to government-funded testing facilities.

For foreign MNEs operating in emerging economies, the implication is profound. Rather than assuming they can transplant their existing FSAs intact, they must recognize that their competitive advantages are partially contingent on how well they integrate with the local ecosystem. An MNE that builds deep ties with local suppliers, universities, and policy makers can co-create new FSAs that neither party could generate alone. This redefinition challenges the long-held view that MNEs are purely knowledge exporters. Instead, they become co-creators of innovation within the host country.

[IMAGE: Side-by-side comparison: left panel 'Traditional FSA' showing a closed firm boundary with internal R&D; right panel 'Redefined FSA' showing firm embedded in a network of government labs, universities, suppliers, and MNEs.]

The Multifaceted Role of MNEs

MNEs in emerging economies do not merely transfer knowledge from headquarters to subsidiaries. They play three simultaneous roles: instigators, conduits, and beneficiaries of innovation.

As instigators, MNEs catalyze local ecosystem activity by setting up R&D centers, sponsoring university collaborations, demanding higher-quality inputs from local suppliers, and creating competitive pressure that spurs domestic innovation. For example, when a German automotive MNE establishes an engineering center in Vietnam, it forces local component manufacturers to upgrade their processes to meet global standards, thereby igniting a broader innovation chain.

As conduits, MNEs channel global knowledge—including advanced technologies, management systems, and market intelligence—into the local economy. This happens through formal mechanisms (licensing, joint ventures, training programs) and informal channels (expatriate rotations, technical assistance). The flow is not one-way; MNEs also act as conduits for local innovations to reach global markets, providing a bridge for reverse innovation.

As beneficiaries, MNEs absorb local innovations that emerge from the recombination process. A subsidiary may discover a novel manufacturing technique from a local partner that, when codified and transferred to other units, becomes a global productivity gain. This tripartite role challenges the simplistic view of MNEs as monolithic knowledge exporters and highlights opportunities for mutual learning—provided that MNEs invest in absorptive capacity and relational trust.

[IMAGE: Flowchart with three interconnected boxes: 'Instigator' (sparking partnerships), 'Conduit' (sharing global knowledge), 'Beneficiary' (absorbing local innovation).]

Policy Implications for R&D, Training, and Standards

The redefined innovation framework carries actionable implications for policymakers in emerging economies. First, R&D policy should move beyond direct subsidies to fostering recombination. Governments can design technology parks that deliberately mix local startups with foreign MNE R&D units, encouraging cross-pollination. They can also fund collaborative research consortia that tackle industry-specific challenges (e.g., renewable energy storage in India, or digital health in Kenya).

Second, training and human capital development must align with the recombination imperative. Curricula in universities should emphasize interdisciplinary problem-solving and hands-on experience with both local contexts and global standards. Apprenticeship programs that rotate students through MNE subsidiaries and local SMEs can build the dual capability needed for knowledge recombination.

Third, standards and regulatory frameworks should be designed to balance openness with protection. Overly strict intellectual property regimes may stifle the flow of imported knowledge, while overly weak protection discourages MNE investment. A nuanced approach—such as compulsory licensing for essential technologies combined with patent pools—can enable recombination without sacrificing long-term innovation incentives.

Finally, trade and investment policies should encourage MNEs to deepen their embeddedness. Performance requirements (local R&D spending, technology transfer commitments) are often criticized, but when designed flexibly, they can spur the very ecosystems that create co-shaped FSAs. The key is to avoid rigid mandates and instead create incentives for sustained collaboration.

Conclusion: A Strategic Shift for Global Business

The framework developed by Anand, McDermott, Mudambi, and Narula—with over 200 citations since its 2021 publication—has reshaped how international business scholars and practitioners understand innovation in emerging economies. It moves beyond the narrow view of innovation as technological breakthrough, toward a systemic, relational, and multi-level process of recombination.

For global business leaders, the implications are clear: success in emerging markets requires more than exporting homegrown FSAs. It demands active participation in local innovation ecosystems, willingness to learn from local partners, and strategic investment in relationships with governments, universities, and suppliers. For policymakers, the path to sustained catching-up lies not in isolation or imitation, but in designing institutions that enable the continuous recombination of local and global knowledge.

As emerging economies continue to rise—accounting for an increasing share of global GDP, R&D spending, and patent filings—the insights from this redefined innovation framework will become ever more critical. Firms that embrace the complexity of co-shaping FSAs and playing multifaceted roles will be best positioned to thrive in the next wave of global economic transformation.

[IMAGE: World map highlighting emerging economies with glowing nodes representing innovation hubs, connected by lines indicating knowledge flows.]