Diffusion of reverse innovations across markets: An agent-based model

Abstract

The analysis of business efforts to internationalize the sales of novel products is pervasive across practitioners and academics. The traditional business perspective stands that innovative products are conceptualized and designed in a developed country. The further diffusion process in which Multi-National Companies (MNC) have relied is to find new market segments outside of the original country, that is, in developing countries. Reverse innovations have the potential of disrupting the way business operates and commerce is exchanged around the world, but it is not clear how such an innovation diffuses across countries. For example, research is needed to understand how products like ‘chotuKool’, an affordable, low-energy- consumption portable cooler that was firstly launched in India to attend to the needs of rural families (WIPO 2013), can diffuse to developed countries. The typical family in the rural landscape in India cannot afford large refrigerators due mainly to two restrictions. The first of them is price. While urban families may have enough family income to afford large, branded, high-energy consumption refrigerators, rural families may not be able to access such appliances. However, they can afford a product like chotuKool, which has a price point of less than one third of a commercial refrigerator. The second reason is electricity coverage. While India has doubled electricity overage since 2000 (The Hindu 2017), there are still 240 million who lack access to electricity (Bloomberg 2017). This limits the diffusion of new mainstream products. Other innovative products, often regarded as reverse innovations or frugal innovations, have been launched in emerging countries, such as China. Academic literature has gathered case studies on frugal and reverse innovation. Such is the example of Hang et al. (2010) who discuss how four innovative products that fall into the category of disruptive innovations diffused from developing countries to developed countries. In the literature, there are also frameworks aimed to understand how innovations flow across borders. For example, Hossain et al. (2016) argue that frugal innovations—affordable, sustainable, easy-touse new products built in business environments under scarce resources— start to diffuse locally and then flow towards closely related business spaces. If successful, the innovation reaches places that are more distant and finally, it reaches a stage of reverse diffusion when the product lands in a developed country.