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The Economist Corner – essential readings IV

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A special report on innovation in emerging markets

The world turned upside down

The emerging world, long a source of cheap labour, now rivals the rich countries for business innovation, says Adrian Wooldridge (interviewed here) Apr 15th 2010 – From The Economist print edition.

IN 1980 American car executives were so shaken to find that Japan had replaced the United States as the world’s leading carmaker that they began to visit Japan to find out what was going on. How could the Japanese beat the Americans on both price and reliability? And how did they manage to produce new models so quickly? The visitors discovered that the answer was not industrial policy or state subsidies, as they had expected, but business innovation. The Japanese had invented a new system of making things that was quickly dubbed “lean manufacturing”.

This special report will argue that something comparable is now happening in the emerging world. Developing countries are becoming hotbeds of business innovation in much the same way as Japan did from the 1950s onwards. They are coming up with new products and services that are dramatically cheaper than their Western equivalents: $3,000 cars, $300 computers and $30 mobile phones that provide nationwide service for just 2 cents a minute. They are reinventing systems of production and distribution, and they are experimenting with entirely new business models. All the elements of modern business, from supply-chain management to recruitment and retention, are being rejigged or reinvented in one emerging market or another.

Why are countries that were until recently associated with cheap hands now becoming leaders in innovation? The most obvious reason is that the local companies are dreaming bigger dreams. Driven by a mixture of ambition and fear—ambition to bestride the world stage and fear of even cheaper competitors in, say, Vietnam or Cambodia—they are relentlessly climbing up the value chain. Emerging-market champions have not only proved highly competitive in their own backyards, they are also going global themselves.

The United Nations World Investment Report calculates that there are now around 21,500 multinationals based in the emerging world. The best of these, such as India’s Bharat Forge in forging, China’s BYD in batteries and Brazil’s Embraer in jet aircraft, are as good as anybody in the world. The number of companies from Brazil, India, China or Russia on the Financial Times 500 list more than quadrupled in 2006-08, from 15 to 62. Brazilian top 20 multinationals more than doubled their foreign assets in a single year, 2006. Read more here.

The outlook for the world economy

Curb your enthusiasm

A welcome recovery—but an uneven one, with dangers both for sluggish Europe and bubbly emerging economies. Apr 22nd 2010 – From The Economist print edition.

THERE is a whiff of exuberance around the world economy these days. Financial markets are buoyant, business confidence is rising and global growth seems increasingly robust. In its latest forecasts, released on April 21st, the IMF predicts that global output will grow by 4.2% this year on a purchasing-power basis, a full percentage point more than it foresaw six months ago. Other seers are even more optimistic, predicting growth of more than 4.5%—or close to the average pace of the boom years before the recession. The level of global output is now back to where it was before the downturn. And given the scale of the financial crisis, the recovery is surprisingly brisk. With global business investment accelerating and consumer spending strong, there is growing optimism that the recovery is becoming self-sustaining.

Some of this optimism is justified. Just as financial stress worsened the recession, so healthier financial markets are now reinforcing the recovery. Higher asset prices have propped up consumer spending and narrower corporate bond spreads have eased firms’ borrowing costs. Economic recovery, in turn, has helped ease financial pain. The IMF has reduced its estimate of banks’ total losses from the crisis by $500 billion, to $2.3 trillion, two-thirds of which has already been written off.

The trouble is that the good fortune has not been shared equally. The healthy pace of global growth belies differences between regions that are big and are getting bigger. Historically, deeper recessions are followed by stronger recoveries. But this time around countries that were least affected by the recession (primarily the largest emerging economies) are seeing the fastest acceleration. China’s economy is now growing at double-digit rates. The IMF expects India’s GDP to increase by almost 9% this year. Some forecasters reckon that Brazil’s growth rate could reach 7%, which would be its fastest pace in a quarter of a century. In contrast, countries where the downturn was deepest have the weakest recoveries. Output fell further in Britain and the euro area than it did in America. Yet the IMF expects output growth of only 1% in the euro zone and 1.3% in Britain this year, compared with more than 3% in America. Read more here.

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Written by Theophyle

April 25, 2010 at 10:00 am

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