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The future of innovation

April 13, 2012, 3:57 PM UTC

Try this. Take a map of the world. Mark the countries with the most growth potential. Now plot the office locations of your company’s 50 highest-ranking executives. Chances are that most of them don’t work in an emerging economy, where the most robust market opportunities lie today and for the foreseeable future.

In Reverse Innovation: Create Far From Home, Win Everywhere, Dartmouth professors Vijay Govindarajan and Chris Trimble use this exercise to illustrate the challenges of reverse innovation, which they define as innovations that start in poorer countries rather than rich ones.

It used to be that most products were invented in the developed world and then tweaked for consumers in developing countries. But as incomes grow in places like China, India and Brazil, many executives have spotted opportunities to grow their businesses by reversing this trend. Reverse innovation comes with plenty of hurdles, which makes this book particularly timely.

The book, an extension of a 2009 Harvard Business Review article that Govindarajan and Trimble co-authored with General Electric CEO Jeff Immelt, reads like a how-to guide for executives looking to innovate beyond the U.S. and Europe. Govindarajan spent two years as an innovation consultant for GE (GE). His work inspired Reverse Innovation, much of which explains how GE set about creating products in the developing world and India, including a portable, lower-cost health device that measures heart rhythms. The authors point out that similar technology can be used to help the rural and urban poor in the U.S.

Reverse innovation has a long history. You probably think of Gatorade as an American sports drink, but it’s actually rooted in Bangladesh. A 1960s cholera outbreak brought Western doctors to the country, where they tweaked a local recipe of coconut water, carrot juice and other ingredients used to treat severe diarrhea caused by the infection. Its success was highlighted in a medical journal and eventually made its way to researchers at the University of Florida who were trying to figure out how to re-hydrate athletes quickly.

The authors provide numerous case studies that explain why innovations created in rich countries often struggle to take off in the developing world. We’re reminded that building a successful business is as much about anthropology as it is about economics. It’s not enough to look at income trends. We also need to understand how people actually live in different parts of the world.

A few examples: Logitech (LOGI) realized that Chinese consumers needed a mouse that also doubled as a remote control, because so many of them downloaded movies from the Internet and then watched them on their televisions. Deere & Company (DE) learned that big tractors didn’t work so well in India, where farms are much smaller and where tractors often double as the family car.

The book has a few shortcomings. While the authors do a good job of explaining how managers can overcome organizational and administrative barriers to reverse innovation, they ignore external obstacles that come with doing business in economies where everything from courts to government institutions are relatively weak.

After all, these are real concerns. In 2010, according to The Financial Times, Jeff Immelt told business colleagues assembled at a private dinner that he found China hostile to multinational companies: “I really worry about China,” he said. “I am not sure that in the end they want us to win, or any of us to be successful.”

The book’s forward, written by PepsiCo. CEO Indra Nooyi, seems oddly timed given the challenges that PepsiCo (PEP) has recently faced marketing healthier products to customers globally. This is certainly a noble effort, especially as the U.S. struggles to confront its obesity epidemic. But the strategy damaged key brands like Pepsi-Cola, which has lost ground to Diet Coke in the U.S. market.

Still, the global financial crisis confirmed that developing nations will probably drive global growth in coming years, given that most richer countries are now saddled by heavy debts and budget deficits. It’s a useful and even inspiring read for any executive who cares about the future of business innovation.