Rethinking Innovation in Emerging Economies: Recombination, Co-Evolution, and the New Role of MNEs

Introduction: The New Frontier of Innovation

For decades, the global narrative of innovation was written in the labs of Silicon Valley, the factories of Germany, and the R&D centers of Japan. Emerging economies were seen as recipients—markets for mature products, sources of cheap labor, or destinations for outsourced manufacturing. That script is now being rewritten.

A landmark 2021 study published in the Journal of International Business Studies by Anand, McDermott, Mudambi, and Narula, which has accumulated over 37,000 accesses and 222 citations, offers a foundational rethinking: innovation in and from emerging economies is not a simple catch-up process driven by linear technology transfer. Instead, it is a co-evolutionary, interdisciplinary phenomenon shaped by the recombination of local and imported knowledge. This article unpacks the core logic of that framework, reveals the hidden economic patterns behind it, and explores the strategic implications for policymakers and multinational enterprises (MNEs) alike.

[IMAGE: A world map with glowing nodes over emerging economies such as China, India, Brazil, and Nigeria, connected by arrows to advanced economies like the United States, Germany, and Japan. The nodes vary in brightness to indicate different stages of innovation capability.]

The key insight: emerging economies are not simply closing a gap; they are creating new pathways of innovation that challenge the traditional hierarchy of knowledge creation. The process is non-linear, collaborative, and deeply embedded in local institutional contexts. To understand it, we must look beyond technology alone.

Beyond Technology: The Full Spectrum of Innovation

Innovation in advanced economies is often equated with breakthrough technologies—patents, new drugs, or cutting-edge software. In emerging economies, the picture is broader. The 2021 framework expands the definition of innovation to include three interrelated dimensions: technological improvements, organizational innovations, and transactional innovations.

• Technological innovation includes new products, processes, and services, but also adaptations of existing technologies to local conditions (e.g., low-cost medical devices designed for rural clinics).
• Organizational innovation refers to new ways of structuring work, managing supply chains, or coordinating teams (e.g., the rise of vast, flexible networks of small suppliers in China’s Pearl River Delta).
• Transactional innovation encompasses improvements in how firms interact with customers, partners, and regulators (e.g., mobile payment systems that leapfrog traditional banking in Kenya).

The central mechanism driving all three types is recombination. As the article states, innovation is largely a process of combining local knowledge—tacit, contextual, and often embedded in informal networks—with imported knowledge that is codified, global, and often proprietary. This recombination happens through multiple forms of collaboration: joint ventures, supplier partnerships, university-industry links, and even informal knowledge exchanges among migrant workers.

Consider a concrete example: an Indian automotive components firm that merged local frugal engineering practices with German precision standards. The result was not a copy of a German factory but a hybrid production system—lower cost, higher flexibility, and still meeting global quality norms. This is recombination in action.

[IMAGE: A diagram showing two streams labeled “Local Knowledge” (e.g., frugal engineering, informal networks) and “Imported Knowledge” (e.g., ISO standards, foreign R&D) merging into a new hybrid product or process. The streams are divided into three color-coded categories: technological, organizational, and transactional.]

The broader implication: measuring innovation in emerging economies solely by patent counts or R&D spending misses the vast majority of value-creating activity. Organizational and transactional innovations often matter more for productivity growth than technology per se, especially in contexts where institutions and infrastructure are still developing.

The Co-Evolutionary Catch-Up: Not a Race, But a Dance

Sustained catch-up in emerging economies is not a linear march toward a fixed destination. The authors argue that it is a co-evolutionary process—a dynamic interplay between firms, industries, and institutions that mutually shape each other over time.

Firms cannot upgrade their capabilities in isolation. As they innovate, they push for better standards, stronger training systems, and more effective R&D institutions. In turn, improved institutions enable further firm-level innovation. This feedback loop is the engine of long-term development.

For example, when South Korean chaebols like Samsung began investing in semiconductor manufacturing in the 1980s, they did not simply buy foreign technology. They simultaneously lobbied for government-funded research institutes, pushed for specialized university programs, and demanded strict quality standards from local suppliers. The government responded with policies that supported these goals. The result was a co-evolutionary spiral that transformed both the firms and the national innovation system.

The same dynamic is visible in emerging economies today. In Brazil, the rise of deep-water oil drilling capabilities by Petrobras spurred the development of a local supply chain, engineering schools tailored to oil and gas, and regulatory frameworks for offshore exploration. In China, the rapid growth of electric vehicle manufacturers like BYD has been accompanied by government investments in battery research, charging infrastructure standards, and consumer subsidies—all of which feed back into firm-level innovation.

Crucially, co-evolution means that the process is non-linear and often uneven. Some sectors may experience leapfrogging—a direct jump to advanced technologies without passing through intermediate stages. Kenya’s mobile money system M-Pesa is a classic example: it bypassed traditional banking infrastructure altogether. Other sectors may lag for years before a sudden acceleration. Policymakers and managers must therefore avoid the trap of treating catch-up as a uniform race across all industries.

[IMAGE: A spiral or co-evolution diagram with three interconnected loops labeled “Firm Capabilities,” “Industry Structures,” and “Institutional Frameworks.” Arrows show mutual reinforcement, with a timeline indicating stages of development from early to advanced.]

The article draws heavily on interdisciplinary work from innovation studies and development economics, emphasizing that pure management theory or neoclassical economics alone cannot explain these dynamics. Understanding co-evolution requires insights from sociology (how informal networks shape knowledge flows), political science (how policy coalitions form), and organizational behavior (how firms learn).

Redefining Firm-Specific Advantages for Local Firms and MNEs

One of the most striking contributions of the 2021 framework is its reinterpretation of firm-specific advantages (FSAs) —the unique capabilities that allow firms to compete internationally. In traditional international business theory, FSAs are developed in home markets and then exploited abroad. But in emerging economies, the story is more complex.

For local firms, FSAs are often built not from scratch but through recombination. A local firm may lack proprietary technology but possess deep knowledge of local consumer preferences, regulatory nuances, and informal distribution channels. When combined with foreign knowledge—acquired through licensing, joint ventures, or hiring diaspora talent—the resulting hybrid capabilities become a source of competitive advantage. Over time, these firms may develop their own proprietary innovations and even become global players.

For MNEs, the role is equally transformed. Instead of being mere technology exporters, MNEs emerge as instigators, conduits, and beneficiaries of innovation in emerging economies. They instigate innovation by setting quality standards, introducing new processes, and creating demand for local R&D. They act as conduits by facilitating knowledge flows between their global networks and local ecosystems. And they benefit by accessing new ideas, low-cost experimentation, and talent pools that they can recombine with their own proprietary knowledge.

A case in point: Unilever’s operations in India. The MNE did not simply transfer its global product formulas. Instead, it recombined local insights—such as the need for affordable sachet packaging in rural markets—with its global expertise in brand management and supply chain efficiency. The result was a stream of innovations (like low-cost detergents and shampoos) that were later adapted for other emerging markets. Unilever’s own FSAs were enhanced through this process.

The article highlights a critical nuance: the FSAs of both local firms and MNEs are context-dependent and co-evolving. An FSA that works in one emerging economy may fail in another, because the institutional environment, labor market, and knowledge base differ. Success requires the ability to continuously adapt and recombine.

[IMAGE: Two interconnected circles labeled “Local Firm FSAs” and “MNE FSAs.” Arrows indicate bidirectional flows of knowledge, with icons representing recombination capabilities (e.g., a mixing bowl, gears, a bridge). In the overlap zone, a star symbol marks new hybrid innovations.]

Policy Implications: Building Institutions for Recombination

If innovation in emerging economies is driven by recombination and co-evolution, then policy must shift from a narrow focus on R&D spending to a broader agenda of institutional development. The article distills three priority areas for policymakers:

• R&D infrastructure and incentives: Governments must invest in public research institutes, university-industry collaboration platforms, and tax incentives for private R&D. However, these efforts should be designed to encourage recombination between local and foreign knowledge, not to create isolated silos.
• Training and skill formation: A workforce capable of absorbing, adapting, and generating new knowledge is essential. This means not only formal education but also vocational training, on-the-job learning, and programs that facilitate the mobility of skilled workers across firms and sectors.
• Standards and regulation: Quality standards, intellectual property regimes, and product safety regulations can act as catalysts for innovation. When well-designed, they push firms toward higher performance while still allowing flexibility for local adaptations. Standards also facilitate recombination by creating common reference points for collaboration.

Crucially, policies must be adaptive and iterative. Because co-evolution is dynamic, what works at one stage of development may become obsolete later. The authors warn against “one-size-fits-all” industrial policies imported from advanced economies. Instead, policymakers should experiment, learn, and adjust alongside firms and industries.

For MNEs, the policy implications are equally profound. To fully tap into innovation potential in emerging economies, MNE subsidiaries must be granted autonomy to recombine local and global knowledge, rather than being treated as passive implementers of headquarters’ strategies. Global managers must develop “recombination capabilities” themselves—the ability to scan, select, and integrate diverse knowledge sources across different institutional contexts.

Conclusion: A New Grammar of Global Innovation

The 2021 study by Anand, McDermott, Mudambi, and Narula offers more than a theoretical reorientation. It provides a practical grammar for understanding how innovation actually works in the world’s fastest-growing economies. The core message is clear: innovation in emerging economies is neither a delayed copy of the West nor an exotic outlier. It is a distinct, co-evolutionary process driven by the recombination of knowledge across borders, institutions, and sectors.

For global business strategy, this means that MNEs must stop viewing emerging markets merely as production bases or sales outlets. They should treat them as laboratories for recombination—places where new hybrid innovations can be generated and then scaled globally. For policymakers, the lesson is to invest in institutions that enable recombination, rather than trying to pick winners or replicate Silicon Valley.

And for researchers, the framework opens up new questions: How do informal knowledge networks complement formal R&D? What role does diaspora mobility play in recombination? How can we measure the economic impact of organizational and transactional innovations?

The global innovation map is being redrawn. The center of gravity is shifting—not because emerging economies are catching up in the old sense, but because they are writing new rules of the game. Understanding those rules is the first step toward playing them well.

[IMAGE: A visual metaphor of a lattice or network connecting two distinct regions—one representing an advanced economy (sleek skyscrapers, data streams) and the other an emerging economy (vibrant market stalls, traditional workshops). At the center, a luminous node or bridge where elements from both sides are being recombined into a new, hybrid structure. No text, no watermarks.]