Innovation remains the key to China’s economic success

Emerging market companies have in the past tended to compete with their peers in developed economies on the basis of cost.

In more recent years however, businesses in the region have recognised they cannot rely on low wages, cheap currencies or protectionist measures forever. Many firms have realised that they need to offer more sophisticated, innovative products.

By competing on the basis of quality rather than price, companies should be able to expand, or protect, their margins and profitability, as well as develop more sustainable business models.

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In the past few years, research & development (R&D) investment in emerging markets has risen dramatically.

For instance, between 2007 and 2012, China and India doubled their total spending.

R&D spending in emerging markets is currently increasing at a faster rate than in developed nations, albeit they are starting from a lower base. This investment is delivering tangible results.

The number of patent applications in China has soared in recent years and China has now overtaken the US.

This trend of increased R&D spending is encouraging as it indicates a commitment to innovation and the development of advanced technological products within emerging markets.

A commitment to R&D and brandbuilding should enable companies to maintain their competitive advantages and sustain their returns over time.

The recent success of Samsung’s smartphones shows how potent the combination of exciting products and a desirable brand can be.

One innovative Chinese firm that is taking on the leading global players is Hollysys Automation Technologies.

Hollysys provides sophisticated control devices and signalling systems for industrial, railway and nuclear projects.

These control technologies and applications are used to improve the safety, reliability and efficiency of systems. R&D is central to the company’s culture and has enabled Hollysys to develop industry-leading technology. Hollysys has been successful in winning contracts on China’s high-speed rail network and for nuclear power plants.

The company’s equipment is also gaining recognition overseas and it has exciting long-term prospects as it continues to develop innovative cutting-edge technologies and finds new markets for its products

There are still too many companies in emerging markets that are focused on competing on cost rather than quality.

In the longer term, however, there should be increasing numbers of emerging market companies to follow the example of firms and place the emphasis on innovation in order to drive profitability and become globally competitive.

Jenny Lowe is features editor at Investment Adviser


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