Assessing competitive advantage of emerging markets in knowledge intensive business services

Assessing competitive advantage ofemerging markets in knowledge intensive

business servicesRajshekhar (Raj) G. Javalgi, Andrew C. Gross, W. Benoy Joseph and Elad Granot

Cleveland State University, Cleveland, Ohio, USA

AbstractPurpose – The dramatic growth and international scope of knowledge-intensive business services (KIBS) are evident in emerging markets such asChina and India. Nations, like firms, seek to capitalize on their available resources and capabilities (e.g. people, technology, skills) in order to build andmaintain core competencies in certain industry sectors. This paper has the following objectives: to discuss the classification of KIBS, to marshalconceptual and statistical evidence on KIBS in major emerging markets, to compare and contrast selected major emerging markets in regard to theirKIBS activities, and to discuss policy implications.Design/methodology/approach – In this conceptual paper, extant literature is reviewed and discussed pertaining to the KIBS sectors. Severalexisting data sources are used to assess the comparative performance of major emerging markets in the KIBS sectors.Findings – The emphasis is on finding comparative longitudinal statistics that are useful for comparison and contrast among major emerging markets.The analysis indicates that while the major emerging markets are building competitive advantage by focusing on knowledge-intensive businessservices, their progress differs sharply. For example, China shows the lead, followed by India, Brazil, Russia, Mexico, Turkey, and Indonesia. Smallernations lag behind these in most indicators. It is evident that leading major emerging nations have not reached parity with highly industrializedcountries.Research limitations/implications – The results show ranking and contribution of various major nations in the global knowledge economy, butadditional time series and analysis are needed to assess comparative rankings. However, the classification and the indicators illustrated here offer apanoramic, comparative picture over the past decade. Using international business theories, research can develop statistical models to explain foreignmarket entry strategies of knowledge-intensive service firms.Practical implications – The paper is of value to managers considering entry and/or expansion into major emerging markets in various sub-sectors ofknowledge-intensive sectors. The specific industry and function pursued by a firm need to be identified and matched up with host nation characteristics(e.g. more software design and pharmaceutical research in India v. more manufacturing design and R&D facility in China). The paper also providesguidelines to policy makers to sustain their country’s competitive advantage in the KIBS sectors.Originality/value – The paper looks at knowledge-intensive business services in major emerging markets. It offers both conceptual contributions andstatistical evidence that key nations differ in their activities in regard to such high-level and complex service offerings.

Keywords Emerging markets, Service industries, Knowledge economy, Competitive strategy

Paper type Conceptual paper

Introduction

An executive summary for managers and executive

readers can be found at the end of this article.

Services industries account for nearly two-thirds of the

world’s total output (World Factbook, 2008). In the USA

alone, for example, the service sector accounts for more than

two-thirds of GDP and 80 percent of workforce employment

(Survey of Current Business, 2005). Globalization has also

opened opportunities for outsourcing a host of manufacturing

and service operations from high-cost to low-cost regions.

China, India and other major emerging economies have

benefited greatly from the recent trend to global outsourcing

because of their particular strengths in manufacturing,

technical, and human capital resources.Growth of the service sector is not restricted to advanced

economies. Developing economies have accounted for a

growing share of the world trade in services, ranging from 33

percent of GDP for China and 48 percent for India to as high

as 80 percent for Panama (World Factbook, 2008). The average

growth of services during the 1990s was 9 percent in China

and 8 percent in India (Tata Services, 2002). A number of

forces have influenced the growth and strategic importance of

services including rising cross-border activities of firms, the

need for scientific and technical expertise, new sets of

challenges and opportunities resulting from advances in

information technologies, and the need to sustain innovation

and competitive advantage (Javalgi and Martin, 2007; Javalgi

and White, 2002). Simply put, services permeate every aspect

of a modern economy and are instrumental in connecting

nations to each other with information, knowledge, goods,

and services.There is widespread agreement that, over the past two

decades, the global economy has shifted from manufacturing

to technology-intensive and knowledge-intensive business

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing

26/3 (2011) 171–180

q Emerald Group Publishing Limited [ISSN 0885-8624]

[DOI 10.1108/08858621111115895]

171

service industries. The growth of knowledge and information

technologies has heightened interest in knowledge-intensivebusiness services (KIBS) as a strategically important businesssector (Aslesen and Isaksen, 2007). Information technologyservices, management consulting, legal, accounting, financial,

engineering, and market research are some typical examplesof KIBS (Strambach, 2002). Knowledge intensive serviceswithin the private sector constitute a large and growing part ofthe service sector’s output. It is estimated that this sector ofservices more than doubled from $4.5 trillion in 1986 to

$11.5 trillion in 2005 in constant dollars (Global Insight,2007). The USA, the European Union, and Asia are theleading providers of knowledge-intensive services, accountingfor nearly 90 percent of global value-added activity in 2005.Whereas the USA dominates with an estimated 40 percent

share of world service revenues, and the EU’s share isapproximately 25 percent, both regions have stagnated ordeclined in the past ten years. Asia, on the other hand, is theonly region which has shown a steady increase in share of

knowledge-intensive services (22 percent) with China andIndia accounting for a significant share of this activity(National Science Board, 2008).

This paper examines the competitive advantages of selected

emerging markets in the growing sector known as“knowledge-intensive business services” (KIBS) anddiscusses policy implications for sustaining advantage. Morespecifically, the objectives of this paper are four-fold:1 to discuss the nature and classification of KIBS;2 to marshal conceptual and statistical evidence on KIBS in

major emerging markets;3 to compare and contrast selected major emerging markets

in regard to their KIBS activities; and4 to discuss policy implications.

Knowledge intensive business services: studybackground

Services, unlike goods, have unique characteristics such asintangibility, inseparability, heterogeneity, and perishability.

In addition to these general characteristics, knowledge-intensive business services also possess the additionalcharacteristics of high customization, risk and uncertainty,and credence properties that add to their complexity anddifficulty in being evaluated by customers (Zeithaml, 1981).

Hence, the production and delivery of knowledge intensiveservices requires the producer to be able to create a servicethat is of consistent quality and whose quality can be judgedwith tangible methods that meet the customized specifications

of customers. If the service is relatively low-knowledgeintensive (e.g. transcribing legal depositions), the accuracy oftranscriptions and speed with which the work can becompleted offer palpable measures of quality. For highknowledge-intensive services such as engineering design or

software development, however, quality is more difficult tomeasure; the quality and credibility of the service providerbecomes a surrogate measure of service quality. Nations thatare firmly invested in the knowledge economies of today willenjoy significant competitive advantages as providers of

knowledge-intensive services.Key players in KIBS are generally private firms that rely

heavily on knowledge or expertise related to a specific

discipline (e.g. IT) or functional domain such as technical orcustomer service (Bilderbeek et al., 1998). Miles et al. (1995)

classified KIBS into two categories. The first category deals

with traditional professional services such as management

consulting, advertising, accountancy, and legal services and

which are based on social and institutional knowledge. The

second category of services relates to technical knowledge and

transfer of this knowledge. Technology-based services include

information technology-related services, architectural and

engineering services, medical and pharmacological research

services, design, and R&D.The National Science Board (2008) offers an alternate

classification of knowledge-intensive service industries

consisting of two broad categories: market-driven and

public-sector oriented. Market-oriented services include

communications, financial, computer software development,

and business services such as management consulting. Public

sector services include services such as education, health,

entertainment and tourism.We have greatly expanded and modified the National

Science Board classification by grouping KIBS based on the

level of skill or knowledge intensity (see Table I).As Table I shows, some knowledge-intensive services

require high levels of skills and expertise (e.g. technical

consulting) compared to others (e.g. data entry or customer

call centers). An assessment of the competitive positions of

services listed in Table I within the context of emerging

markets will be further discussed in this article.In brief, KIBS play a key role in the creation and

distribution of knowledge in a regional, national and

international context. More importantly, when KIBS are

international in scope, they facilitate the “transfer of tacit

knowledge from one knowledge system to another by enabling

co-location and co-presence between themselves and client

firms in a number of locations” (Roberts, 2000, p. 165). The

following discussion focuses on the drivers impacting

globalization of knowledge-based services.

Drivers impacting globalization of knowledge-based services

Key drivers for a knowledge-driven economy of an emerging

market such as India or China include the recognition of and

access to global talent; advances in telecommunications and

information technology; the rise of offshore outsourcing of

manufacturing and services; and the worldwide movements

toward economic liberalization and improved legal

protections for intellectual property. Their impacts on KIBS

among emerging markets is presented in Figure 1 and

discussed briefly in the following sections.

Access to global talent

An important factor impacting the globalization of

knowledge-based services is the availability of and access to

global talent. According to Friedman et al. (2007), at least

three factors impacting the global marketplace for talent have

become more competitive than ever before. First, the rise of

rapidly developing economies and the globalization of value

chains have created unprecedented demand. Companies are

seeking the best locations for their operations in order to

compete globally on the basis of cost, talent and proximity to

markets. Second, there is a shortage of talent in advanced

economies which is compounded by the imminent retirement

of baby boomers. Third, some emerging economies offer a

Assessing competitive advantage of emerging markets

Rajshekhar (Raj) G. Javalgi et al.


Volume 26 · Number 3 · 2011 · 171–180

172

vast pool of educated workers to take up low-skilled as well as

technically- and intellectually-demanding projects.Hence, as reported by Friedman et al.(2007), it is not

surprising that global companies are actively investing in

human capital in developing economies as demonstrated by

the following examples:. by 2010 IBM expects to double its Indian operations by

adding more than 50,000 employees;

. L.G. Philips is investing $1.1 billion in Poland and

planning to hire 12,000 people there;. Deloitte Touche Tohmatsu plans to double its staff in

China by 2009;. by 2010 Cisco Systems plans to move 20 percent of its

leadership team to India; and. Boeing has hired over 1000 Russian aerospace engineers

for the Boeing Design Center in Moscow.

Table I Classification of knowledge intensive services by key sectors and knowledge intensity

Skills/knowledge intensity Public sector Market-oriented

Low Travel and tourism services Call centers

Park and ride Help desk

Restaurant services IT enabled services

Transportation services Data banks and data analysis

Regulatory agencies Printing services

Employee inquiries

After-sales support

Market research

Medium Public educational services/advice IT outsourcing

Museum and galleries Technical support services

Health and safety education Payroll processing

Other government services (e.g. state fares, public assistance training) Account processing

Claims processing

Transaction processing

Advertising services

Market research report

Hardware and software consultancy

High Distance education Logistics consulting, supply chain design

Medical imaging R&D, private laboratory testing

Pharmaceutical and biotech services Software development

Drug testing Product and service design

Laboratory testing Architectural and engineering services

Security services Banking and financial services

Tax auditing Legal services and insurance services

Border control and surveillance Accounting and tax services

Management consulting

Advanced communication services

Figure 1 Key drivers impacting globalization of knowledge-based services




Volume 26 · Number 3 · 2011 · 171–180

173

It is evident from this sample that global companies search the

globe for the right kind of talent – and they are findingaffordable talent in emerging markets that have invested in

and developed high quality educational systems. Farrell et al.(2005) note that young professional talent in selected

emerging markets is growing at 5.5 percent annually whilethe number in mature economies is rising at just one percent

annually.

Advances in information and communications

technology

One of the most significant drivers in the outsourcing of

services to off-shore locations has been the dramatic advancesin telecommunications and information technology, with

advances penetrating even the most impoverished regions ofthe world. Indeed, across nations, there are a number of

“digital divides” that separate the rich from the poorcountries, between urban and rural populations, and

between more and less educated or affluent groups. Age andgender also contribute to the digital divide. But manyemerging nations in Asia and Latin America have invested in

telecom and IT, permitting them to leap-frog over severalstages of economic development. Advances in satellite

communications and rapid developments in broad-bandinternet connectivity have permitted firms in advanced

nations to outsource services that involve handling andprocessing of sensitive financial, legal, medical and other

information in secure environments. For example, thenumber of internet hosts in India in 2005 was an estimated

2.3 million and China had 10.6 million (World Factbook,2008)

The rise of outsourcing to emerging markets

Emerging markets such as South Korea, Malaysia, India,

China, Russia, and Brazil have become popular outsourcingtargets for global firms that are investing in KIBS

(Radhakrishnan, 2007). Given the rapid change intechnology and the reduction in telecommunications cost,

the rate of growth for the offshoring of services is increasing,especially in key emerging markets. Offshoring, which refers

to the relocation of jobs and production to a foreign location,is not a new phenomenon. What is new, however, is the

offshoring of knowledge-based services such as businessprocess outsourcing (BPO) and professional services such asaccounting, engineering and legal services. The relocation of

labor intensive services (e.g. payroll processing, telephone callcenters) to lower-wage emerging markets is consistent with

the well-known principle of comparative advantage whichpredicts that nations are better off if they produce goods and

services that give them a competitive advantage over othernations. Hence, past history and conventional wisdom would

suggest that countries such as India, China, and Indonesia,with their relative abundance of unskilled labor, should

specialize in labor-intensive production whereas developedeconomies such as the USA or Germany, with high laborcosts and educated workforces, should specialize in capital-

intensive service production.The most remarkable trend, however, is that some

emerging economies are building their comparativeadvantage in both less-skilled service sectors as well as in

advanced-skill sectors. Indeed, as the number of educatedworkers with college or post-graduate degrees has grown in

India, China, and other developing economies, the next wave

of outsourcing is expected to be in research and design

(Wadhwa et al., 2007). As Table II shows, the statistics for

science and engineering graduates in China and India seemimpressive, but independent observers suggest that these data

be viewed with caution.As an example, it has been pointed out that because of

problems in regard to definition and classification as to whatconstitutes an engineer or a technology graduate in China and

India, their numbers may be unreliable. Deutsche Bank(2005) Research estimates that China graduates 600,000

engineers per year but only one out of ten is suitable for work

at a multinational firm (Trinh, 2006, p. 16). The sameresearch reports that even though India has an estimated pool

of 22 million university graduates, only 25 percent ofengineering graduates and 10-15 percent of other university

graduates are suitable for work in the IT sector (Trinh, 2006).The figures in Table II are likely to include anyone who

studied engineering, possibly technicians, and even dropoutsand “empty seats” in government-approved engineering

schools (Turley, 2006).

Economic liberalization, political stability, and

intellectual property protection

The emergence of the modern global economy can be

attributed to the opening of trade with China in the 1970s,the rise (and stumble) of the “Asian Tiger” economies of

Indonesia, Thailand, and Malaysia in the 1980s and 1990s,

the reunification of Germany and the breakup of the SovietUnion in the 1990s, the move to a model of vigorous “state

capitalism” in China in the 1980s and 1990s, and the politicalshift to economic liberalization in India in the mid- to late

1990s. The opening of markets in low-cost countries attractedinvestors from advanced nations which translated into massive

foreign direct investment in manufacturing facilities in thePacific Rim nations. Services outsourcing followed with low-

end operations (e.g. data entry, transcribing of records, and

customer service call centers) in English-speaking nationssuch as Ireland, Philippines, and India (see Jahns et al., 2006).

It was inevitable that nations with well-educated, lower-paid labor pools would soon be targeted for the outsourcing of

higher-end, knowledge intensive services. But higher-endKIBS (e.g. pharmaceutical research; financial investment

modeling), because of their sensitive proprietary andcompetitive conditions, require assurances that intellectual

property (IP) and investor rights will be protected, and the

government of the host country will be governed by laws, not

Table II Four-year bachelor’s degrees in engineering, computerscience, and information technology awarded from 2001 to 2005(in USA, India and China in thousands)

Country 2001 2002 2003 2004 2005

USA 114.2 121.3 134.4 137.5 133.9

India 82.1 109.4 129.0 139.0 170.0

China-A 282.6 361.3 NA

China-B 219.6 252.0 351.5 442.5 517.2

Notes: Data for China-A ¼ Ministry of Education (MOE) and ChinaEducation and Research Network; Data for China-B ¼ Ministry ofEducation Yearbook; Both sets are suspect but they represent best estimatesavailable; These are both definitional and methodology problemsSource: Wadhwa et al. (2007)




Volume 26 · Number 3 · 2011 · 171–180

174

by capricious bureaucrats (e.g. see Lai, 2008). Both India and

China, but especially China, have experienced problems inprotecting IP; patent violations have been noted in counterfeitbrands or copying and selling technical designs (Asakawa,2005). Oddly enough, many European and American firms(e.g. Dow Chemical, Honeywell International, Nokia,

Siemens, General Electric) have ignored these flaws andmade significant R&D investments in both India and China.

The competitive advantage of emergingeconomies in KIBS

Porter’s (1990) seminal work on the competitive advantageamong nations suggested that national competitiveness maynot depend on the economy as a whole but on specificindustry sectors such as heavy manufacturing or information

technology. Hence, nations that possess such strengths willgain prominence in the global marketplace. India, forexample, has received considerable international attentionbecause of its strengths in the information technology (IT)sector. Its success in IT has spilled over to other knowledge-based services such as accounting, R&D, medical and

pharmaceutical, engineering, and technical consulting(Kapur and Ramamurti, 2001).

Indeed, China, India, and the other nations cited here have

made giant strides and are showing two-digit annual growthrates. At the same time, our analysis shows that these nationsstill have a long way to go to achieve parity with industrializednations. Taken at face value, the numbers suggest that Chinais in the lead, with India in second place, followed by Brazil,

Mexico, Russia, and Turkey. Russia had a good science-engineering base in the past, but has experienced somesetbacks because of recent political events. While it is now in a“recovery” mode, Russia is unlikely to be a large base forKIBS outsourcing. The following discussion and set of five

tables (Tables III-VI) reveal the progress that major emergingmarkets have achieved in KIBS and related areas.

The National Science Board (2008) has classifiedknowledge-intensive service industries into two broad

categories: market-oriented, and public-oriented. Market (orprivate-sector) services consist of business, communications,and financial services; the public sector consists of educationand health services. Globally, the revenues of the threemarket-oriented knowledge-intensive services grew at an

annual rate of 4.8 percent between 1986 and 2005compared to 2.7 percent for other service industries.Market-oriented services have grown from 22 percent of allservices in 1986 to 30 percent in 2005 (Global Insight, 2007).

Knowledge-intensive services have grown rapidly in majoremerging economies. National Science Board (2008)estimates of value-added revenues for all types of KIBS (inconstant 2000 US dollars) among seven major emergingmarkets are shown in Table III.

Table III data for 2005 show that China led the way inknowledge-intensive services ($450 billion), followed byBrazil, Mexico, and India. China displayed double-digit

growth from 1995 to 2005, a rate unmatched by other nationsexcept for India. Independent estimates also suggest thatmarket-oriented KIBS worldwide constitute about 30 percentof all services but have grown at a 4.8 percent rate v. 3.3percent for all services (Global Insight, 2007). Growth rates,

on the average, are also slightly higher in the three market-oriented sectors than in the two public-oriented ones. In sum,

the evidence shows that all seven major emerging nations

embarked on the route of emphasizing not just agriculture

and manufacturing, but services and especially science-

technology or knowledge-based services, with China leading

the way.While value-added revenues from knowledge-intensive

services constitute one way of demonstrating the level to

which a nation has evolved as a knowledge economy, other

key indicators are worth noting which reveal the competitive

advantages and resources that can shape success in KIBS.

Four indicators, discussed below, are science and engineering

scholarship, research patents, knowledge economy index, and

economic strengths.

Science and engineering scholarship

Research publications, especially in science and technology,

reflect the intellectual vitality of a nation in its ability to move

up the knowledge-intensive services ladder. Data for seven

emerging nations is summarized in Table IV. The data once

again reveal that China is in the lead followed by India and

Russia. Russia has achieved scientific and technological

breakthroughs in the past, but as of late, has fallen back,

and its recent growth rate is negative.Also, according to a National Science Board (2008) study,

the progress made by selected emerging nations in the area of

Table III Value-added revenue for all knowledge-intensive services,selected major emerging nations, 1995-2005 (2000 US$ bil. and %)

Annual growth (%)

Country 1995 2000 2005 2000/1995 2005/2000

China 147.0 252.9 449.4 11.4 12.2

India 46.6 76.9 113.8 10.5 8.1

Indonesia 17.2 19.7 28.7 2.7 7.8

Brazil 129.8 135.1 158.8 0.8 3.3

Mexico 84.8 103.1 116.0 4.0 2.4

Russia 39.1 40.2 56.6 0.6 7.1

Turkey 26.4 35.2 43.2 5.9 4.2

Notes: Further breakdown also available on market-oriented, knowledge-intensive services (communications, business, finance) versus non-market-oriented knowledge services (education and health); Annual rates of growthcomputed by the authorsSource: National Science Board (2008, Appendix Tables 6-4 and 6-5)

Table IV Output of science and engineering articles, all fields, selectedmajor emerging nations, 1995-2005

Annual growth (%)

Country 1995 2000 2005 2000/1995 2005/2000

China 9,061 18,479 41,596 15.3 17.6

India 9,370 10,276 14,608 1.9 7.3

Indonesia 129 182 205 7.0 2.5

Brazil 3,436 6,407 9,889 13.3 9.1

Mexico 1,937 2,971 3,902 8.9 5.6

Russia 18,603 17,180 14,412 21.6 23.5

Turkey 1,715 3,484 7,815 15.2 17.5

Source: National Science Board (2008, Vol. 1, Tables 5-19 and 5-21, andAppendix Tables 5-34)




Volume 26 · Number 3 · 2011 · 171–180

175

“scholarly output” show that China moved from 14th in 1995

to 5th by 2005, India remained in 12th place, while Russia

slipped from 7th to 13th place. Brazil and Turkey moved up

to 17th and 19th place in this ten-year interval. Scholarly

output, as shown in Table IV, is defined as number of research

articles published in all fields of science and engineering. All

of the above must be taken in perspective with the fact that

the USA has been the consistent leader in this field with about

200,000 articles published per annum; however, its global

market share is declining and moved from 34 to 29 percent

during the 1995-2005 period. In both years, Japan ranked

second, the UK third, and Germany fourth. It is hard to

dislodge old-time leaders, but growth rates for the major

emerging economies shown in Table IV indicate a “closing of

the gap.”

Research patents

Yet another output indicator from the science-technology field

is the number of patents applied for and/or granted. The

private sector in each major nation is dedicated to this task in

both high-tech and other industries. However, it is truly

difficult to compare and contrast individual patents even in a

given field and in one country. The difficulties are many-fold

when one attempts to do such comparisons across various

sectors and major nations. To overcome this limitation on

measuring national inventive activity, a database has been

developed as a collaborative project involving a host of

national and international organizations (EU, OECD, the US

National Science Foundation, the World Intellectual Property

Organization, and several others). The database counts only

those inventions for which patent protection has been applied

for or granted in the three largest markets: the USA, the EU,

and Japan. These inventions are called “triadic patent

families,” and available statistics for a selected emerging

markets are shown in Table V.The high cost of filing and the need to manage patent costs in

competitive industries prove triadic patents to be a more

robust than simple patent counts according to OECD-based

organizers of the database. Clearly, China and India have notmade any significant inroads in this field as much as they havein the previously discussed areas. These nations may bereluctant to file triadic patents because of cost considerationsand their proclivity towards introducing imitation products.The USA has been the leader in filings since 1989 and hadabout 37 percent of the global market share in 2003; the EU’sworld share was at 30 percent, and Asia at 28 percent in 2003,with Japan leading the way there.

Knowledge economy index

In addition to the NSB’s massive data-gathering program andtruly wide-ranging report (National Science Board, 2008), theWorld Bank (2008) has developed the KnowledgeDevelopment Program which incorporates four keyindicators: education, innovation, economic incentive, andinformation technology. Combining the four sets, it hasdeveloped a “Knowledge Economy Index” for over 100nations and ranked them on both an overall basis and theindividual series. According to this index, in 2007, Swedenwas ranked first, Canada seventh, and the USA was listed intenth place. Looking at the same set of seven major emergingnations discussed earlier and for which statistics were cited inTables III to IV, their rankings according to the World Bankare summarized in Table VI.

Several nations currently rank ahead of China, namelyBrazil, Mexico, Russia, and Turkey. China ranks 75th on thelist and India occupies the 101st place. Clearly, they have along way to go to reach the top ranks. However, as Table VIshows also, the trend in improvement is impressive for China,though not for India. China has moved from 104th in 1995 to75th by 2007, while India has slipped even further down.Since the Knowledge Economy Index is made up of fourdistinct components, we have examined these in more detail(not shown in Table VI). The most surprising finding here isthat India ranks so low, because it comes in 106th ineducation and 108th in the information technology index;Russia and Brazil fare much better in this regard. Clearly, allnations cited in Table VI have challenges ahead of them.

Economic strengths

The national competitiveness of the two Asian giants – Chinaand India – have been noted because of their vigorous growthrates in recent years in GDP, global market share of world

Table V Triadic patent families selected major emerging nations, 1995-2003

Annual growth (%)

Country 1995 1999 2003 1999/1995 2003/1999

China 42 92 225 21 25

India 11 32 99 31 32

Malaysia 4 0 0 nm nm

Philippines 0 0 0 nm nm

Thailand 2 0 0 nm nm

Notes: Ordinary patent counts do not distinguish between minor and majorinventions. To address this problem, a database has been developed bycounting only inventions for which patent protection has been sought in theworld’s three largest markets: USA, Japan, and EU. These inventions arecalled triadic patent families. The database is housed at the OECD. Abovedata not available for Brazil, Mexico, Indonesia, Russia, and Turkey; Triadicpatents compared to size of economy and population also show China andIndia ranking near the bottom (along with Brazil and Mexico), with Finland,Switzerland, Japan and Germany at top; Annual growth rates calculated bythe authors; nm ¼ not meaningfulSource: National Science Board (2008, Tables 6-24 and AppendixTables 6-51)

Table VI Knowledge economic index ranking for selected majoremerging nations, 1995 and 2007

Country 1995 2007 Trend

China 104th 75th þþ

India 97th 101st 0 or 2

Indonesia 92nd 91st 0

Brazil 58th 54th 0 or þ

Mexico 45th 59th 2 2

Russia 55th 47th þ

Turkey 60th 53rd þ

Notes: Knowledge economic index rank combines the following four ranks:economic incentive, innovation, education and ICT (information andcommunications technology); In 2007, Sweden was ranked 1st, Canada 7th,USA 10th; lower number ¼ higher rankSource: World Bank (2008)




Volume 26 · Number 3 · 2011 · 171–180

176

trade, and productivity and per capita income growth which

have exceeded the rates of advanced and more mature

economies such as the USA. For example, averageproductivity growth for the period 2000-2004 was 1.7

percent for the USA versus 4.4 percent for India and 8.6

percent for China (Conference Board, 2006). These reportssuggest that the future looks promising for these fast-growing

emerging economies. Yet, the same study also points out that,

despite these gains, the absolute level of productivity and percapita income for nations such as India and China remain far

lower than those of industrialized nations.Researchers and practitioners alike have developed a

location attractiveness index for offshore outsourcing of

services using such factors as financial structure (e.g.infrastructure costs), people skills and abilities (e.g.

education and language proficiency), and business

environment of a nation (e.g. economic environment) (e.g.Kearny, 2004). Based on the composite indices, Kearny

(2004) noted India, China, Malaysia, Czech Republic,

Singapore, Philippines, Brazil, Canada, Chile, and Polandrated as top ten destinations for offshore outsourcing. India

with its strong mix of low-costs and the availability and therichness of human capital occupied the first position, followed

by China with its vast labor pool and low costs. China is

growing in other areas as software development, and Chineseengineers are gaining proficiency in process engineering.

Other emerging markets like Malaysia, the Philippines, and

Indonesia are growing faster in the IT and IT enabled servicesand as well as in call centers.

Policy implications

The world’s emerging nations have become importantpartners in the production and delivery of manufactured

goods and a wide range of services. Advanced economies,

with their voracious appetites for low cost goods and services,have become dependent on the resources of emerging

economies to fulfill this demand. Knowledge intensive

business services are the latest developments in today’sglobal economy as firms in advanced nations partner with

those in emerging economies to deliver a burgeoning varietyof services. But the global environment for KIBS is dynamic

and constantly evolving; nations that participate in this sector

must recognize the strategic issues that can give them asustainable competitive advantage. Key issues and their policy

implications are discussed in the following sections.

Investing in infrastructure

Global businesses that depend on KIBS count on suppliers

who can deliver services with seamless efficiency. Emergingeconomies have had an uneven record of infrastructure

investment. For example, India’s transportation infrastructure

is notoriously outdated in the quality of its highways,warehousing, freight-handling, and ports facilities, and its

telecommunications systems have been handicapped by

chronically unreliable power supplies. China, on the otherhand, has made dramatic strides in infrastructure

improvements, making it a more inviting destination formultinational business collaborations for manufacturing as

well as services.Physical infrastructures may be less critical for certain types

of knowledge services (e.g. medical transcriptions; income tax

preparation), but they are vital for the delivery of other

services that require regular face-to-face interactions (e.g.

collaborative or joint ventures or direct investment; medicalservices; educational programs). Physical and

telecommunications infrastructures help to facilitate trade atall levels and contribute to the ease with which business can

be conducted. In nations with poor infrastructures, focused

investments are warranted for upgrading physical andtechnical infrastructures, and the responsibilities for such

improvements must be shared by both the private and publicsectors of emerging economies.

Fostering entrepreneurship: the strategic role of SMEs

Small- and medium-sized enterprises (SMEs) play animportant and strategic role in the economic development

of a country. SMEs, constituting as much as 90 percent of

enterprises in many countries around the globe, represent thedriving force behind innovations and entrepreneurial

investments and contribute greatly to the nationaleconomies of their nations through job creation,

international trade, and new product and servicedevelopments.

Unofficial estimates, reported on internet blogs, suggestthat China has more than 40 million registered SMEs which

are responsible for about 60 percent of China’s industrialoutput and for creating most new urban jobs (BeijingMan,

2006). International collaborations are also becomingcommonplace for foreign SMEs in China: there are an

estimated 300 SMEs from Sweden, 800 from France, morethan 500 from Germany, and a staggering 50,000 from the

USA (BeijingMan, 2006). Recognizing the significance ofSMEs to China’s economy (SMEs accounted for 60 percent

of the nation’s industrial output and employed 75 percent ofthe urban workforce at the turn of the twenty-first century),

the Chinese government introduced economic reforms toenable SMEs to raise capital, and to grow and prosper (US

Embassy-China, 2002). But bureaucratic hurdles, officialcorruption, and uneven legal and political protection have

been deterrents to even this thriving sector of the Chineseeconomy.

In India, SMEs exist in a variety of industries, includingchemicals and pharmaceuticals, medical and surgical

equipment, bioengineering, management consulting,information technology, and computer software. The post-

liberalization era in the Indian economy has paved the way forunprecedented opportunities and challenges for SMEs,

especially in the knowledge intensive service sectors (Toddand Javalgi, 2007). In the global economy, where there is

significant demand for knowledge based services, several

factors work in favor of Indian SMEs. These includecompetitiveness in the domestic and export markets,

operational flexibility, location flexibility, significant exportearnings, capacity to develop technology-oriented industries,

and building expertise in the information technology area atthe global level – in addition to English language fluency for

KIBS where English is the lingua franca.With the rising demand for knowledge-based service sectors

and the increasing speed of the entry of multinationals, firmsin India, especially SMEs, have created a very conducive

environment for outsourcing, subcontracting in such sectorsas R&D, engineering, science, ITand IT-enabled services, and

medical and pharmaceutical services. However, SMEs inIndia, like other developing economies, are confronted with

formidable challenges. Some of these challenges can be




Volume 26 · Number 3 · 2011 · 171–180

177

broadly classified as managerial (e.g. lack of managerial skills,

especially at the international level), financial (lack of financial

support and incentives), and technological (technologicalobsolescence and isolation from technology hubs).

In order to overcome these and other problems hindering

innovation and entrepreneurial initiatives and enhance theirinternational presence, it is imperative that nations such as

India and China support SMEs and foster environments that

are conducive to venture capital, economic development,formulation of appropriate national and international policies,

investment in building technology capacity, financial returns,and R&D.

The high end of KIBS: research and development

R&D represents knowledge services at their most intense andsophisticated levels. Internationalization of research and

development activities accelerated in the 1990s and

continues at a heightened pace in the twenty-first century.As emerging nations develop their educated labor pools and

evolve into knowledge economies, their participation in the

R&D efforts of multinational businesses and internationalnongovernment agencies will grow more prominent.

China and India have become leading investment sites forR&D. In India, R&D investments have focused on sectors

such as IT, telecommunications, automotive,

pharmaceuticals, and biotechnology; investments in Chinaconcentrate on personal computers, telecommunications,

chemicals, petrochemicals, pharmaceuticals, biotechnology,

automotive, and transportation industries (Asakawa, 2005). A2004 McKinsey & Company global survey, reported by

Asakawa, found that American and European executives rated

India as their top choice for R&D investment whereasexecutives from the Asia-Pacific region preferred China.

Nearly one hundred multinationals have set up R&D centers

in India, creating knowledge-intensive centers fortechnological innovation (World Bank, 2008). In the past

decade, companies such as AstraZeneca, Glaxo-Smith-Kline,

ABB, Ericsson, and SKF established and expanded significantR&D operations in India, which offered significant cost

advantages in the areas of contract research and clinical trials

(Pandey et al., 2004).In the area of information technology and IT-enabled

services, India is expected to continue to be a global leader asit increases its R&D capabilities and enhances greater

university-industry collaborations. But even emerging

markets cannot count on cost advantages as a permanentcompetitive edge. A recent study by Zinnov Management

Consultants involving 594 software development and

engineering services firms with captive or offshore R&Dcenters in India, operating costs have become a serious

deterrent to growth (Rao, 2008). Rising wages in India have

resulted in cost escalations of 12 percent or more atcompounded annual growth rates, resulting in several firms

– including Dell India and Bose Corporation – shutting their

R&D operations in India. Dell moved its hardware R&D unitfrom Bangalore to Texas and Taiwan.

Conclusions and suggestions for future research

This study attempted to synthesize the evidence from a variety

of sources to advance understanding of how emerging marketsare positioned in the global marketplace for the production

and delivery of knowledge intensive services. Although the

existing literature reveals interesting insights into the nature of

knowledge economies and KIBS, there is a need for empirical

research that will help to advance theory building, theory

testing, and identifying practical and field-tested strategies for

firms in this environment.The production and delivery of knowledge-intensive

services through international collaborations with off-shore

partners offers a rich array of topics for future investigations.

Some recommendations for future research include the

following:. Apply existing international business theories such as the

resource-based view, transaction cost analysis, and

Dunning’s (1995) eclectic paradigm to better

understand the internationalization process of KIBS in

emerging markets.. Develop an integrative model that elucidates the

relationships among Porter’s (1998) “diamond”

framework to assess the competitive advantages of

emerging markets in KIBS.. Identify key marketing issues and challenges for KIBS

(e.g. service quality management; strategic alliances in

global KIBS production and delivery; country of origin

issues).. Identify best practices in outsourcing of KIBS. How do

they vary by region? What are the success factors in

outsourcing KIBS and how do they vary with knowledge

intensity?. Conduct empirical investigations, both qualitative and

quantitative, that can contribute to better theory building

in this field.

In conclusion, knowledge-based services have emerged as

important engines for economic growth in emerging markets

that are evolving into knowledge economies. Emerging

markets in KIBS sectors are gaining prominence and

achieving equal status with partners that are based in

advanced economies. But because knowledge-intensive

services are constantly evolving, the competitive advantages

of firms and nations are ephemeral. Fueled by the global

competition in the KIBS sectors, policy makers in emerging

markets are seeking to build competitive advantage for their

nations or regions with aggressive macro and micro-level

policies. The global mindset and vision of policy makers will

continue to shape the competitive map for knowledge-

intensive services in the coming years.

References

Asakawa, K. (2005), “Accelerating R&D Investments into

India and China”, Research Institute of Economy, Trade

and Industry, available at: www.rieti.go.jp/en/columns/a01Aslesen, H.W. and Isaksen, A. (2007), “New perspectives on

knowledge-intensive services and innovation”, Geografiska

Annaler Series B: Human Geography, Vol. 89, pp. 45-58.BeijingMan (2006), “SME business in China”, November 4,

available at: http://beijingman.blogspot.com/2006/11/sme-b

usiness-in-china.htmlBilderbeek, R., denHertog, P., Marklund, G. and Miles, I.

(1998), Services in Innovation Knowledge Intensive Business

Services (KIBS), as Co-producers of Innovation, Synthesis

Paper S14S-S3, Studies Technology, Innovation, and

Economic Policy Group, Oslo.




Volume 26 · Number 3 · 2011 · 171–180

178

Conference Board (2006), Total Economy Database, Groningen

Growth and Developmental Centre, September, available at:

www.conference-board.org/economics/database.cfmDeutsche Bank (2005), China and India; A Visual Essay,

Berlin and Deutsche Bank, New York, NY.Dunning, J. (1995), “Reappraising the eclectic paradigm in an

age of alliance capitalism”, Journal of International Business

Studies, Vol. 26 No. 3, pp. 461-91.Farrell, D., Laboissiere, M., Rosenfeld, J., Sturze, S. and

Umezawa, F. (2005), The Emerging Global Labor Market,

McKinsey Global Institute, New York, NY, pp. 1-13.Friedman, D., Hemeriling, J. and Chapman, J. (2007),

“Aligning talent for global advantage”, Boston Consulting

Group Report, Boston Consulting Group, Boston, MA,

pp. 1-11.Global Insight (2007), “World industry service database”,

Science and Engineering Indicators, 2008, (NSB 08-01; NSB

08-01A), Arlington, VA, January.Jahns, C., Hartmann, E. and Bals, L. (2006), “Offshoring:

dimensions and diffusion of a new business concept”,

Journal of Purchasing and Supply Chain Management, Vol. 12,

pp. 218-31.Javalgi, R.G. and Martin, C.L. (2007), “Internationalization

of services: identifying building blocks”, Journal of Services

Marketing, Vol. 21 No. 6, pp. 391-7.Javalgi, R.G. and White, D.S. (2002), “Strategic challenges

for the marketing of services internationally”, International

Marketing Review, Vol. 19 No. 6, pp. 563-81.Kapur, D. and Ramamurti, R. (2001), “India’s emerging

competitive advantage in services”, Academy of Management

Executive, Vol. 15 No. 2, pp. 20-32.Lai, E. (2008), “Intellectual property protection in a

globalizing era“, Economic Letter, Federal Reserve Bank of

Dallas, Vol. 3, March, pp. 1-8.Miles, I., Kastrinos, N., Flanagan, K., Bilderbeek, R.,

den Hertog, P., Huntink, W. and Bouman, M. (2008),

Knowledge-Intensive Business Services: Users, Carriers and

Sources of Innovation, EIMS Publication No. 15, European

Innovation Monitoring System.National Science Board (1995), Science and Engineering

Indicators, 2008, National Science Foundation, Washington,

DC.Pandey, A., Aggarwal, A., Devane, R. and Kuznetsov, Y.

(2004), “India’s transformation to knowledge-based

economy: evolving role of the Indian diaspora”,

Evalueserve, pp. 1-33.Porter, M.E. (1990), The Competitive Advantage of Nations,

The Free Press, New York, NY.Porter, M.E. (1998), “Clusters and the new economics of

competition”, Harvard Business Review, Vol. 76 No. 6,

pp. 77-90.Radhakrishnan, S. (2007), “Rethinking knowledge for

development: transnational knowledge professionals and

the ‘new’ India”, Theory and Society, Vol. 36, pp. 141-59.Rao, M. (2008), “Fewer captive R&D projects coming to

India, Livemint.com/Wall Street Journal, March 10, available

at: www.livemint.com/2008/03/10235600/Fewer-captive-Ra

mpD-projects.htmlRoberts, J. (2000), “Knowledge systems and global

advertising services”, Creativity & Innovation Management,

Vol. 9 No. 3, pp. 163-70.

Strambach, S. (2002), “New knowledge production and

competitive cities: the case of Stuttgart”, European PlanningStudies, Vol. 10, pp. 215-321.

Survey of Current Business (2005), Survey of Current Business,Bureau of Economic Analysis, Washington, DC, May, p. 14.

Tata Services (2002), Statistical Outline of India, 2002-2003,Department of Economics and Statistical Services, Tata

Services, Mumbai, pp. 254-5.Todd, P. and Javalgi, R.G. (2007), “Internationalization of

SMEs in India: fostering entrepreneurship by leveraginginformation technology”, International Journal of EmergingMarkets, Vol. 2 No. 2, pp. 166-80.

Trinh, T. (2006), “China and India vs Europe”, EuropeanForum Alpbach, Economic Symposium, Deutsche BankResearch, August 30.

Turley, J. (2006), “Engineering shortage? Get real!”, ElectronicEngineering Times, January 16, p. 47.

US Embassy-China (2002), “China’s small and mediumenterprises: room to grow with WTO”, available at: www.

usembassy-china.org.cn/econ/ptr/smes2002.htmlWadhwa, V., Gereffi, G., Rissing, B. and Ong, R. (2007),

“Where the engineers are”, Issues in Science and Technology,Spring, available at: www.issues.org/23.3/wadhwa.html

World Bank (2008), Knowledge Development Program, availableat: www.worldbank.org/kam

World Factbook (2008), World Factbook, Central IntelligenceAgency, Washington, DC, available at: www.cia.gov/library/

publications/the-world-factbookZeithaml, V.A. (1981), “How consumer evaluation processes

differ between goods and services”, in Donnelly, J.A. andGeorge, W.R. (Eds), Marketing of Services, AmericanMarketing Association, Chicago, IL, pp. 186-90.

Corresponding author

Elad Granotis can be contacted at: at [email protected]

Executive summary and implications formanagers and executives

This summary has been provided to allow managers and executivesa rapid appreciation of the content of the article. Those with aparticular interest in the topic covered may then read the article in

toto to take advantage of the more comprehensive description of theresearch undertaken and its results to get the full benefit of thematerial present.

Knowledge-based services have emerged as important enginesfor economic growth in emerging markets that are evolving

into knowledge economies. Emerging markets in KIBS(knowledge-intensive business services) sectors are gaining

prominence and achieving equal status with partners that arebased in advanced economies. But because these services are

constantly evolving, the competitive advantages of firms andnations are ephemeral. Fueled by the global competition inthe KIBS sectors, policy makers in emerging markets are

seeking to build competitive advantage for their nations orregions with aggressive macro and micro-level policies.

This growth has heightened interest in KIBS as astrategically important business sector. Knowledge-intensive

services – information technology services, managementconsulting, legal, accounting, financial, engineering, and

market research are some typical examples – constitute a




Volume 26 · Number 3 · 2011 · 171–180

179

large and growing part of the private service sector’s output.The USA, the European Union, and Asia are the leadingproviders but, whereas the USA and EU share or revenueshave stagnated or declined, Asia has shown a steady increasewith China and India accounting for a significant share of thisactivity. Emerging markets such as South Korea, Malaysia,Russia and Brazil have also become popular outsourcingtargets for global firms that are investing in KIBS.

Key drivers for a knowledge-driven economy of anemerging market such as India or China include therecognition of and access to global talent; advances intelecommunications and information technology; the rise ofoffshore outsourcing of manufacturing and services; and theworldwide movements towards economic liberalization andimproved legal protections for intellectual property.

In “Assessing competitive advantage of emerging markets inknowledge intensive business services” Rajshekhar (Raj)G. Javalgi et al. examine the competitive advantages ofselected emerging markets in the growing KIBS sector anddiscuss policy implications for sustaining advantage.

Global businesses that depend on KIBS count on supplierswho can deliver services with seamless efficiency. Emergingeconomies have had an uneven record of infrastructureinvestment. For example, India’s transportation infrastructureis notoriously outdated in the quality of its highways,warehousing, freight-handling, and ports facilities, and itstelecommunications systems have been handicapped bychronically unreliable power supplies. China, on the otherhand, has made dramatic strides in infrastructureimprovements, making it a more inviting destination formultinational business collaborations for manufacturing aswell as services.

Physical infrastructures may be less critical for certain typesof knowledge services (e.g. medical transcriptions; income taxpreparation), but they are vital for the delivery of otherservices that require regular face-to-face interactions (e.g.collaborative or joint ventures or direct investment; medicalservices; educational programs).

With the rising demand for knowledge-based service sectorsand the increasing speed of the entry of multinationals, firmsin India, especially SMEs, have created a very conduciveenvironment for outsourcing, subcontracting in such sectorsas R&D, engineering, science, ITand IT-enabled services, andmedical and pharmaceutical services. However, SMEs inIndia, like other developing economies, are confronted withformidable challenges. Some of these challenges can be

broadly classified as managerial (e.g. lack of managerial skills,

especially at the international level), financial (lack of financial

support and incentives), and technological (technological

obsolescence and isolation from technology hubs).In order to overcome these and other problems hindering

innovation and entrepreneurial initiatives and enhance their

international presence, it is imperative that nations such as

India and China support SMEs and foster environments that

are conducive to venture capital, economic development,

formulation of appropriate national and international policies,

investment in building technology capacity, financial returns,

and R&D.China and India have become leading investment sites for

R&D. In India, R&D investments have focused on sectors

such as IT, telecommunications, automotive, pharmaceuticals,

and biotechnology; investments in China concentrate on

personal computers, telecommunications, chemicals,

petrochemicals, pharmaceuticals, biotechnology, automotive,

and transportation industries. Nearly 100 multinationals have

set up R&D centers in India, creating knowledge-intensive

centers for technological innovation. In the past decade,

companies such as AstraZeneca, Glaxo-Smith-Kline, ABB,

Ericsson, and SKF established and expanded significant R&D

operations in India, which offered significant cost advantages

in the areas of contract research and clinical trials.In the area of information technology and IT-enabled

services, India is expected to continue to be a global leader as

it increases its R&D capabilities and enhances greater

university-industry collaborations. But even emerging

markets cannot count on cost advantages as a permanent

competitive edge.What can be counted on is that the global mindset and

vision of policy makers will continue to shape the competitive

map for knowledge-intensive services in the coming years.

Knowledge intensive business services are the latest

developments in today’s global economy as firms in

advanced nations partner with those in emerging economies

to deliver a burgeoning variety of services. But the global

environment for KIBS is constantly evolving. Nations that

participate in this sector must recognize the strategic issues

that can give them a sustainable competitive advantage.

(A precis of the article “Assessing competitive advantage of

emerging markets in knowledge intensive business services”.

Supplied by Marketing Consultants for Emerald.)




Volume 26 · Number 3 · 2011 · 171–180

180

To purchase reprints of this article please e-mail: [email protected]

Or visit our web site for further details: www.emeraldinsight.com/reprints

Documents

Assessing competitive advantage of emerging markets in knowledge intensive business services