Innovation in Emerging Economies: How MNEs and Local Recombination Drive Catching-Up

Summary: This article explores the dynamics of innovation in emerging economies, drawing on insights from a 2021 Journal of International Business Studies paper. It argues that innovation is not merely technological but involves organizational and transactional improvements through the recombination of local and imported knowledge. Multinational enterprises (MNEs) act as instigators, conduits, and beneficiaries of this process, while institutions and networks co-evolve to support capability upgrading. For international business researchers and policymakers, understanding this co-evolution is key to fostering sustainable catching-up. The analysis highlights trade, investment, and policy implications, using the paper's 219 citations and 37k accesses as evidence of its impact.

The Catching-Up Imperative in Emerging Economies

For decades, the prevailing narrative surrounding economic development has centered on technology transfer from advanced to emerging economies. The assumption was straightforward: poorer nations adopt the technologies of richer ones, and convergence follows. Yet, the reality has proven far more complex. Many emerging economies have achieved remarkable growth rates, but persistent gaps in technological sophistication, organizational capability, and institutional quality remain. The challenge of sustained catching-up—the process by which firms and industries in emerging economies upgrade their capabilities to compete globally—remains one of the most pressing issues in international business.

[IMAGE: A timeline showing emerging economy GDP growth relative to advanced economies, with a callout to the 2021 publication.]

Innovation in emerging economies is fundamentally shaped by this catching-up imperative. Unlike their counterparts in advanced economies, firms in these contexts must simultaneously upgrade technological and organizational capabilities while societies reconfigure institutions and networks to improve knowledge resources. This dual transformation—firm-level upgrading and societal-level reconfiguration—creates a unique dynamic that conventional innovation models fail to capture.

A seminal work by Anand, McDermott, Mudambi, and Narula, published in 2021 in the Journal of International Business Studies, offers a powerful framework for understanding this process. With 37,000 accesses and 219 citations to date, the paper has become a touchstone for scholars and policymakers alike. Its central insight is deceptively simple: innovation in emerging economies is best understood as a process of recombination—the novel combination of local and imported knowledge. This recombination occurs across technological, organizational, and transactional domains, and multinational enterprises (MNEs) play a pivotal role as both instigators and beneficiaries.

Beyond Technology: The Three Faces of Innovation

When policymakers speak of innovation, they typically refer to technological breakthroughs: new products, new processes, new scientific discoveries. But the catching-up experience of emerging economies suggests a broader definition is necessary. Innovation is not limited to technological activities; it includes organizational and transactional improvements that are often more important for latecomer firms.

Organizational innovation refers to new ways of structuring work, managing talent, and coordinating activities. Transactional innovation involves improvements in how firms interact with suppliers, customers, and partners—including new contracting models, supply chain configurations, and market entry strategies. Together, these three faces of innovation constitute the full spectrum of capabilities that emerging economy firms must develop.

[IMAGE: A Venn diagram showing 'Technological', 'Organizational', and 'Transactional' innovations overlapping at 'Recombination'.]

The key insight is that innovation is a process of recombination of local and imported knowledge, shared through multiple forms of collaboration. A firm might combine imported manufacturing technology (technological) with a local distribution network (transactional) and a new performance management system (organizational) to create a product category that did not previously exist. This perspective explains why emerging economies often leapfrog in services or business models rather than pure technology. Consider mobile payments in Kenya: the technological infrastructure (M-PESA) was not revolutionary by global standards, but the recombination of mobile technology with local banking practices and informal trust networks created a transformative innovation. Similarly, e-commerce in China thrived not because Alibaba invented new technology, but because it recombined global e-commerce models with local logistics, payment systems, and regulatory environments.

The co-evolution of firm capabilities and societal institutions is essential for such recombination to succeed. Firms cannot innovate in a vacuum; they require supportive regulatory frameworks, educational systems, and labor markets. As firms upgrade their capabilities, they also push for institutional changes that enable further innovation. This reciprocal relationship creates a virtuous cycle—or, when it breaks down, a persistent trap.

MNEs as Hubs: Instigators, Conduits, and Beneficiaries

Multinational enterprises occupy a unique position in this innovation ecosystem. They are simultaneously instigators of innovation, conduits for new knowledge, and beneficiaries of the recombination capabilities they help develop. This threefold role makes MNEs indispensable actors in the catching-up process.

As instigators, MNEs bring imported knowledge—advanced technology, management practices, global standards—into emerging economies. Their presence creates demonstration effects and competitive pressure that forces local firms to upgrade. As conduits, MNEs transfer this knowledge through supply chains, joint ventures, and labor mobility. Engineers trained in MNE factories later found local startups; managers who worked at global firms bring best practices to domestic companies.

[IMAGE: A flowchart showing an MNE at center, with arrows labeled 'imported knowledge' and 'local knowledge' converging into 'recombined innovation', then spreading to local firms and global markets.]

As beneficiaries, MNEs themselves gain from the recombination process. By combining imported knowledge with local insights—market understanding, regulatory navigation, cultural nuance—they develop new capabilities that can be deployed globally. The classic example is the development of frugal engineering models by automotive MNEs in India. Companies like Suzuki, Hyundai, and Renault developed low-cost vehicles for the Indian market that later became global products. The knowledge generated through local recombination—how to produce high-quality vehicles at dramatically lower cost—became a source of competitive advantage worldwide.

This creates a dynamic where MNEs and local firms co-evolve. Local suppliers upgrade their capabilities to meet MNE standards; MNEs adapt their processes to leverage local strengths. Over time, a sophisticated ecosystem emerges that supports continuous innovation. The relationship is not always symmetrical—MNEs often capture a disproportionate share of the value created—but the overall effect is positive for the host economy.

Crucially, the most successful catching-up stories involve MNEs that actively seek out local knowledge rather than simply transferring their existing models. This requires a different mindset from the traditional "headquarters-knows-best" approach. MNEs that invest in understanding local market conditions, partner with local research institutions, and empower local managers to experiment are more likely to generate valuable recombinations.

Institutional Co-Evolution and Network Dynamics

Firm-level capability upgrading cannot occur in isolation. It requires supportive institutions—laws, regulations, norms, and organizations—that enable knowledge recombination. Equally important are network relationships that facilitate the flow of knowledge between firms, universities, government agencies, and other actors.

The concept of co-evolution captures this reciprocal dynamic. As firms in emerging economies develop new capabilities, they demand institutional changes: stronger intellectual property protection, better vocational training, streamlined business registration. These institutional improvements, in turn, enable further firm-level upgrading. The process is iterative and often slow, but it creates a foundation for sustained catching-up.

[IMAGE: A cycle diagram showing 'Firm Capabilities' and 'Institutional Reconfiguration' feeding into each other, with 'Network Relationships' as a connecting bridge.]

For example, the rise of China's electric vehicle industry was not simply a story of technological innovation at firms like BYD or NIO. It required government investment in battery research, charging infrastructure, and consumer subsidies. It required universities to train engineers in battery chemistry and electric powertrains. It required a network of suppliers, from raw materials processors to software developers. Each of these elements co-evolved with the others, creating an ecosystem that now rivals established automotive clusters in Germany and Japan.

Policy implications are significant. Governments in emerging economies cannot simply "pick winners" or provide blanket subsidies. They must foster an environment conducive to recombination: investing in education and research, creating platforms for collaboration between foreign and local firms, and ensuring that regulatory frameworks are flexible enough to accommodate new business models. They must also recognize that the process of institutional development is itself a form of learning—mistakes will be made, and adaptive policies are more important than perfect plans.

For international business researchers, the co-evolution lens shifts attention away from static comparisons of firm capabilities toward dynamic processes of change. How do networks form and evolve? What triggers institutional reforms? How do firms navigate periods of institutional uncertainty? These questions require longitudinal studies and fine-grained analysis of specific industries and regions.

Implications for Trade, Investment, and Policy

The recombination framework has concrete implications for international trade and investment. Traditional trade policy focuses on tariff reduction and market access. While these remain important, the innovation perspective suggests that deeper integration—through supply chains, R&D collaboration, and talent mobility—matters more for catching-up.

Emerging economies should prioritize policies that attract "deep" FDI—investments that bring not just capital but also knowledge, management expertise, and global networks. Tax incentives alone are insufficient; countries need to invest in the absorptive capacity of their firms and workers. This means strengthening education systems, particularly in STEM fields; supporting industry-university partnerships; and creating mechanisms for knowledge diffusion from foreign to local firms.

[IMAGE: A world map with arrows indicating knowledge flows from advanced economies to emerging economies, with nodes representing innovation hubs.]

For MNEs, the framework suggests that emerging markets should be viewed not merely as production locations or consumer markets, but as sources of recombination-driven innovation. Firms that treat their emerging market operations as learning laboratories—where imported knowledge is combined with local insights to create genuinely new products and processes—are better positioned to generate global competitive advantage.

The digital transformation accelerates these dynamics. Digital platforms reduce the cost of knowledge recombination, enabling smaller firms and entrepreneurs to participate in global innovation networks. At the same time, digital technologies create new opportunities for leapfrogging, as seen in mobile payments, e-commerce, and telemedicine. However, digital divides persist, and countries with weak digital infrastructure risk falling further behind.

Conclusion: A New Research Agenda

The 2021 paper by Anand, McDermott, Mudambi, and Narula has influenced the field of international business by shifting the conversation from technology transfer to knowledge recombination, from firm-level analysis to co-evolutionary dynamics, and from static comparisons to process-oriented research. Its 37,000 accesses and 219 citations reflect the resonance of these ideas with scholars and practitioners grappling with the complexities of innovation in emerging economies.

The catching-up imperative remains as urgent as ever. Emerging economies face headwinds from deglobalization, technological disruption, and climate change. Yet the fundamental logic of innovation as recombination—of local and imported knowledge, across technological, organizational, and transactional domains—offers a path forward. Firms must build recombination capabilities; institutions must evolve to support them; and networks must facilitate the flow of knowledge between actors.

For international business researchers, the challenge is to deepen our understanding of these processes through empirical studies that capture the richness and heterogeneity of emerging economy contexts. For policymakers, the imperative is to create conditions that enable recombination while managing the distributional consequences of innovation. And for MNEs, the opportunity is to recognize that their most valuable innovations may emerge not from headquarters but from the creative recombination of global and local knowledge in the world's most dynamic markets.