Lead Markets

This thesis intends to answer three questions: First, what is a lead market; second, what constitutes a lead market, and third, how companies can harness lead markets to generate global innovations. Considering the international, cross-border diffusion of innovations one can observe that a particular technological design such as the facsimile machine, the personal computer or the mobile cellular telephone is often adopted by one country or region much earlier than by other countries which subsequently follow this country, which I will call the lead market. A lead market is defined as a country that adopts an innovation that is subsequently adopted worldwide. When different designs of an innovation compete internationally, the design preferred in the lead market becomes the global dominant design. The study suggests a theoretical explanation for the phenomena of lead markets and collects empirical evidence from a detailed case study of the cellular mobile telephone industry. The international diffusion of an innovation design adopted first by the lead market, i.e. subsequent adoption of an innovation design preferred in the lead market by other countries, can be put down to the special market context in the lead market. The market context includes demand preferences, the environmental condition and the degree of competition.

A nation is considered to be able to gain a competitive advantage — among others — by generating product and process innovations.¹⁰ As knowledge about these innovations leaks out of the country and is used by firms of other countries as well, the country loses its competitive advantage. The national competitive advantage is therefore based on a temporary technological knowledge monopoly. Trade between advanced countries can occur even if factor prices are equal but the national “scientific and technological capabilities” (OECD 1968) differ. This is known as the technology gap theory in international trade. The technological gap hypothesis was first introduced by Posner (1961) and evaluated in a case study of synthetic materials by Hufbauer (1966). Posner (1961) assumes that consumer preferences are equal worldwide. A country can gain a technological lead over other countries through pioneering innovations occurring either randomly by chance, out of entrepreneurial effort¹¹, or they are correlated with former innovations and investments, which also stabilises the technological lead of a country. In contrast to popular interpretations of the technology gap theory, scientific advances and basic inventions are not assumed to be facilitating a technological gap.¹² Instead, a technology lead is assumed to be based mainly on knowledge accumulated during the production (called learning-by doing, see Arrow 1962b).

The last chapter demonstrated that a variety of technological designs could, over time, be reduced to a dominant design. If preferences vary among nations dominant designs for each country emerge. Examples show, however, that the convergence of the variety amongst technical alternatives does not stop at national borders despite internationally varying demand. Instead, the variety on an international level can also be reduced and the world market becomes more and more homogeneous. It is often the case that one alternative drives other product versions or technologies out or confines them to niche markets. Or competitors simply give up the race on the international market and start producing the competitor’s design as was the case in VCR standards (Rosenbloom, Cusamano 1987). Whereas Utterback (1994) only looks at the emergence of a dominant design (normally the United States), one has to explain when and how a globally dominant design emerges among national favourites. Often, several national or regionally specific dominant designs co-exist for a while before one dominant design emerges on an international level.

Since their invention in the 1920s, mobile telephone services have evolved only gradually over time as a niche market unnoticed by most businesses and consumers. Yet, mobile telephony has revolutionised telecommunications in the 1990s. The international diffusion of mobile telephony took off in the 1990s when new digital technology was introduced and prices fell so that more and more private consumers could afford it. From an industry ridiculed as “Mom and Pop”-operator business in the United States (Calhoun 1988), the mobile telephone business emerged as one of the industries most valued by stock markets around the world. The International Telecommunications Union (ITU) now admits that against all former predictions mobile telephony is on its way to substituting fixed-line telephony. Mobile data communications is rapidly evolving as a totally new form of communications, transforming the daily life of most people in almost all countries.¹¹⁶ Among several technical concepts, digital cellular mobile systems have become the global dominant design of mobile telephony. This case study will examine whether a country or a region adopted the dominant design earlier than others and, if this is the case, why it did so and what this has meant for the international competitiveness of companies in these countries. At first glance, there are two surprising outcomes of the world-wide mobile telephone industry: first, despite their technological knowledge advantage in radio technology, the United States have not become the market with the highest penetration rates that led the world into a new area of telecommunications. Second, Japanese manufacturers do not dominate the mobile telecommunications equipment market despite their advantage in electronics, miniaturisation of electronic devices, and their dominance in other telecommunications equipment sectors such as facsimile machines, consumer electronics and cameras. In contrast to the prediction derived from technological gap and comparative advantage theory, the Nordic countries, as I will call Norway, Sweden, Finland and Denmark, happened to be the markets where cellular mobile telephony was first widely adopted; these countries’ companies dominate the world mobile telephone equipment industry.

In this chapter I will outline how international firms can use lead markets. One of the main goals of a multinational firm is to develop innovations that can be introduced around the world. Global innovations offer standardisation advantages that are at the core of the competitive advantage of multinational firms. A lead market concept of innovation can help a multinational firm to generate global products and to avoid getting locked-in to idiosyncratic national market environments. I will begin this chapter by reviewing the traditional responsiveness-standardisation problem of multinational firms. On the one hand multinational firms seek to develop globally standardised innovations, several factors make globally standardised products advantageous or even necessary. On the other hand, responsiveness of firms to local markets is an success factor for innovations as well. When confronted with conflicting demand preferences from country to country, multinational firms with strong commitments to serving all large markets are prone to respond with highly differentiated product variants each fitting nation-specific demand characteristics. Applying the lead market concept I come to the following conclusions for a firm’s innovation strategy. A firm can develop global innovations by being responding to the lead market and ignorant to other markets’ needs. By locating resources in lead markets, companies can increase the probability of global market success of standardised innovations. In the last section of this chapter I embark on developing a method of identifying lead markets ex ante.

In this chapter I shall summarise the hypotheses presented in this thesis and critically discuss the validity of the concept of lead markets. Lead markets were defined as regional markets that are characterised by market-specific attributes which support the innovation design that is adopted in the domestic market to become the globally dominant design. In order to do so lead market designs have to substitute other designs that might be or would have been initially preferred by users in other countries.

Lead market ability constitutes an international competitive advantage for a nation, because it strengthens domestic firms and facilitates exports. In contrast, an idiosyncratic market is a disadvantage for domestic firms, since preference is given to innovation designs that cannot be easily exported and even risk being squeezed out of the home market. Therefore, it is of vital interest to governments that the domestic market is a lead market and not an idiosyncratic or lag market.