Beyond Catching Up: How Recombination and Institutional Co-Evolution Are Reshaping Innovation in Emerging Economies

Recombination and Institutional Co-Evolution Reshape Innovation in Emerging Economies

**How local-global knowledge blending and systemic transformation are rewriting the rules of catching-up**

Introduction: The Hidden Logic of Innovation in Emerging Economies

Innovation in emerging economies is frequently dismissed as a poor cousin of Western R&D—mere imitation, incremental tweaks, or low-cost replication. Yet a growing body of research reveals a far more intricate reality. Drawing on a seminal 2021 editorial in the *Journal of International Business Studies*, this article reframes innovation in these contexts as a dynamic process of catching-up driven by the co-evolution of firms, institutions, and knowledge networks. The most successful innovations do not emerge from isolated R&D labs but from the strategic recombination of local and imported knowledge—a process with profound implications for how we understand firm-specific advantages (FSAs) in a globalized world.

The editorial challenges international business scholars to look beyond traditional firm-level analyses and consider multiple levels of causation: the firm, the industry, and the broader societal ecosystem. It argues that the real engine of innovation in places like China, India, Brazil, and Southeast Asia lies at the intersection of deliberate policy, institutional adaptation, and the catalytic role of multinational enterprises (MNEs). [IMAGE: A world map with highlighted emerging economies (BRICS, Southeast Asia, Africa) and arrows showing knowledge flows between them and advanced economies.]

The Catching-Up Paradox: Sustained Effort vs. Structural Hurdles

Unlike advanced economies, where innovation often exploits existing frontiers, emerging economies face the twin burden of closing technological gaps while simultaneously upgrading organizational and institutional frameworks. This "catching-up paradox" demands more than simply buying foreign machinery or licensing patents. It requires sustained effort across decades, punctuated by structural reforms that reshape everything from intellectual property regimes to vocational training systems.

Firms must build capabilities not only in product design and manufacturing but also in supply chain coordination, quality control, and after-sales service. Meanwhile, societies must reconfigure institutions—educational curricula, patent offices, standards bodies, and R&D consortia—to support these upgrading trajectories. Critically, catching-up is not linear. As the editorial notes, it proceeds through iterative cycles of trial and error, often triggered by external shocks such as financial crises, trade disputes, or sudden regulatory changes. China's electric vehicle industry, for example, did not leap forward in a straight line; it stumbled through early battery failures and subsidy scandals before arriving at global leadership. [IMAGE: A graph showing a 'catching-up curve' with plateaus and jumps, labeled 'Technological capability' vs. 'Time', with annotations for institutional reforms.]

Co-Evolution of Firms and Societies: A New Lens for IB Research

Traditional international business theories have long centered on firm-specific advantages—unique technologies, brands, or managerial know-how that allow companies to compete abroad. But the 2021 editorial pushes for a systemic view where firms and societies co-evolve. Domestic public and private actors shape the innovation ecosystem through infrastructure investment, research funding, and regulatory design. In turn, these ecosystem conditions redefine what constitutes an FSA for both local and foreign firms.

Consider the trajectory of companies like Huawei, BYD, and Reliance Industries. Each succeeded not just because of internal R&D but because they operated within an ecosystem that provided institutional support—government-backed research programs, preferential procurement policies, and coordinated supplier networks. Huawei’s rise in 5G telecommunications, for instance, was enabled by Chinese state-led standards development and massive domestic deployment, which allowed the firm to refine its technology before competing globally. BYD’s dominance in electric vehicles similarly rests on China’s aggressive EV subsidies, battery supply chains, and charging infrastructure buildout—all outcomes of institutional co-evolution.

For foreign MNEs entering such environments, the challenge is different. They must not only transfer their own FSAs but also adapt to local institutional configurations and, in some cases, participate in shaping them. Those that succeed often act as conduits, bringing advanced knowledge while also absorbing local innovations and recombining them into new products for global markets. [IMAGE: A diagram showing two intersecting cycles: 'Firm Capabilities' and 'Institutional Evolution', with arrows connecting them and labels like 'Policy feedback', 'Market signals', 'Knowledge spillovers'.]

Recombination as the Core Innovation Mechanism

At the heart of this process lies recombination—the deliberate blending of locally generated knowledge with imported technologies, business models, and organizational practices. Recombination is not simply adaptation; it is creative synthesis. It explains why many emerging-market innovations look like "jugaad" (frugal engineering) at first glance but later evolve into globally competitive platforms.

The editorial identifies three forms of recombination: technological, organizational, and transactional. Technological recombination involves merging foreign designs with local materials or production methods. Organizational recombination adapts management systems—from Toyota’s lean production to Silicon Valley’s agile methodology—to local labor markets and cultural norms. Transactional recombination rethinks business models, such as India’s Jio disrupting telecom with ultra-low-cost data plans financed by cross-subsidies from other Reliance businesses.

Each form requires deliberate coordination across firms and institutions. For example, the rise of mobile payment systems in Kenya (M-Pesa) and China (Alipay) depended on regulatory forbearance, telecommunications infrastructure, and partnerships between banks, mobile operators, and retailers—a dense web of institutional and network co-evolution. [IMAGE: A visual concept of three interlocking gears labeled 'Technology', 'Organization', 'Transaction', with arrows showing knowledge flows from 'Local Sources' and 'Global Sources' into a central 'Recombination' hub.]

The Role of Multinational Enterprises: Instigators, Conduits, and Beneficiaries

MNEs occupy a paradoxical position in emerging-economy innovation. On one hand, they bring capital, technology, and global market access. On the other, they are often blamed for crowding out local firms or extracting profits without reinvesting. The editorial argues for a more nuanced view: MNEs act simultaneously as instigators, conduits, and beneficiaries of the recombination process.

As instigators, MNEs trigger capability-building by demanding higher quality standards from local suppliers, introducing new process technologies, and training workers. As conduits, they transfer knowledge across borders—not only from headquarters to subsidiaries but also from local subsidiaries back to global R&D networks. This reverse innovation flow has become a critical source of new products for MNEs, from GE’s low-cost ultrasound machines developed in India to Nestlé’s fortified foods created for African markets. As beneficiaries, MNEs capture value from these innovations by integrating them into global supply chains and branding.

However, the distribution of benefits depends on institutional settings. Strong intellectual property protection, local content requirements, and antitrust enforcement can tilt outcomes toward domestic actors. Weak institutions, by contrast, may enable MNEs to dominate without transferring significant know-how. The co-evolution framework reminds policymakers that institutional design is not a one-time event but an ongoing negotiation. [IMAGE: A diagram showing an MNE with arrows pointing to and from local suppliers, research institutes, and government agencies, with labels 'Knowledge spillover', 'Standards upgrade', 'Reverse innovation'.]

Redefining Firm-Specific Advantages in a Globalized World

One of the most provocative claims in the editorial is that the very concept of FSAs must be rethought in the context of emerging economies. Traditional FSAs—proprietary technology, global brands, managerial expertise—are often assumed to be owned and controlled by the firm. But in dynamic catching-up environments, FSAs are increasingly co-created with external actors.

Local firms may develop advantages that are not easily imitable by foreign competitors, precisely because they are embedded in local institutions and networks. For example, Chinese smartphone maker Xiaomi built an FSA in community-driven product development and flash sales, a model that relies on deep integration with WeChat and Taobao ecosystems—assets foreign entrants cannot replicate overnight. Conversely, foreign MNEs may find that their traditional FSAs erode if they fail to adapt to local recombination patterns.

This redefinition has practical implications for strategy. For local firms, it means investing in network building and institutional engagement, not just R&D. For MNEs, it requires a shift from "knowledge transfer" to "knowledge co-creation"—a move that demands humility, long-term commitment, and a willingness to share control. [IMAGE: A comparative table or visual showing 'Traditional FSA' (e.g., patent, brand) vs. 'Co-evolved FSA' (e.g., ecosystem integration, regulatory agility) with examples from Huawei, BYD, Xiaomi.]

Policy Implications: Building Institutions for Innovation

For policymakers, the editorial offers a clear message: innovation in emerging economies cannot be left to market forces alone. Appropriate institutions are needed to support R&D investment, vocational training, technical standards, and knowledge coordination. But institutional design must be context-sensitive. What works in China—state-led industrial policy with export orientation—may not work in India or Brazil, where democratic governance and fragmented regulatory systems require different approaches.

The article highlights several policy levers: public funding for basic and applied research in strategic sectors; intellectual property regimes that balance protection with diffusion; competition policy that prevents monopolistic lock-in; and platforms for public-private dialogue to align innovation priorities. Importantly, coordination failures—where firms hesitate to invest because others are not investing—require government to play a convening role, as seen in South Korea's early semiconductor consortia or Malaysia's electronics clusters.

Yet the co-evolution perspective warns against over-reliance on government. Institutions themselves evolve through trial and error, and policies that succeed at one stage may become barriers at another. The most effective innovation ecosystems are those that maintain flexibility—allowing firms, universities, and regulators to iterate and adapt. [IMAGE: A set of icons representing different policy tools (R&D tax credits, patent office, training centers, industry standards body) connected by a feedback loop labeled 'Iterative adjustment'.]

Emerging Patterns in Global Innovation Dynamics

The 2021 editorial also points to emerging patterns that are reshaping the global innovation landscape. First, the geography of innovation is becoming more multipolar. While the United States, Europe, and Japan remain dominant in basic research and high-end manufacturing, emerging economies are increasingly leading in process innovation, business model innovation, and frugal engineering. Second, the digital revolution is accelerating recombination by lowering the costs of knowledge sharing and coordination. Platforms like Alibaba, Tencent, and Mercado Libre are creating innovation ecosystems that span borders, often bypassing traditional institutional bottlenecks.

Third, sustainability pressures are pushing emerging-economy firms to innovate in green technologies—solar, electric vehicles, battery storage—precisely because they face fewer legacy infrastructure constraints. This "leapfrogging" potential offers a new pathway for catching-up that does not simply replicate the industrialized world's carbon-intensive trajectory.

For international business researchers, these trends demand new theoretical tools. The editorial calls for more longitudinal studies that track co-evolution over decades, cross-country comparative work that isolates institutional variables, and micro-level research that examines how recombination actually happens inside firms and networks. [IMAGE: A timeline graphic showing the shift from a unipolar innovation world (2000) to a multipolar one (2020s), with nodes representing emerging hubs like Shenzhen, Bangalore, São Paulo, Nairobi.]

Conclusion: A Call for Systemic Thinking

The innovation story in emerging economies is not one of catching-up in the rearview mirror, but of actively reshaping the road ahead. Recombination and institutional co-evolution offer a powerful framework for understanding how firms, governments, and societies together create new capabilities. For practitioners—both corporate strategists and policymakers—the lesson is clear: invest not only in technology but in the institutions and networks that enable knowledge to flow, combine, and recombine. For researchers, the editorial opens up a rich agenda that moves beyond static notions of FSAs toward a dynamic, co-evolutionary view of competitive advantage.

In a world where innovation is increasingly distributed and collaborative, emerging economies are no longer passive recipients of technology from the West. They are active laboratories for new models of value creation—models that may well define the next era of global business.