Home-Host Country Demand Structure Gap and Reverse Innovation

Abstract

This study focuses an important yet underexplored question in reverse innovation literature, namely the antecedents of leading multinational enterprises’ subsidiaries located in emerging markets to reversely transfer the innovation from emerging markets to developed markets. We combine the literature on reverse innovation with the demand-based view on innovation, and examine how the demand structure gap between home developed market and host emerging market can influence a subsidiary’s reverse innovation decision. We propose an inverted U-shaped relationship by identifying two latent mechanisms: one is the opportunities for the innovation to be novel, and the other is the possibilities for the innovation to be applicable to developed markets. Empirical results based on panel data on subsidiaries with OECD nationalities in China support our hypotheses. This study contributes to reverse innovation literature by investigating demand-side factors, and enriches the discussion on demand-driven innovation by taking a locationally differentiated cross-border perspective and highlight the potential detrimental aspects of consumer heterogeneity.