I am now well into the third full day at the Annual Meeting of the World Economic Forum in Davos, Switzerland.  It is an incredibly stimulating yet exhausting event where the value comes from the rich diversity of participants and topics covered in meetings extending from 7am to midnight and later.

I have been coming to this meeting for a number of years because I find it invaluable to do pattern recognition in terms of issues that are drawing the attention of global leaders. What is discussed and drawing the crowds here is revealing, but what is not discussed is perhaps even more revealing.

When I first came here in 1997, the hot topics were the two “I’s” – information technology and the Internet.  Older CEO’s crowded into sessions to listen to dot com entrepreneurs talk about how the Internet was going to change the world.  In the years following 2000, the enthusiasm for technology has substantially waned, even though one can still find sessions on IT. This is definitely not the crowd draw that it once was.

This year’s overarching theme is “The Creative Imperative” and one of the hot topics is innovation.  Executives are gathering in a variety of venues to try to figure out what they can do to ramp up their innovation performance and enhance the creativity of their organizations.

On another dimension, many of the sessions this year focus on “the emergence of China and India” as a key management challenge. The sessions on China and India are drawing large crowds – there is clearly much interest in the extraordinary growth of these emerging economies and the implications for global business. The sessions dealing with innovation and with China and India are very rich and thought-provoking.

What’s interesting to me, though, is that few people are drawing a connection between innovation and the emergence of China and India – for all intents and purposes, these are treated largely as independent topics.  In some cases, executives will observe that the emergence of China and India increases the innovation imperative for Western companies, but that is generally the extent of the connection.

That really misses the point of the management challenge posed by China and India.  In fact, the rise of China and India can largely be traced to some very distinctive innovation being pioneered by companies in these regions.  Western executives tend to overlook this innovation for a variety of reasons.

• They are often still locked into mindsets that attribute the growth of these economies to purely to wage rate arbitrage – leveraging lower wage rates to capture a growing share of global economic activity.
• They miss a lot of the innovation that is going on because they deal primarily with large, traditional (and in the case of China, often state-owned) enterprises in these countries.
• Western executives too often tend to equate innovation with breakthrough product innovation.  As a result, the management innovations that are being pioneered by companies in China and India tend to fall below the radar screen. These innovations are largely innovations in management techniques designed to foster
  rapid, incremental innovation rather than breakthrough product innovation.

As I have written elsewhere, three different patterns of management innovation are driving the growth of entrepreneurial companies in China and India – open production, open distribution and lean process management (in the latter case, taking techniques originally pioneered by Japanese companies in manufacturing and supply chain operations and applying them to a broad range of other business processes).

As the discussions here at Davos confirm, few Western companies even see this innovation, much less understand its importance. That’s a big shame. It can be a source of great vulnerability for Western companies.

In the near-term, there’s a significant opportunity for all companies to harness these innovative management techniques to deliver more value to their customers.  If Western companies wait too long, though, they will be exposed to increasing global competition from the companies in China and India that are pioneering these techniques. These companies are increasingly active in a broad range of industries ranging from cell phones and software to motorcycles and apparel. 

As these management techniques come together, they create powerful bootstrapping platforms that build capability very rapidly.  As I have emphasized in other writing, Western companies should not be misled by static snapshots of relative capability. What matters are trajectories and the relative pace of capability building.

The two “I’s” that are shaping this year’s discussions at Davos – innovation and India (along with China) are actually much more tightly linked than most Western executives recognize. If there is one commitment that everyone should take back from Davos, it is to better understand the connection between these two vital topics.