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‘Indirect’ learning

17 August 2015

The article at a glance

Concern about executive ‘brain drain’ from developing countries is misplaced. ‘Indirect’ learning in mature markets crucial to developing-country firms’ growth, says research …

Concern about executive ‘brain drain’ from developing countries is misplaced. ‘Indirect’ learning in mature markets crucial to developing-country firms’ growth, says research co-authored at Cambridge Judge.

'Indirect' learning

Concern about a “brain drain” of executives from developing countries who work in mature markets is misplaced because such “indirect” learning abroad is critical to their companies’ growth in developed markets, finds research co-authored at Cambridge Judge Business School.

Companies from India and other emerging economies have little opportunity to learn directly from their own so-far limited experience in developed markets. So the knowledge gained from learning indirectly from business leaders, rival firms and networks in mature markets “plays a crucial role” in explaining why some developing-country firms grow faster in developed markets, found the research.

The study, titled “Indirect learning: how emerging-market firms grow in developed markets” published in the January issue of Journal of Marketing, holds important policy implications for the debate over the free flow of skilled people from emerging economies such as India.

“Developing countries have worried about a ‘brain drain’ of executives and talented young people if they work or study in mature markets,” says the study’s co-author, Jaideep Prabhu of Cambridge Judge Business School.

But our research shows that encouraging such movement of people helps both developing and developed countries: business leaders from countries like India often return to manage Indian companies and help them grow in mature markets like the US and UK, while countries in the West benefit because these Indian business leaders who return home to run companies often invest in developed countries. It’s really a win-win situation.

Prabhu cites the India-based Tata Group as a prominent example of an emerging-country firm whose leaders’ travels have reaped benefits both at home and abroad. Former chairman Ratan Tata studied in the US and current chairman Cyrus Mistry studied in the UK. The group’s holdings currently include luxury car maker Jaguar Land Rover in Britain, while Tata Consultancy Services has offices throughout the US and now sponsors the prestigious New York City Marathon road race.

As part of the study, the research compared the growth in developed markets of 116 Indian firms with a sample of 160 UK firms, drawing on the contrast between those two countries’ global business history. “While India discouraged and even prevented its firms from venturing into international markets until 1999, the United Kingdom has encouraged its firms to venture into international markets for several centuries.”

The study was co-authored by Sourindra Banerjee of Warwick Business School; Rajesh Chandy of London Business School; and Jaideep Prabhu, Jawaharlal Nehru Professor of Indian Business & Enterprise at Cambridge Judge Business School.

The findings suggest that policymakers in emerging economies should not only be careful about placing obstacles in the paths of citizens who wish to work or study abroad, they might in fact encourage such movement through scholarships, an increase in loan availability and removal of foreign exchange restrictions on spending in developed countries.

In addition, such policymakers should resist the demands of domestic business leaders for protectionist barriers, because “greater developed-market competition help emerging-market firms learn about developed markets and pursue international growth”.