Emerging markets leading the way in innovation

Brian S. Freiwald, CFA, Portfolio Manager, 10/07/21


  • Innovation is driving exciting growth across emerging market countries.
  • Emerging markets dominate three key areas — semiconductors, fintech, and electric vehicles.
  • We are finding companies that offer unique investment opportunities across the developing markets universe.
Innovation is driving growth across emerging market countries. In our view, the developed world no longer holds a monopoly on invention.

We believe many of the leading companies of the next 20 years may originate in emerging markets driven in part by leadership positions in STEM (science, technology, engineering, and mathematics) education, innovation in technology applications, and a growing tech-savvy population.. The dominance in three main areas — semiconductors, fintech, and electric vehicles (EVs) — is creating some exciting investment opportunities, in our view.

Internet of Things and semiconductors

Asia accounted for more than two thirds of all patent, trademark, and industrial design applications in 2018, according to a World Intellectual Property Organization report in 2019. Since then, Asia has continued to strengthen its position as the region with the greatest activity in patent filing. China has also produced more Ph.D.s in science, technology, engineering, and mathematics (STEM) since 2003. By 2020, China was producing 50% more STEM Ph.D. students than the United States, according to an August 2021 report by CSET, a policy research organization at Georgetown University. In addition, China now produces 30% of all artificial intelligence (AI) research papers, according to a February 2021 article in the Harvard Business Review.

The combination of STEM Ph.D.s and AI research helps quantify the large and significant pool of talent available in Asia. Population growth and a more tech-savvy younger generation are also fueling the digital economy in many of these countries. In 2018, for example, a money transfer app from a leading China-based technology conglomerate had more than a billion transactions per day, according to an article in the May-June 2021 issue of Harvard Business Review. We believe this combination of talent and tech-forward thinking is a key element in Asia’s emerging dominance in the space.

The leadership in AI scientific research is a key driver for the growth of the Internet of Things (IoT), which comprises digital technologies or devices embedded in all kinds of consumer and industrial products. These include smart watches and home devices as well as more industrial applications in areas such as agriculture and precision manufacturing.

China leads the world in the use of the Internet of Things

(%, Number of Internet of Things connected devices)

internet of things

Source: Statista, as of August 2021.

As more and more items are rebuilt and redefined as a “smart” tool, semiconductors have become more integral to our daily lives. Asia has an outsized exposure to some of the leading companies globally in this space. Two companies, one based in Taiwan and one in South Korea, currently dominate the global semiconductor landscape. These two firms have over 135,000 employees and spend over $65 billion annually on capital expenditures to expand their technological advantages. More businesses are using IoT technology and the number of IoT-connected devices is projected to increase to 43 billion by 2023, tripling the current total. (McKinsey 2019).

India and Brazil embrace digital wallets

Many emerging market companies have leap-frogged from credit cards to mobile payments. Mobile payments are becoming the standard from Brazil to India. In India, about 93% of internet users used digital wallets versus 43% in the United States as of April 2021, according to a report by Blackhawk Network. Internet connectivity is also an important driver in this space.

Additionally, growth in areas such as online banking and alternative lending platforms is expanding banking access among growing populations in many developing countries, including Latin America. Historically, many people and small businesses in these countries had limited access to financial services. Accessible technology, specifically in fintech, can help businesses access banking services outside traditional financial infrastructures. This can ultimately help improve livelihoods and drive greater consumer activity, spurring economic growth.

Latin America is seeing a boom in fintech startups

(Number of startups and % of total, by country, Q1 2018)

Latin American FinTech

Source: Inter-American Development Bank, Finnovista, November 2018.

Electric vehicles make a splash in China

China is the world’s leader in EV sales, outpacing the United States and Europe. In 2020, EVs made up 8% of Chinese vehicle sales compared with about 4%–5% for the rest of the world, according to EV-volumes.com data. This same data projects that Chinese penetration will grow to more than 30% by 2030. Furthermore, EV companies in China benefit from government support, including subsidies for local buyers. This has led to the largest increase in absolute monthly units sold since January 2020.

We believe Chinese EV manufacturers are particularly well positioned to benefit from this consumer trend. Electric vehicles are some of the top-selling models in China compared with Europe and the United States. A critical component of EVs is the battery, and all of them are currently designed and manufactured by Korean, Japanese, or Chinese companies. Three companies currently dominate the space, with approximately 70% market share, according to an August 2021 article published by the Institute of Electrical and Electronics Engineers (IEEE).

Electric vehicles are some of the top-selling models in China

Electric Vehicles

Source: Putnam, as of July 2021.

The future

We have long believed that emerging markets are well positioned to lead the world in innovation. The powerful combination of leadership in STEM academic resources, a strong pipeline of creative new and accessible technology solutions, plus a receptive and growing, tech-savvy population results in a powerful incubator for innovation in the emerging markets.

For more information, learn more about Putnam Emerging Markets Equity Fund.

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