Three Things Needed to Nurture Innovation

Where are we in the innovation-driven growth cycle in Asia? I believe that we are standing in the very early innings of this innovation-driven growth era and here's why. For innovation to take place, you need three things. First, you need very strong human resources. Second, you must have vibrant capital markets to support these companies. And third, you must have a very large addressable market. Now with rising income levels, Asia has all three.

1. Strong Human Resources

Asia has one of the largest, highly educated, well-trained workforce today. Asia produces more PhDs than Europe or the US, and that's not including Asian students studying abroad who may return to their native countries.

2. Vibrant Capital Markets

The second piece is vibrant capital markets, active venture capital and equity markets to support these companies.  Today, Asia is one of the biggest markets for venture capitalists and equity markets.

3. Large Addressable Markets

You need a large addressable market, otherwise you cannot expect innovations to create much value. And today, Asia has the world's largest consumer market, bigger than the US and Europe.

History Repeats Itself?

The last time we saw this was in the U.S. in the '70s. Think about what happened then, the U.S. passed around $8,000 income level back in the '70s. Around that time we had a ‘big bang’ of innovative companies like Microsoft, Nike, and Genentech, and they're still leading innovation today. All of these companies were born to serve the needs of the US market first, and then they grew to be global giants and created tremendous value for investors. For example, Microsoft and Nike have returned approximately 20% per annum since their public listings.¹ Also, innovative industries in consumer, healthcare, and technology sectors clearly outperformed the broader S&P 500, and these are the sectors that Matthews’ innovator strategies are focusing on. We believe Asia now is where the U.S. was back in the '70s, and we are beginning to see an emergence of many innovative companies.

Since regulatory reform began in November 2020, there has been a very clear divergence between the U.S. and China, as you can see in Chart 1.  A few things that I've learned about companies in China; they don't have to reinvent their business model because of these reforms, they just need to adjust their strategy to make sure they're complying with a new regulatory environment. Companies like Tencent may continue to be competitive globally and Alibaba may continue to be an e-commerce giant in China. I believe that the aim of the Chinese government is trying to protect consumers’ rights and they're not trying to break up these companies.

Chart 1. Asia ex Japan vs. U.S.