Large companies increasingly engage in social innovation: Facebook and six other companies offer affordable internet in less developed countries through, for example, while Microsoft is offering internet ready smart phones at $29, tailor-made for developing markets. Why are these companies offering novel, low-cost products in emerging markets, which only marginally contribute to their profits, if at all? Steve Davis, a speaker on social innovation at the World Economic Forum in Davos this year, explains.

“One answer is that the demographic model of the world is changing,” says Davis, CEO of PATH, an international non-profit organization and leader in global health innovation. “We used to live in a world where the demographic wealth model was that of a pyramid, with few at the top and many at the bottom. Over the last 25 years however, we have moved to more of a diamond shape, with an emerging middle class in many large countries like China, India and Brazil.”

That evolution translates in hard economic numbers, because despite recent gloom stories about a slowdown in emerging markets, these set of emerging countries, including China, India and Brazil now have a larger GDP, measured by purchasing parity, than their developed market counterparts including the US and Europe. “These people emerge as new consumers,” says Davis. “It makes big and small corporations alike are wonder: ‘How do I engage with the lower middle income class?’”

But as companies like Facebook, Google or Microsoft enter emerging markets because of the changing demographic, they realize the need to meet different customer demands. That, says Davis, is a second reason why companies revert to social innovation. “Geneva, Washington and Seattle can’t decide what those people need,” says Davis. “These countries are setting their own standards, and thus innovation is no longer a one way street. It is multi-nodal.”

The result is that companies increasingly set up R&D centers in the emerging world, and offer products specifically made for the emerging world. “These initiatives [such as the ones from Facebook and Microsoft] are quasi philanthropic in the beginning, but eventually help,” says Davis. “They help penetrating market, understanding consumer behaviour and building a brand.”

And what goes around, comes around. It’s not just Western companies who engage in “social innovation” or that enter new emerging markets. Davis’ own PATH organization helped a Chinese company get WTO pre-qualification for an encaphilitis vaccine, making it the first Chinese company to ever get such a stamp of approval, and allowing it to serve the many encaphilitis patients in India and Southeast Asia. That project was subsidized by philanthropic and international organizations at first, but now is making money for the low-cost Chinese vaccine manufacturer.

The overarching trend, Davis says, is that multinationals, non-profits and governments increasingly see how they can tackle big problems together, in a way that satisfies all of their interests. Examples abound: Pearson has committed to doing more work on education tools in emerging markets; Unilever is successfully targeting consumers at the bottom of the market with products like Lifebuoy; and by now everyone is familiar with the success of M-Pesa, a mobile money service emanating from Kenya.

The question, however, remains whether social innovation can become mainstream in companies’ operations. “The problem in the market,” Davis explains, “is that this is a long-term portfolio play, whereas many companies keep focusing on short-term growth and profits.”

But still, he insists, social innovation is “moving from kumbaya to board room,” because the need behind it won’t go away. “With the long term trends in climate, health, and economic development, business will have to adapt their activities in this direction,” Davis says. “I’m an optimist.”

Steve Davis, CEO of PATH, was one of the speakers at "Advancing Corporate Social Innovation" session at the Annual Meeting of the World Economic Forum in Davos.

Author: Peter Vanham is Media Lead, U.S. and Industries, and a Global Leadership Fellow at the World Economic Forum. He is also writing a book, Before I Was CEO. He is reporting from Davos this wee