Assessing the Lead Market Potential of Countries
for Innovation Projects
Marian Beisea and Thomas CleffbaCentre for European Economic Research (ZEW), Mannheim, Germany,

Research Institute for Economics and Business Administration, Kobe University, 2-1 Nada ku,
Rokkodai, Kobe-shi, Email: rian@rieb.kobe-u.ac.jpbPforzheim University of Applied Sciences, Pforzheim, Germany
Running Title: Assessing Lead Market Potential

Abstract: This paper presents an approach to assessing the potential of countries to increase
the likelihood that locally preferred innovation designs become successful in other countries,
too. The concept suggests that for many innovations lead markets exist that initiate theinternational diffusion of a specific design of an innovation. Once a specific innovation design
has been adopted by users in the lead market chances are that it subsequently becomes
adopted by users in other countries as well. Lead markets can be utilised for the developmentof global innovation designs. By focusing on the design of the innovation which responds tothe preferences within the lead market, a company can leverage the success experienced in thelead market for global market launch. In order to follow a lead market strategy of new productdevelopment, it is necessary to assess the lead market potential of countries before an
innovation is developed and tested in the market. This paper presents an indicator-based
methodology that approximates the lead market attributes of countries. This assessment
methodology was applied to two innovation projects at the truck division of DaimlerChrysler
AG. The method produces information that is of importance for the development phase andthe market launch of globally standardised innovations.
Key Words: Innovation, Global Diffusion, Market Entry

1

Introduction

When Siemens, a large electrical machinery and office equipment manufacturer
headquartered in Germany, analysed the market opportunity for the new facsimile technology
in the 1970s they concluded that neither an introduction in Europe nor in the biggest foreign
market, the United States, would be successful. The prototype machines were bulky andemitted an awful scent; the paper was physically irritating and the quality of the transmitted
text was poor. The telex system, which was already popular in some local markets, seemed
more advantageous. The marketing team of the telecommunications division at Siemens,
however, discovered that Japan preferred the facsimile technology because of the pictorial
character of its language and thus held a lead market advantage over Europe and the UnitedStates that threatened Siemens’ global market position in the text-based telecommunications
equipment sector. They concluded that once the technological design of text-based
telecommunications equipment opens up a mass market in Japan, it would develop the power
to spread worldwide and squeeze designs preferred in other countries out of the world market.
As a result, the telecommunications division of Siemens did not abandon facsimile
technology but introduced a fax machine in Japan. The Japanese affiliate of Siemens took the
responsibility for further development of the technology as well as for the market launch,documented the market feedback and constantly refined the product. As expected, the fax
machine was not only a big success in Japan. When the mass market emerged and the
diffusion of the fax machine took off in 1985, production costs decreased rapidly due toeconomies-of-scale of production. Lower prices and improved quality made the fax machine
become increasingly popular in the United States and Europe as well. As a result of thepioneer advantage in Japan, Siemens became the leading producer of fax machines.
As most readers will know, the strategic response of Siemens to the situation in the 1970s
described here is fiction. What is true is that at that time Siemens had developed a2

considerable technological advantage in facsimile technology. Unfortunately, it did not carryout an analysis on the lead market potential of countries. Because of low market response
from the German market, they abandoned facsimile technology and concentrated R&D
activities on improving the telex system. In contrast, Japanese firms sensing local demand forthe particular technology invested continuously in facsimile technology and introduced astream of improved fax machines in Japan. The resulting bandwagon spread over to theUnited States and later to Europe. The international diffusion of the fax machine renderedJapanese manufacturers, such as NEC, Ricoh and Sharp, dominant. At the end of the 1980s,
Japanese firms nearly controlled 90 % of the world market (Yoffie 1997, p. 33). The facsimile
technology eventually superseded the telex system, which had been the preferred device inEurope and the US.
Countries where users prefer and adopt a specific innovation design that does not only appeal
to domestic users, but can subsequently be successfully commercialised in other countries as
well, can be called lead markets, countries that follow lag markets. Lead market countries area chance for firms to develop global innovations. By concentrating attention and resources on
one country market, focusing on a narrow range of market preferences and feedback, a firm
can lower the market research costs as well as speed up the process of innovation
development. In knowing the market context of the lead market it can avoid nationallyidiosyncratic innovation designs. Firms that do not respond to lead markets run the risk that
their innovation designs albeit initially successful in their home markets become squeezed outof the market by innovation designs adopted in the lead market.
The lead market approach to global innovation strategy of international firms was firstsuggested in the 1980s by Porter (1986) and has been discussed since then (e.g., Gerybadze etal. 1997, Johansson 2000). Bartlett and Ghoshal (1990) describe lead markets are “themarkets that provide the stimuli for most global products and processes of a multinational
3

company” (Bartlett and Ghoshal 1990, p. 243). Yet, the term ‘lead market’ has been used invarious ways in literature in the past. In the definition used by most diffusion researchers alead market is a country in which the diffusion process of an innovation first takes off (e.g.
Kalish et al, 1995, Kotabe, Helsen 1998). Other authors have used the term ‘lead market’ todenote the country in which an innovation was invented (Yip 1992), in which a subsidiary ofa multinational company takes over global product responsibility, for instance as global
coordinator of marketing activities (Raffée, Kreutzer 1989), or as a mixture of all (Jeannet1986).
We define lead markets as regional markets with specific attributes that increase theprobability that a locally preferred innovation design becomes internationally successful aswell.1 After studying many globally successful innovations, such as cellular mobile telephony,the fax machine, personal computer and others, we argue that in order to contribute tostrategic innovation management of a firm lead markets should be defined solely by market
context factors of countries and not by firm specific factors or scientific technologicalknowledge endowments of countries. For most global innovations we analysed, the early
adaptation in one country was the stimulating factor that led to the international
competitiveness of firms that responded to the country market. First of all, there rarely was asignificant general scientific-technological knowledge gap between firms in the US, Europe
and Japan. If a knowledge gap existed, it was either closed quickly by firms that perceived astronger local market demand than firms in other countries or it concerned technologicalnuances that often result from different local conditions and preferences. Most firms and eveninternational corporations are biased towards their home market environment. Home market
conditions such as demand preferences and environmental conditions often shape a firm’s
innovations. Local infrastructure and complementary goods or the lack thereof influence thedesign of a product; the creativity of engineers is stimulated by their own living context while4

market knowledge is perceived and acquired most conveniently from the home market withinformation from foreign markets being less weighted or understood than information fromthe home market. The technological capacity of firms is then used to match local conditions
that often cause the resulting new products and processes to be culture specific. The Japanese
preference for the fax machine is one example. The personal computer has been described asa response to the call for independence by the individualistic American society. The
perfection of an air conditioning system in a car is of little interest to users in countries withmild climate. The benefit of a technology is not general; it is commonly environment-specific.
Therefore, in addition of looking for the “best” technology, it is necessary for an internationalfirm to analyse the ability of countries to make nationally preferred innovations beneficial andadopted in foreign markets.
In this paper, we present a method of assessing the potential of countries to leverage anational innovation success internationally. The lead market analysis suggested here aims at
assessing the lead market potential of countries for a specific innovation project. After
retrieving that information, the firm can decide on how to respond to the lead market potentialof a foreign country according to its own firm-specific capabilities and global resource
allocation. In this manuscript, we suggest an analytic method to assess the lead market
potential of countries for specific innovation projects.
We first review the different mechanisms that can be responsible for the international
diffusion of an innovation design that is first adopted in a single country and the emergence ofa globally dominant design. We argue that several country-specific characteristics exist, that
increase the probability that a design preferred domestically becomes the globally dominant
design. These attributes can be arranged in a set of five groups, the lead market factors. To
identify potential lead markets we have developed a concept of lead markets that focuses on
quantifying lead market factors. In the second stage, we report on the procedure and the5results of a real application of our methods to estimate the potential lead market role ofcountries for two innovation projects of the truck division of DaimlerChrysler AG.

2

Origins of the Lead Market Role of Countries

2.1

The International Diffusion of Innovations

Since countries have different preferences and reap different benefits from innovations (or the
innovation has different price tags from country to country) they prefer different innovations.
While the diversity from country to country initially induces a variety of nationally preferredinnovations, an innovation often emerges as globally successful. Figure 1 exhibits the typicalinternational diffusion pattern of a specific innovation.
Figure 1: The international diffusion pattern of an innovation design
100
90
80

Penetration rate
in percent
Lead market

70
60
Lag markets
50
40
30
20
10
0

t

Starting with Griliches (1957) this pattern of the diffusion of an innovation across regions andcountries is frequently observed. The first studies on the international diffusion of innovations
are by Maddala and Knight (1967) and Poznanski (1983) about steel making processes, bySwan (1973) studying the adoption of synthetic rubber, Nasbeth and Ray (1974) reviewing
6the diffusion of production techniques and Antonelli’s (1986) study on information
technologies. One of the most detailed studies to date is Tilton (1971). More recently
Gatignon et al. (1989), Dekimpe et al. (1998a/b), Takada, Jain (1991), Ganesh et al. (1997)
have added analysis on the order of countries adopting a specific innovation. All these studies
found evidence for a variety of factors why technology diffuses from country to country. It
has been observed that the lead market is often not the country where the innovation wasinvented or where the technology used for it was mainly developed.
Before discussing the factors of international diffusion, a defining aspect of the lead market
phenomenon has to be emphasized. Lead markets have previously been characterised ashaving the most innovative customers, i.e. customers who are most open to new products,
most willing to adopt early and risk the failure of an innovation (e.g. Albach 1993). Takeuchi
and Porter (1986) as well as Johansson and Roehl (1994) define lead markets as markets withthe most demanding buyers or those buyers most likely to adopt innovations anticipating acontinuous flow of new products incorporating state of the art technology. In contrast, a closer
look at the situation in the first phase of the diffusion process reveals that, often, it is not theinnovativeness of users that explains the time lag between countries, but that different designsof the same innovation idea were initially preferred from country to country. These different
designs compete worldwide and one finally emerges as the global dominant design while theother designs vanish from the market place. An innovation design, as defined by Utterback(1994), is a specification or configuration of an innovation idea. Different designs of an
innovation have the same basic function but different specifications or a different mix of
attributes such as size, quality performance, precision, technology, energy consumption etc.
Different designs are characterised as alternatives for the same need or function and therefore
compete against each other on the world market. For instance, the fax machine is an7

innovation design of a communication device transmitting written information. An IBM andan Apple computer are different designs of a personal computer.2
Figure 2 includes the diffusion curves of competing innovation designs that were initiallyadopted by a lag country that switched to the lead market design. This pattern illustrates thatlead markets are not necessarily the most innovative markets. The telex system was adopted
before the fax machine hit the markets. In France, an online service similar to the Internet was
adopted widely in the early 1980s that let other countries cool, before the Internet took off in
the United States ensuing a world buzz. Countries, which quickly adopt an innovation designthat is never adopted by other countries, can be called idiosyncratically innovative markets. A
firm responding to idiosyncratic markets can gain a temporary local innovation success but islater compelled to switch to the dominant design losing its pioneer advantages. To thecontrary, firms responding to the market conditions of the lead market can internationallyleverage local knowledge which they have preferred access to through their home market
advantage (Linder 1961) sustained by the experience curve and other pioneer advantages.
Since the lead country normally stays ahead in the penetration rate over a long period of time,they constantly benefit form early user feedback representative for the world market enablingthem to constantly adjust the design to the mass market needs ahead of their global
competitors.

8

Figure 2: The international diffusion pattern of competing innovation designs
100

Penetration rate
in percent

90
80

Innovation design B
in lead m arket
Innovation design B
in lag m arket

70
60
50
40
30
20
10

Innovation design A
in lag m arket
Innovation design
A in lead m arket

0t

The preferences of a country are not always so easy to explain like in case of the fax machine.
However, this is not the main question, since it is more relevant to explain why othercountries follow and the innovation design that sells in the lead market is able squeeze out
designs previously preferred in other countries. The more important question is why othercountries follow the lead market. In the next section, we present a simple consumption modelthat demonstrates various internationalisation mechanisms.
2.2

A Simple Theoretical Model of Lead Markets

We start with a simply two product two country, two stage static comparative consumption
model to find out what drives a country to adjusts its consumption patter towards that ofanother country. Let us consider two countries that in the first stage favour different productdesigns, meaning that each product design has a large market share in one country and a low
one in the other. Either the two designs represent an innovation confronting an establishedproduct that the innovation aims to replace or they represent two different designs of an
innovation. The latter case describes two nation-specific innovation designs competing tobecome the globally dominant design. The former is the more commonly referred case of an
9innovation introduced in the world market. It is assumed though that both countries have thesame general willingness to adopt innovations, so that the different consumption pattern
results from different market contexts. Within the economic theory of consumer behaviour(e.g. Deaton, Muellbauer 1980), different consumption patterns in countries can be the resultof (1) different budget constraints, (2) different preferences, i.e. different properties of goods
are preferred because of varying environmental context or tastes, and (3) different prices of
the goods in the two countries.
In the second stage both countries prefer the innovation design that was preferred initially by
one country, which at this time can be called the lead market. There are three general reasonsfor the other country to change its adoption pattern: (1) the available budget of users reachlevels that was present in the lead market in the first stage, (2) the relative benefit of the
product adopted in the lead market for users in the lag country could have increased, and (3)the relative price of the product in the lag country could have decreased.
Interpreting these changes of adoption stimuli, three basic lead market mechanisms can bederived. First, the lead market experiences anticipatory demand. Anticipatory demand meansthat the lead market enjoys a budget or yields a high relative benefit of an innovation designthat later is available for users in other countries as well. The international trend of increasing
average income causes a superior product to be adopted earlier in markets with high-income
levels (Vernon 1966, Dekimpe et al. 2000). A country also renders anticipatory demand thatis at the forefront of an international trend that changes the utility of specific innovations. This
is what Porter (1990) calls a demand advantage of a country and how Bartlett and Ghoshal(1990, p. 243) explain lead markets: “local innovation in such markets becomes usefulelsewhere as the environmental characteristics that stimulated such innovations diffuse toother locations”.

10Second, preferences in the lag market can be influenced by consumer choices of users in thelead market. For instance, adoption reduces uncertainty about the benefit of an innovation
design. This “demonstration effect” has often been considered an important mechanism ofdiffusion (Mansfield 1968, Kalish et al. 1995). Potential adopters in a lag country observe thesuccess of the innovation in the lead market, triggering a high adoption rate in the lag country.
Reputable first adopters of an innovation signalling the credibility of an innovation canfurther reduce the risk of adoption.
And third, a relative price reduction of the design preferred in the lead market for users in thelag market shifts consumption in the lag market away from the previously preferred design
towards the design preferred in the lead market. This price mechanism can be further divided
into two sub cases. The price of the lead market design is initially lower in the lead market
than in the other market, but the lower price becomes available over time in the other country
as well (anticipatory price conditions). Second, if prices are the same but preferences differ infrom country to country, an innovation design becomes adopted by both countries if the priceof the design preferred in the lead market decreases in relation to the prices of other designs.
This price reduction effect is the main argument of Levitt's (1983) famous "globalisation ofmarkets" hypothesis. It describes a simple substitution effect: innovation designs that becomeless expensive become dominant in countries that would prefer other innovation designs.
Relaxing two assumptions of the consumption model, perfect information on consumer
preferences and non-strategic behaviour of firms and consumers, leads to two additional
arguments for the internationalisation of innovation pattern. First, when preferences are not
perfectly known, companies test the market with alternative innovation designs. The morealternatives offered the higher the likelihood of finding the technological design that is themost beneficial and the larger the variety of new applications of an innovation. Differences in
the competitive climate in countries can lead to different consumption patterns even if
11

preferences and process are the same. For instance, in a country with a monopolist fewer
alternative designs are offered than in a country where several companies compete. The
argument for the internationalisation is that fierce competition in one country may lead to thediscovery of an innovation design that is more beneficial for users in other countries than thebest among the locally offered designs. Thus the initial consumption pattern of the lag
markets does not reflect the local preferences when too few alternatives are offered in themarket to uncover the preferences and determine the locally most beneficial design. A country
with more local competitors or tougher competition is therefore more likely to find a designthat is the most beneficial to both itself and many other countries as well.
Second, if companies or customers or other actors in the market (suppliers, banks,
government) expect the other country to be the lead market they could strategically bias theinnovation designs offered locally towards the preference system of the other country. It canbe expected that a design would have a better chance of becoming the globally dominant
design if it matches the preferences of the other country and already incorporates features thatenhance its utility there.
In order to apply these fundamental theoretical arguments to a specific innovation project, asystem of five basic groups of lead advantages of a country has been derived: demandadvantages, price advantages, transfer advantages market structure advantages and export
advantages. All national advantages and the relevance of the specific topics within eachcategory are innovation specific. While this section should give the theoretical background,the next section shall provide a roadmap for the derivation of variables in order to quantify thelead market potential of countries for specific innovation designs.

12

3

An Applied System of Lead Market Advantages of Countries

3.1

Demand advantage

Central to this internationalisation mechanism is a global trend in which specific innovations
become increasingly beneficial or preferable in most countries. In the past, the dominant
global trend that explained a lead market was increasing income (Vernon 1966). Today,
however, per capita income does not vary much among industrialised countries. The relevant
trends nowadays are, for instance, demographic trends, environmental trends or socioeconomic trends. An international trend can also be in the build-up of infrastructurecomplementary to innovations (streets, distribution system, refuelling stations) or theavailability of complementary goods (video cassettes). The demand advantage is rather
exogenous, meaning that the global trend occurs independent of the adoption decision of thelead market.
Lead markets share this feature of the demand advantage with lead users suggested by vonHippel (1986). A trend is also the main diffusion mechanism that prompts other users tofollow the lead users. Lead users are users who “face needs that will be general in themarketplace – but face them months or years before the bulk of that marketplace encountersthem” (von Hippel 1986, p. 786). Behind that, von Hippel suggests, lays a trends ofenvironmental conditions or technology as the diffusion mechanism.
3.2

Price advantage

A continuous decline in the relative price of one innovation design was the most frequentmeans to overcome international demand differences in the cases we studied before. The priceof fax machines, the cellular mobile phone and the personal computer dropped considerably
faster than their respective competing designs. For instance, the cost of production of the fax
machine was reduced thirty-fold from 1980 to 1992 (Coopersmith 1993). Relative price13

reductions are mostly based on economies of scale of mass production thus giving the country
with the biggest market for an innovation a cost advantage. Large countries therefore have a
cost advantage but the total population does not always determine the size of the market. For
specialised high-tech products with few applications, small countries can also offer asufficiently large domestic market (Kravis, Lipsey, 1971). In addition to size, market growth
can have an effect on costs. The cost of a new technology is higher for the potential adopter ifexisting production techniques have to be replaced than if new capacity has to be deployed. In
addition, faster growth will lower the risk of producers having to make full use of new
investments (Porter 1990).
Another cost advantage can result from staying at the forefront of an international trend infactor prices, such as input factors for the production or complementary factors for theutilisation of a specific product, such as petrol for a car or video cassettes for a video recorder.
The cost advantage can result from increasing or decreasing factor prices. First, an innovationof universal appeal is normally adopted to a greater extent in a country where it first costs less.
In the cellular mobile telephone industry, prices of calls decreased steadily worldwide after
the introduction of the mobile phone in the early 1980s. In Nordic countries, this global pricetrend was anticipated since prices were already at low levels in the 1980s. Second, a costadvantage can result from increasing factor costs when rising factor prices induce factor
saving innovations that initially are country-specific but later meet global market needs. For
example, a country where labour costs are at such high levels that machinery companies
concentrate their innovation efforts on automating machinery will be a lead market if labourcosts in other countries follow the upward trend relative to the cost of other factors.
3.3

Transfer advantage

Innovations can internationally diffuse when the adoption behaviour of customers of foreign
markets is influenced by the adoption of an innovation design in the lead market. The
14

adoption of one innovation design in one country increases the perceived benefit of an
innovation design in another country because it lowers the uncertainty associated with aninnovation (demonstration effect). Information on the innovation not only enhances theawareness of the innovation design but also reduces the uncertainty surrounding new products
and processes. International diffusion of durable goods thus depends on the intensity ofcommunication between two countries (Takada, Jain, 1991). Putsis et al. (1997) show that the
number of cross-border communication ties is not equally distributed among nations and is
not symmetrical. A case study included in Nabseth and Ray (1974, p. 115) demonstrates thatusers get information on innovations of a product domain from preferred countries. The
reputation and sophistication of a user in one country can be a signal for the quality of an
innovation design for users in other countries. Another transfer advantage previously noted byPorter (1990) and Douglas and Wind (1987) is when the preference of a country for a design
can be actively transferred abroad, e.g. by businesspersons, military and tourists. This transfer
effect can stem from multinational companies as well. They have an incentive to use
standardised equipment in all subsidiaries, which creates demand for foreign innovation
designs.
Network externalities can also increase the benefit of an innovation design across countries,
making an innovation adopted abroad more attractive for users than the indigenous design.
The worldwide success of the Internet could have been based on this effect. Countries thatused different online protocols, such as France, slowly switched from the home-grown system
to the Internet. However, while externalities often drive the diffusion of a dominant design
within a country (Varian 2001), squeezing out local innovation designs in foreign countries
necessitates cross-country externality overcompensating for local externalities within aforeign country. This requires strong interaction between actors of different countries. For

15

instance, the number of fax machine users in Japan did not increase the benefit of the fax inthe US since communication between America and Japan is limited.
3.4

Market structure advantage

Competition and entrepreneurial effort have been described as two of the main determinantsof international patterns of adoption of innovations from Posner (1961) to Dosi et al. (1990).
A lead market is a competitive market. First of all, industrial customers tend to be moredemanding towards their suppliers when they face competition than when they are tightly
regulated or hold a monopoly (Porter 1990). Second, competing firms are more strongly
pressured to follow those who have already adopted a new technology (Mansfield 1968, p.
144). And third, maybe most importantly, more innovation designs are tested in a competitivemarket than in a monopolised market. As a result, a competitive market is more apt to find adesign that is not only the best within the domestic environment but also the best across allnational environments. Fierce domestic competition facilitates finding an internationallyhomogenous latent consumer demand for innovations. Competition was indeed found to be anational competitive advantage (e.g. Porter 1990, Mowery 1995, Sakakibara, Porter 2001).
The degree of competition can be measured with market concentration indicators, firm
formation activities indicating barriers of entry or fluctuations in market share (Sakakibara,
Porter 2001)
3.5

Export advantage

Three factors can deliver an export advantage: the similarity of local market conditions toforeign market conditions, domestic demand that is sensitive to the problems and needs offoreign countries, and local agents that put pressure on companies to develop exportableproducts. In the first place, innovations are easier to export if the environment and market
conditions of foreign countries are similar to those of the domestic market the innovation was
designed for. Dekimpe et al. (1998b) support the hypothesis already suggested by Vernon
16

(1979) that the closer the similarity of cultural, social and economic factors between two
countries, the greater the likelihood that an innovation design adopted by one of two countries
will be adopted by the other country as well. A country is more likely to resort to a foreign
design if the loss of benefit is small. That gives a country whose innovation-specific attributesof the environment lays in the middle of the range of environmental conditions an export
advantage over countries with somewhat more extreme environmental conditions.
Even if the domestic environment is not at the forefront of a global trend, a high sensitivity ofdomestic users to global problems can push domestic companies into a global perspective andincrease their ability to meet global problems before companies in other countries. For
instance, consumers in one country can be sensitive to the effects of worldwide climaticchange even if their domestic environment is not affected as much as that of other countries.
Other examples are wildlife protection, wood cutting in the tropics and pollution caused by
raw material extraction.
Pressure for export can come from local users, suppliers, financial sources and other national
institutions. Some customers put pressure on producers to develop globally successful and not
idiosyncratic solutions if they can expect lower prices for an innovation that can be exported,even if the idiosyncratic version would technically suit their own environment better. The
argument of export orientation is similar to what Ohmae (1995) calls a “port of entry”: aregion or state that is shaped by the demands of the global economy and characterised bylarge export shares. A strong export orientation of local companies shapes the political, socialand cultural system of a nation, the education of its engineers and managers, the export
competence of employment and its supporting institutions (governmental agencies).
Export orientation however is difficult to measure exogenous, because export shares are also
the result of a lead market role that might be derived from factors other than exportorientation.
17

4

Assessing the lead market potential

4.1

The estimation model

The lead market concept presented here is based on the assumption that the country with thelargest lead market advantages as described above is most likely to become the lead market.
The lead market potential of countries can be estimated by quantifying the lead market
advantages for a particular innovation idea. Yet, because historical accidents play a role in thelead market pattern as well, one cannot totally predict the lead market. The method suggested
is an indicator-based international benchmark using indicators that approximate the countryspecific lead attributes derived from the basic theoretical internationalisation mechanisms.
No variables in the theoretical model can be observed directly. They have to be quantified
with proxies. Figure 3 depicts both the structural model of the lead market theory and the two
empirical models that assign empirical data to theoretical constructs. The structural model isthe theoretical relationship between country specific advantages and the lead market potential.
The empirical models construct indicators that correlate strongly with the latent variables. On
the left side, appropriate indicators for the lead market factors have to be collected for eachinnovation project for every regional market that could be a lead market.

18

Figure 3: Structural and empirical models of the lead-market analysis

Variables

Cost
advantage

1.......................
2.......................
n.......................

Variables

Demandadvantage

1.......................
2.......................
m.......................

Variables
1.......................
2.......................
o.......................

Exportadvantage

Variables
1.......................
2.......................
p.......................

Leadmarketpotential

Lead and lag
countries ofadoption

Marketstructureadvantage

Variables
1.......................
2.......................
q.......................

Transferadvantage

Empirical model of exogenous variables

Empirical model of endogenous variables
Structural model

The lead market factors are all relative variables and not absolute variables, because the leadmarket potential results from the relative advantage of one country compared to othercountries. Although lead markets could be countries, sub-national regions or groups ofcountries, the examples of internationally as well as nationally successful innovations suggestthat the country level is the most common. In relation to the lead market advantages, countries
tend to be more homogenous within their own boundaries and more heterogeneous in relation
to other countries, and externalities that support standardisation are mostly local (see e.g. theseminal work by Hägerstrand 1973). In addition, it is difficult to acquire data on a subnational level. An aggregation of the quantified lead market factors would provide us with ameasure for the lead market potential of a firm.
The application of the lead market model ends with the derivation of estimates for the leadmarket potential. The right side of the model would provide us with an empirical outcome thatwould allow to check the prediction power of the lead market potential. However, testing theprediction requires collecting a sufficient number of ex post facto lead market cases. The
reason for this is the observation pattern of lead markets. It can only be observed whether a19country is a lead market or a lag market. There is no further distinction within lag markets,
whether they followed earlier or later. For example, the observation of the exogenous variable
would be 1 for the lead market and 0 for all countries that follow. In the current situation, onemust make an analysis of potential lead markets for innovation ideas without information on
the real contribution of each lead market factor. This aggregation problem is discussed further
below.
The suggested estimation method was applied in an exploratory study for the truck division ofDaimlerChrysler AG. The aim was to identify potential lead markets based on the lead market
method for two ongoing innovation projects. The truck industry is characterised by a variety
of market contexts inhibiting the emergence of globally standardised models. As a result ofinternationally varying legal requirements, driving conditions, fuel prices, quality norms anddriving habits, designs of trucks used in the United States, Europe and Asia vary considerably
in many aspects. Few parts are interchangeable and few are globally standardised. However,for globally standardised innovations such as the GPS global positioning system, the antilocking brake and CB radio, the lead market pattern of the international diffusion can beobserved.
In two ongoing innovation projects, the lead market advantage had to be estimated for various
countries in order to check whether a single country holds a global advantage enabling it topush a locally preferred innovation design to become the global dominant design. For bothinnovation projects, the lead market concept seemed to be highly relevant, as the next section
will show.
4.2

Two innovation projects

The first innovation project is the development of a system that automates a standard truck orlorry. An automated vehicle guidance (AVG) system would have to control all tasks of adriver so that the driver could be totally substituted. Specialised automated vehicles have been20

used before in ports and manufacturing facilities for repetitive transport tasks. However, these
automated guided vehicles have been specially designed for a particular context. An
automated standard truck on the other hand would have many advantages. It could be
employed in a wide range of locations and in the public vicinity, for instance in a convoy oftrucks on public highways. It could be guided both automatically and manually, for instance
automatically within a container port and manually when driving outside. And because ofstandardisation they would be cheaper than specialised work trucks.
The team of engineers that was assigned to develop the system would first face the task of
selecting the appropriate technology from within a variety of alternatives. Vehicles can be
guided with a variety of technologies such as GPS, laser or other optical positioning systems,
radio communication, transponder and wires embedded in the road. Automated guided trucks
can be either controlled by a central control unit or equipped with visual sensors to be able todrive in a previously unknown area. The choice of technology would depend on the country,
which the system would be primarily designated for, because of different infrastructures,legislations, and driving contexts from country to country. In some countries, for instancethere is already some telecommunication devices employed along public highways; that could
be used for automated vehicle guidance.
According to the project team and other sources, such as the Japanese Technology Evaluation
Centre (JTEC 1993), there is no technological gap between Japan, the USA and Europe in thefield of AGVs. This would mean that each county or region would be able to come up with atechnically sophisticated solution to the innovation task most likely to be best fitted to eachregions context. On the other hand, standardisation advantages are present. An electronic
guidance system would have an extensive cost reduction potential if mass produced. The
creation of an infrastructure necessary to guide vehicles on public roads bears network
externalities making the extra equipment of a standard truck more beneficial for users that can
21

occasionally use automated driving as cruise control. Given the increasing commercial crossborder traffic, network effects would be international advocating international standardisation.
Furthermore, the risk of liability for personal injuries associated with automated vehicles on
public roads implies that a proven technology will be more accepted than unproventechnologies leading to a lock-in effect. As a result, if automated guided trucks are to become
widely used in the future, there are forces that push towards a globally dominant technology
even if the design of the trucks themselves remains internationally diverse.
The second innovation project is the development of a remote diagnosis system (RDS) for
modern trucks. The main problem of new high-tech trucks today is that specialised diagnosis
equipment is often necessary to repair them. One solution would be to remotely support the
repair of a truck either by detecting defects of the truck when a breakdown occurred,communicating with the driver to enable him to repair the truck himself or preparing a mobile
maintenance service to bring the appropriate spare parts, to the defective truck. Anotheralternative would be to concentrate the online support on service points that are not equippedwith the latest diagnosis technology.
The engineering team initially envisioned highly sophisticated three dimensional goggles thatwould allow an expert at the central service station to see what the driver sees and guide thedriver to carry out some diagnosis and repair tasks. The communication would have beenrealised through cellular telephony, satellite-based telephony or on a fixed-line basis. Afterthe lead market analysis was prepared, the design was changed considerably adapting it to thecontext of the potential lead market.
A lead market for this innovation can be expected as well. Since the market context, previous
adoption of an IT-based diagnosis services, the demand for new uses of telecommunicationand the existing IT infrastructure differs internationally in terms of availability and price, it islikely that countries would initially prefer different technological designs. Yet, automation
22

and navigation systems, as well as the different modes of IT diagnosis and repair services, arelikely to converge into worldwide standards when price reductions occur, as most IT
developments have previously shown.
4.3

The Situation at the DaimlerChrysler Truck Division

Since its merger with Chrysler and the acquisition of Fuso, the truck division of Mitsubishi
Motors of Japan, DaimlerChrysler trucks is more committed to developing innovations that
could subsequently be commercialised worldwide. For both innovation projects, however, it
was seen as crucial to achieve an early success in one country or region in order to get thefinancial resources necessary for the global market entry.
Traditionally most of the new technologies used in new Mercedes-Benz trucks were first
introduced into the German market. The home market was naturally seen as the springboard
to foreign markets because of its large size, sophisticated customers and the knowledge ofMercedes engineers and sales staff. The European market in particular is characterised by anincreasing complexity of motor technology in commercial vehicles. The American and Asian
truck markets appear to be less prepared to adopt new technologies and service features. Userknow-how of new truck technologies was considered as being less sophisticated than inWestern European markets. Germany, however, is rather a lag market for services. Users tend
to adopt technology-based service innovations such as distribution systems and services
offered in banks later than in other countries. Services make up a smaller share of industry
here than in other countries. The project teams therefore presumed that Germany would not
be the best market to enter first with its telecommunications-based service innovations.
What made the choice critical is that the prime target market would determine the technology
used because countries vary in their telecommunications infrastructure and both innovations
would use the telecommunications infrastructure somehow. To maximise the benefit for local
users, the design of the new service would have to use the infrastructure available in the23market, which the service would be predominantly designed for. Europe offers a dense
network of cellular mobile services in which even less populated rural areas benefit fromextensive coverage. Large parts of the United States and Australia in contrast are still notcovered by cellular telephony and are only accessible via satellite.
Both project teams were aware of their global resources, the backing of the upper
management that would enable them to select the country market to enter first freely. The leadmarket concept follows exactly this strategy: design an innovation to suit demand in a single
country to achieve a first market success and later leverage the lead market potential of thecountry and introduce the innovations with the same technology in other countries as well.
The innovation project teams were therefore receptive to our proposal to use these innovation
projects as a first real case for assessing the lead market potential.
4.4

Collecting indicators for lead market factors

The main practical challenge of the empirical model of the exogenous variables is to findnational data on indicators that can be used as proxies for the lead market factors. Table 1
gives an overview of the set of variables used for the five lead market factors in the case of
the remote diagnosis service (RDS). The first column lists the main lead market factors andtheir sub factors as described before. In the second column, variables are specified to quantify
the lead factor for the specific innovation project. It was compiled during discussions with the
project teams. The variables are either directly country-specific, such as factor costs
prevailing in a country, or they are attributes of the technical design of an innovationpreferred by the country, such as the cost reduction potential of the design.
Since the variables in the second column are derived without concern of data availability(“ideal”), variables had to be found for which national data is available and which would
correlate with these ideal variables. The third column lists the indicators that are expected to
be good proxies for the lead market advantages of countries. For instance, the degree of24competition in country is indicated by concentration of truck sales in the country market. The
Herfindahl index was used to quantify the concentration degree. Altogether a set of 32 and 29
indicators respectively was used in the analysis. National data was found in a variety of
databases published by international organisations such as the OECD, IMF, World Bank or
United Nations. However, some indicators were not available. In these cases, even weakerproxies have been used. For instance, the GDP per capita was used as a variable for income ofcustomers. Other variables were derived by interviewing experts,3 for example the know howof the users. For some variables, no appropriate data could be found at all.
A group of 44 countries for the remote diagnosis innovation and 30 for the automated guided
truck was included in the analysis. These groups consist of all OECD countries and those nonOECD countries which were deemed by the project team members as being relevant as
possible lead markets. Even if some countries seem odd, company people often haveexpectations about the lead markets and if these countries are not included in the analysis,
they later might fail to give full support to the strategy.
The estimation of the cost reduction potential of designs is normally too difficult or costly fora lead market analysis. In our project, we assume the same cost reduction potential ofdifferent designs and take various estimates for the national market size as the main proxy forthe price effect. For the demand effect and the anticipatory factor price effect trends have tobe identified. After the trend is specified, the country that leads the trend has to be assigned
the largest value of a trend variable. For instance, a decreasing factor price trend means thatthe country with the lowest factor price is the country with the highest lead effect: the prices
must therefore be transformed into negative values. The main trend for the innovation projects
are identified as the trend toward automation (AGV) and the trend of call center services(RDS). Variables for the demand advantage are always relative measures, such as penetration25

rates or income per capita, to denote the rank of countries on a trend regardless of their market
size.

26

Table 1: : A system of variables as proxies for lead market factors for a specific innovation project
Innovation:
NACE industry class.:
Potential markets
Lead market factors
Cost advantage
Price reduction potential

Market growth

Anticipatory factor costs

Demand advantage
Trend

IncomeCollateral assets
User know-how

Export advantage
Sensibility to global needs

Remote diagnosis service for trucks
64.20.3 or 64.20.5 (50.20.1)
Australia, South Africa, China,
Scandinavia, Brazil
Variables

Cost decline per production volume and [M] Market size (trucks)
accumulated production volume[M] Market growth (trucks)[M] Number of call centre seats 1999
[M] Predicted number of call centre seats 2005
[M] Absolute growth rate of call centre seats[M] Annual average of telecom revenue between 1995 and 1997
Growth of sales of transportation services [M] Road, inland surface goods transported (million hauled tkm)
[M] Total road expenditure: annual average between 1993 and1996 [in SDR]
Cost of telecommunication service[M] Average of the total road user taxation/road network (km)[M] Cost of 3-minute local call in 1995 [in US$][M] Cellular, cost of 3-minute call in 1995 [in US$]
Demand for telesupport services per user

Demand for mobile telecomm. services
per capita
Average income of road haulage
companies as a share of revenue
Road infrastructure density
Innovation expenditure of road haulage
companies
Quality of trucks used
Sensibility for remote support of trucks

Export orientation

Export intensity for trucks and mobile
equipment

Similarity to foreign
markets
Market structureadvantage
Competition

Language compatibility

Contestability
Firm formation

Market entry costs
New firms to number of existing firms

Transfer advantage
Risk
Multinational firms
International mobility ofusers
International attention
Government influence

Preliminaries
Competing technologies: maintenance service stations
Former experience, failures: good market response for services inUK, emergency radio signal button for sedans sells best in USA
Available indicators as proxy[M]etric, [O]rdinal, [N]ominal (standardised)Market power (price-cost/cost )Market concentration

International reputation of road haulage
companies
Share of worldwide revenues of firms
headquartered in the country
Share of foreign revenues of road haulage
companies
Share of worldwide reports on road
haulage subjects
Share of governmental subsidies to total
investments of road haulage companies[M] Call centre seats per capita (1999)[M] Share of call centre seats with at least one service in 2005
[M] Share of service/GDP (1993)[M] Cellular mobile telephone subscribers per capita[M] Annual Average of the GDP per capita between 1993 and1997, PPP
[M] Density of total road network (km/km2)[O] Know-how of road haulage companies[M] Unit value for truck 5-20 tonnes[M] Unit value for truck >20 tonnes[M] Annual average of injury accidents between 1993 and 1997
per Capita[M] Murder, volume of crime per 1 000 000 people (1996)[M] Trade balance of trucks [5-20 tonnes][M] Trade balance of trucks [>20 tonnes][M] trade balance of mobile phones[M] Trade Balance of videophones[M] Share of international citizens speaking the same official
language[O] Competition of road haulage companies[M] Productivity of the telecom sector between 1995 and 1997
[M] Competition trucks (1/Herfindahl index)
Not available
Not available
Not available[M] Production share of domestic firms abroad[O] Share of international road haulage companies[M] Annual average of transport services [% of total service
exports]
Not available
Not available

For the export advantage, export shares and the export import ratios of products that relate to
the innovations have been used. In the RDS case the crime rate was included as an indicator
for the sensibility of local customers for the global value of the service, since the project27

manager considered the perception of a threat for an idle truck along the road as a main
motive of buyers. In the category of market similarity, the usage of the local language abroad
is an indicator for international compatibility in the RDS case.
The transfer advantage was the most difficult to quantify with the exception of the reach ofmultinational firms in the truck industry and the haulage firms. The other categories of thetransfer advantages such as reputation of countries had to be assessed by polling experts,
which we did only for the haulage firms’ competence measure as a proxy of sophistication ofusers in the demand advantage section.
4.5

Aggregating the indicators

In order to derive a ranking of countries in terms of the lead market potential the set ofquantified lead market factors must be aggregated. The aggregation is carried out in two steps.
First, the set of variables for each lead market factor is reduced using a main component
analysis.4 This process leads to a small set of standardised measures for lead market factors,
meaning that their mean is 0 and their standard derivation is 1 leaving the skewness of the
distribution as the information they carry. In the second step, we derive a single value for thelead market potential, simply using the arithmetic average of the main components or othersimple aggregation means.
In the RDS case, the main component factor analysis results in the reduction of 34 variables
into two main components for each lead market advantage. The assignment of the indicators
to the main components is shown in Table 2. The two components of the price advantage canbe interpreted as a size and a cost component. The demand advantage can be reduced to usageof tele-services and user expertise. The price advantage was reduced to the components
market size and anticipatory factor costs. The demand advantage could be specified as thedemand for the use of telecommunications-related services on the one hand and theavailability of collateral assets and user expertise on the other. The export performance of28

countries in trucks and communications equipment and the compound of similarity andsensibility indicators finally indicate the export advantage. The market structure advantage
goes back to competition in the telecoms sector and competition in the truck market. Finally,
the transfer advantage is represented by indicators for the activities of multinational firms andby the single indicator for the mobility of users.
Table 2: Assignment of different items to the components of the main component analysis

Market Size (Trucks)
Market Growth (Trucks)
Number of Call Centre Seats 1999
Predicted Number of Call Centre Seats 2005
Absolute Growth Rate of Call Centre Seats
Annual Average of Telecom Revenue between 1995 and 1997
Road, Inland surface goods transported (million hauled tkm)
Total Road Expenditure: Annual Average betwenn 1993 and 1996 [in SDR]
Average of the Total Road User Taxation/Road network (km)Cost of 3 Minute Local Call in 1995 [in US$]
Cellular, Cost of 3 Minute Call in 1995 [in US$]
Call Centre Seats per Capita (1999)
Share of Call Centre Seats with at least one service in 2005
Share of Service/GDP (1993)
Cellular Mobile Telephone Subscribers per Capita
Annual Average of the GDP per capita between 1993 and 1997, PPP
Know how of Road Haulage Companies
Density of total road network (km/km2)
Unit Value for Truck 5-20 Tons
Unit Value for Truck >20 Tons
Annual Average of injury Accidents between 1993 and 1997 per Capita
Murder, Volume of Crime per 1 000 000 People (1996)
Competitiveness of Trucks [5-20 Tons]
Competitiveness of Trucks [>20 Tons]
Competitiveness of Mobile Phones
Competitiveness of Videophones
Share of international Citizen Speaking the same Offical Language
Export Surplus/National Sales in 1999
Competition of Road Haulage Companies
Productivity of the Telecom Sector between 1995 and 1997
Competition Trucks (1/Herfindahl-Index)
Globalisation Capacity
Share of International Road Haulage Companies
Annual Average of Transport Services [% of total service exports]

Mobility of User

Multinational Firms

Competition on the
Truck Market

Market Structur Transfer
Advantage
Advantage
Competition ofrelated Markets

Sensibility to Global
Problems/Similarity toForeign Markets

ExportAdvantage
Export Performance

Collateral Assets andUser Know-how

DemandAdvantage
Utility of (tele-related)
Services

Anticipatory Factor
Costs

Item

Market Size

Cost
Advantage

X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

As a result, a matrix of ten main components for 30 countries was generated, which waspresented to the project teams and discussed leaving room for discussions about theimportance of each advantage. To reduce the set of lead market components to a country
ranking, the values of the components were amalgamated into indices for each country bydifferent methods. Several country-ranking methods are used to test for robustness of the29result against the ranking method: the mean of all component values, the mean without thebiggest value of each county, the mean without the size component, the median, the numberof top 10 rankings of a country for each component, and the number of last 10 rankings.
Figure 3 depicts the values of the twelve countries with the largest lead market potential for aremote diagnosis system for several aggregation methods. In most cases, the USA hold astrong lead in the lead market potential, suggesting that for this innovation a lead market
pattern is to be expected starting in the US.
Figure 3: Ranking of potential lead markets with different ranking methods
1.5
Mean of all Factors

1.3
Mean of all Factors without the biggest Factorvalue
Mean of all Factors without the two biggest Factorvalues

Lead Market Potential

1.1
0.9
0.7
0.5
0.3
0.1
-0.1

KOR

ITA

FRA

CAN

ESP

BEL

GBR

NLD

SWE

JPN

GER

USA

-0.3
-0.5

The weighting of the lead market factors is always a critical step towards aggregating location
advantages into a catch all estimate of a country’s attractiveness. In the process used here, theskewness of the distribution of a lead market factor across countries turns out to be theimplicit weighting factor and we argue that this is actually a good one. The main components
analysis lefts us with standardised values that are closer to zero for countries that are moreequal to other countries and larger for countries that are more different from all other30

countries. It was argued that the lead potential is a relative variable as opposed to an absoluteone. A high degree of competition doesn’t make a country a lead market unless all othercountries have a much lower competitive furore, keeping in mind that a country needs sway inorder to overcome the preference of foreign users for domestic innovation designs. The
greater the skewness of the lead market indicators, the larger the likelihood of a single country
leading other countries on the adoption path. A high positive skewness reveals that one or a
few countries have very large values, i.e. a large lead market advantage, while the majority ofcountries has lower values. This is a typical lead market situation. A negative skewness value
indicates that the majority of countries cluster around the maximum value. For this leadmarket component, no country has a real lead market advantage.
According to the skewness interpretation, the arithmetic mean is a good aggregation method
for the second step, because the mean is outlier sensitive and single large values of a factor
indicating a large leverage effect of one country over all other countries.
4.6

Results

The exploratory test of the method shows that the results are fairly robust. In both cases,
different ranking methods lead to almost the same country ranking with only small positionchanges. In general, it shows that data on lead market factors can be found but that this is themost time-consuming work. In the AGV case, the lead market assessment found Japan to be
the most convincing potential lead market. Japan is strong in almost all lead market factors,
which means that a design that is accepted in the Japanese market would be a strong
competitor in the world market. The RDS project team initially argued that the best countries
to introduce the technology to first would be countries with lowest coverage of maintenanceinfrastructure. Low coverage on the other hand is a signal for low demand for service. On thecontrary, an existing high level of demand for services is an indicator of a lead market. The
case study not only did not confirm the expectation of the firm’s engineers but after the31

presentation of the indicators, they agreed with the lead market result. The data analysis
demonstrated that their perception was biased towards particular country specific factors,
neglecting several other lead market factors. This confirms that the lead market analysis, withall its shortcomings, can be an important source of information for multinational firms’
innovation strategy.

5

Conclusions for the Innovation Projects

In the lead market analysis the lead market potential of countries are estimated in an indicator
based international comparative study. The lead market potential is the power to attract users
in other countries to adopt the innovation design that is preferred in the local market. This
local leverage power can be used by companies in various ways. The basis for a company thatdevelops an innovation is to respond to the preferences in the countries with the largest leadmarket potential when choice among technological and functional alternatives are to be made.
Market analysis in the countries with a large lead market potential can further help reveal
which design will be most suitable (demanded) in the lead market and which designs will not.
In order to get access to this lead market knowledge, a company can use a variety of means:•reviewing the experience of firms with prototypes tested in the potential lead markets•

traditional market research activities assessing demand preferences in the potential leadmarkets (e.g. conjoint measurement)•

market intelligence from research firms/consultants familiar with the market situation in
the potential lead markets•

marketing activities to get early feed-back from the potential lead markets•

cooperations or strategic alliances with competitors or suppliers in the potential leadmarkets•

listening posts in the potential lead markets•

R&D activities in the potential lead markets

A company can use acquired information in a number of ways. Although the final
consequence of the lead market concept is to develop and introduce the innovation design in32the lead market, companies that lack the capacity (or willingness) to shift its development to
the potential lead market have different options ranked by the degree of lead market
orientation of the innovation development:
1. Develop an innovation design for the potential lead markets using lead market preferences(pro-active).
2. Develop an innovation design to fit the market demand for the home market (or a third
market important for the company) including major requirements of the potential leadmarket (dual-use strategy).
3. Develop innovation designs for the home market but avoid technical designs which are
not suited for the potential lead markets (home-market oriented lead-market strategy)
For instance, in the RDS project the developer team realised that the design first envisioned
would not be suitable for the potential lead market and looked instead for technologies thatwere already adopted in the potential lead market. They decided then to start the RDS service
first as an internet based service for small repair shops and wait to see whether the market
response is positive before extending the service to the actual truck. In the AGV case the team
now thinks about taking a Japanese supplier of automated guidance systems into the boat inorder to gain access to the market preferences in Japan. Cooperation with an insider firm in
the potential lead market offers several advantages compared to an investment in anddelegation of innovation responsibility to the affiliate in the potential lead market. If a
company knows little about the domestic market context of the potential lead market,
cooperation partners that are insiders in the lead market are an important way to gain access to
the lead market. Established domestic companies have the best information regarding the
local market context, can detect new market trends early, have market experience, canevaluate market tests, and have long-term relationships with local users. This is especially
important if pilot users and user-producer interaction is necessary in the market entry phase.
Cooperations are less costly and therefore less risky than establishing an affiliate andacquiring a local company.

33

Yet, the lead market assessment is not a save bet on what country can become a lead market.
The largest lead market potential means that the probability that this country becomes the leadmarket is highest. This conclusion includes, first of all, that other countries can still become
the lead market as well although this is not as likely. There can be errors in the estimation as
well. In practice, this suggests a cautious strategy (e.g. the 3rd option from above) when the
results are rather ambiguous as well as careful examination of the results. Sensitivity analysis
reveals whether the ranking is sensitive to one factor only. In the above example, the US
obtains its biggest lead market potential from its size advantage. This necessitates a closer
look at the economies-of-scale of the design preferred in the US compared to other designs.
Furthermore, if the factor averages of the leading countries are close, the additional market
research should include not only the country with the largest lead market potential but second
and third ranked countries as well. Ideally, the innovation design fits market conditions in allhigh ranked countries. Finally, it is up to the project team to weigh up costs and lead market
probability and decide whether to design an innovation and develop a market launch strategy
that take the preferences of the second and third ranked countries into account.
Acknowledgements: The authors thank Dr. Michael Kokes and Mr. Titz from DaimlerChrysler AG for
their support and their valuable comments. Financial support from DaimlerChrysler AG and theFoerderkreis Wissenschaft und Praxis am ZEW is gratefully acknowledged.

6

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1

There are analogies to lead users suggested by v. Hippel (1986). Lead markets, however, are not simply lead

users on an international level. Lead users develop innovations for their own use such as measuring devices.
Lead markets are countries or regions that first adopt a specific innovation design that later becomes adopted byother countries as well, regardless of where the innovation was invented.

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2

An innovation is often a different design of an established product (or process) and it often competes against

the incumbent in the market because the older design still has its merits for some users or is cheaper.
Competition between innovation designs occurs on different levels but the definition should be independent of
the level of analysis. The GSM cellular telephone competes against other cellular mobile telephone standards aswell as against pagers. All are different designs within the sector of mobile communications. Different designs of
a nuclear reactor compete, as does nuclear energy with wind energy. Therefore, the term ‘design’ used hereencompasses not only a technical specification but also software, a formula such as a soft drink, a technology oreven a technological trajectory. For instance, the lead market for wind energy usage is Denmark (Beise andRennings 2003). As a result, the technical development path from generator generation to generator generation,
starting with small generator types in the 1980s to bigger ones in the 1990s, became globally dominant.
Germany, however, failed with large generators in the 1980s and succumbed to the Danish approach.
3

An additional possibility for a large multinational firm (which was not tested in our study) would be to ask

market researchers of the foreign affiliates. This would mean that the R&D department would not have todisclose information on the innovation project to experts outside the company.
4

Missing data was imputed with the mean of values of all country which neutralised their impact for thosecountries in the final ranking.

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