C.K. Prahalad, Harvey C. Fruehauf Professor of Corporate Strategy and International Business, The University of Michigan Business School

During the last two years, there has been a lot of excitement in India with firms such as GE, Siemens, Intel, Philips and others announcing that they are moving significant R&D work to India. Ostensibly, the advantages are cost, quality and access to a large talent pool. There has been recognition of the latent capabilities of India's many scientific institutions. I expect MNCs to lead the "university-business" collaboration for joint technology development efforts.

But-why this sudden surge of interest? What shape will these initiatives take? How can India shape the contours of this emerging opportunity?

We can understand these trends from two perspectives-the traditional "cost arbitrage" view, with MNCs transferring work around the world, and from the viewpoint of new innovation opportunities in India. The former is the dominant public perspective in the US, Europe and surprisingly, India too. I call it the "Lou Dobbs" show on CNN: greedy MNCs in search of cheap labour. Yet, all MNC managers involved in outsourcing will tell you that they find the case not just more compelling, but more complex than that. Young Indians, they find, have the training and drive to undertake tasks of ever increasing levels of complexity. The competitiveness of MNCs is increasingly dependent on their India connection. This makes India proud and confident; this is India's big global opportunity. We call it BPO. But can the problems of India, especially of the poor-at the bottom of the economic pyramid (bop)-create a global opportunity for India as well? Is bop for real?

Yes. There exists an India that is different-poor and disenfranchised. Some 750 million people live at the bop. More than 250 million people live on less than a dollar a day, making it the fourth largest "country within a country"-one of the largest and poorest countries in the world, within India. Can it create new opportunities for India? Can we grow global businesses by serving the most disenfranchised? I believe that the answer is an unqualified "yes".

Managers, NGOs, bureaucrats and politicians tend to agree that the very poor-the 500 million-plus at the bop in India-are the wards of the state. Their solution to poverty alleviation is subsidies and aid. But this solution has underdelivered around the world. I believe that the best way to eradicate poverty is through profit. We need to bring the disciplines of organised business to bear on poverty-starting with the assumption that the bop represents a potential market. The poor must become consumers, and get the respect accorded to consumers.

The first step in converting the poor into consumers is to create the capacity to consume. Consider India's "single-serve revolution". With shampoos, confectionery, pickles, tea, fragrances, creams and much else available in sachets or other affordable unit packs for rupees one to five, many of the poor are already consumers. Thanks to self-help groups, access to credit has played its part, too. The growth of direct distribution-be it Amway, HLL Net or others-has also fostered a sort of entrepreneurship.

In all, the capacity to consume is rising, and this could create staggering opportunities. Consider the wireless revolution, which is delivering connectivity to people who couldn't have dreamt of it till recently. Nowhere else in the world do managers talk about adding 1.5 million new consumers per month. By 2005, India and China will have an installed base of 350 million wireless devices. By comparison, the US may have 150 million. The masses are driving growth.

How, then, do we develop products and services for the poor? Based on my research over the past four years, I have identified four basic building blocks for bop businesses. First, we need innovative technologies. Last generation technologies from developed countries will not do.

We need to invent solutions-a creative mixture of advanced technology and poor infrastructure. An example of a hybrid solution is the Indian experiment that marries satellite imaging with the net-linked-pc to let poor fisherwomen spot the movement of fish shoals and guide their fishermen husbands. The boats and logistics remain the same, but fishing now is very different. Or take the work done by Shankera Netralaya, a world class eye care facility in Chennai. Thanks to a bus equipped with technology, it can upload high-resolution pictures of the eye from a poor village in South India to its facilities in Chennai and have experts examine the complicated cases. This is telemedicine with a bop twist, and the model can be replicated.

The poor are as conscious of brands as about quality. The focus should be on value, not just on price points

The systems must always be scalable. While NGOs do a great job of finding unique solutions to bop problems, these are often too localised to be scalable. Yet, in a country so large and diverse, scalability is a critical success factor. Amul, Aravind eye hospital, ITC e-choupal and ICICI self-help group financing are all examples of organised scaling. This applies to raw materials-be it raw milk, eye patients, soyabean aggregation from subsistence farmers, or meeting the financial needs of the poor in remote areas-as well as the conversion and selling of the finished good.

The price-performance relationships must be dramatically different in bop markets. The focus is not just on price points, but on value. Performance must be both objective and subjective. The poor are as conscious of 'brands' as about inherent quality. A recent example is the growth of Lifebuoy soap. The product, redone with new technology, costs the consumer more-but the enhanced value bundle has resulted in market share growth. This is no different from farmers willing to pay for quality electricity.

The focus on value can also turn India into an unbeatable exporter. In healthcare, India already has some advantages of many orders of magnitude. Some examples: Jaipur foot in lower limb prosthetics (200-fold advantage over equivalents in the US), Aravind in cataract operations (100-fold advantage) and cardiac care in general (10-fold advantage).

That the Jaipur foot has found takers in 16 countries is no surprise. India could also become a destination for eye and cardiac care. It is the focus on value for the poor that has delivered this opportunity.

A frontier that is still to be explored is ecologically-friendly development, which could present similar opportunities. I do hope that increasingly, Indian firms will focus on water, pollution, energy, recycling, agriculture and education. The opportunities for the private sector are huge. Bottled water is already one of the fastest growing businesses in India. Is there a market for quality water affordable for the very poor? Can we eliminate stomach disorders? Investors should ask.

The question for managers in firms large and small, Indian and MNCs, is simple. Can we convert the problems of the poor into an advantage for global businesses? By addressing the needs of the 750 million Indians at the bop, can we serve the five billion poor-a staggering opportunity-around the world?

More importantly, can we change the basic economics of businesses in fields as diverse as wireless, cardiac care, personal care and distribution? Can India become the laboratory for "next" practices in business-new solutions and new business models? Paradoxically, the very poor of India may hold the key to making India a source of innovation.