By John Moore, Special to CNBC.com
NEW YORK ( CNBC) -- As demand for technology rises in the larger emerging markets, U.S.-based companies will find more opportunities to export their products overseas. But with innovation also on the rise in these regions, lower barriers to entry, and cultural factors that favor homegrown companies in some industries, the expanding consumer marketplace also creates challenges that could chip away at the United States' dominance of the technology industry. Jeffrey Donlon, portfolio manager of the Manning & Napier Technology Series Fund, says several emerging markets are in the middle of a long-term shift from primarily export-driven to consumer-driven economies. That transition is driving the need for new technology companies to serve consumer demand.
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Although there are opportunities for U.S.-based companies in these growing markets, homegrown players are able to deliver a product tailored to their region's unique needs. Donlon points to a pair of recent IPOs from China's Internet sector as evidence of that thriving market -- Youku.com ( YOKU), a YouTube-like video hosting service, and E-Commerce China Dangdang ( DANG), a regional version of Amazon.com ( AMZN). "You've seen Google ( GOOG) dominate search in the United States, so Baidu ( BIDU) starts in China and says they're going to be the dominant Chinese search company," Tennant says. "China's a different market, people are going to want something local that's attuned to the Chinese populace." Tennant adds the same situation with MercadoLibre ( MELI), which basically is the eBay ( EBAY) of Brazil. There's similar growth in the communications equipment sector. Tennant notes that the governments of both developed and emerging nations consider a well-connected populace to be a competitive advantage. As emerging regions build out their network infrastructure, new players have emerged to challenge U.S.-based companies. Tennat notes that companies such as ZTE and Huawei in China make communications equipment and compete with Ericsson ( ERIC) and Alcatel-Lucent ( ALU) of the world," Tennant says. "They've come in and been able to produce a competitive product at a much cheaper price point. That's how they challenge domination by the developed market players, by being able to make a product that covers 70 percent of the demand at half the cost." New Opportunities, New Risks Although homegrown innovation poses challenges to U.S.-based technology companies, fund managers point out that other factors will work in their favor. David Eiswert, manager of the T. Rowe Price Global Technology Fund, notes that the global expansion opportunities for companies like Baidu are limited. Furthermore, innovation in areas based on intellectual property, such as software, are still largely the domain of the United States. But in commodity products where low-cost manufacturing is an advantage, such as PCs, U.S.-based companies will be challenged in the global market. "If you have a business in the West that doesn't have intellectual property and isn't changing fast, the pressure from Asia is going to be incredible," says Eiswert."But the case for U.S. and European companies is that the intellectual property values of the companies are very high, and tech is still about intellectual property. You can see an Acer come out of Taiwan and compete in netbooks. But you're not really seeing anybody coming out of Asia and competing in advanced semiconductors or software. That's where a lot of the profitability is."
Additionally, the fact that emerging markets are currently building their infrastructures creates opportunities for U.S.-based companies. "Technologies like 3-D design software are going to be critical in leading the development efforts in this infrastructure build out," Donlon says. "I really like Autodesk's ( ADSK) positioning as it addresses the build out of those markets." But as technology from the traditional industry powers helps facilitate the expansion of global markets, it's also fostering the conditions that enable the rise of new competitors. "The reality is that other regions of the world are raising their tech profile," Donlon says. "They're becoming increasingly important in the areas of engineering and the sciences, they're graduating more students in these areas than we are. It's becoming more of a competitive race for intellectual assets. Countries like China and India are developing their own R&D capabilities. I definitely believe the technological power is becoming more global and not as U.S.-centric as it has been." -- Written by John Moore of CNBC