In the discourse of sustained economic growth, experts observe that poor nations are suffering from persistent poverty because they don’t have access to ideas. “Nations are poor because their citizens do not have access to the ideas that are used in industrial nations to generate economic value” is a strong proposition in the literature of development economics. Does it mean that if we make all the ideas used by industrial nations available to poor countries, poverty will disappear? Upon accessing all those ideas, within the next couple of decades or so, will all those poor nations emerge as developed economies? Or, is it a fallacy of economic growth by ideas?
However, the role of the idea in economic growth is well appreciated. Paul Romer’s theory states that ideas and objects create economic outputs. It’s quite understandable that poor nations often suffer from sustained poverty because they have very low per capita resources. Their growth is also limited due to the weakness in other objects like infrastructure and labor. Such a weakness could be compensated by increasing the supply of ideas. One of the commonly recommended solutions is to let these countries access ideas used by industrial nations. Furthermore, money is often lent to developing countries to implement such recommendations. But why don’t we recommend that these countries should acquire the capacity of producing and trading ideas? Will it not increase their ability to create increasing economic value out of ideas, by complementing labor and natural resources?
To assess the merit of such recommendations and figure out answers to these questions, we should make good use of a diverse body of evidence. And we should also interpret them within an acceptable, logical framework. Subsequently, it should lead to developing a model of driving sustained economic growth in less developed countries.
Copy of ideas does not necessarily lead to profitable revenue
Let’s assume that ideas that are used by industrial nations to generate economic value are made accessible to firms of poor countries. Does it mean that they will be equally competitive? Highly likely No. Ideas themselves do not contribute to economic value. They should be used as part of products or processes to produce them. In a competitive market economy, access to these ideas should create profit-making opportunities for competing firms. They need to add other objects like labor and natural resources to imported ideas to produce economic value. Besides, they need complementary capacities. Of course, access to ideas, in the form of product design or capital machinery, expands the opportunity of trading their objects like natural resources and labor.
However, the copy of a state-of-the-art industrial product does not always lead to generating profitable revenue. For example, most countries have access to pirated copies of software. But none of the poor nations has succeeded in creating a thriving software industry out of it. Until and unless access to ideas leads to profitable revenue, the market economy will not encourage exploitation of those ideas.
Import substitution fails to develop sustainable industrial capacity—underscores the fallacy of economic growth by ideas
Import substitution strategy focuses on reducing such an idea gap. Developing countries adopted policies to ease the import of capital machinery to access the production process ideas of advanced industrial nations. But it has not led to sustainable industrial capacity development. In fact, the economic potential of ideas depends on time, scale, scope, and brand value, among others. Having access to the same set of ideas that firms in industrial nations are using to generate economic value does not lead to profitable revenue generation by firms of poor nations. To address this limitation, developing countries, however, offer tax differentials and other incentives.
On the other hand, reliance on foreign ideas limits, or even blocks, the local capacity development for generating ideas. As a result, developing countries are still focusing on labor and natural resources to add value to produce economic value with the support of imported ideas. As a matter of fact, such an import substitution strategy has failed to develop competitive capacity in many or most of the developing nations. Let’s put it this way: these countries are still less developed or poor because of the failure of the strategy of developing the industrial economy out of imported ideas.
Unfortunately, the relative opportunity of adding the value of labor and natural resources is continuously shrinking. Instead of importing ideas, rather the focus should be on generating and trading ideas for expanding their wealth creation capacity. To let poor nations exploit ideas to uplift their economic situation, the focus should be on empowering them to profit from their capability of generating and trading ideas and accessing ideas of advanced countries. To shed further light on the fallacy of economic growth by imported ideas, it’s time to look into some pieces of evidence.
Just access to Microwave oven idea didn’t uplift Japanese: underscores the fallacy of economic growth by ideas
In 1945, an American company Raytheon came up with the idea of heating food with microwave energy. As usual, the idea emerged in primitive form. A limited number of customers saw perceived value worth paying $5000 for an energy-hungry large machine. Nevertheless, the Japanese saw great potential in this idea to uplift the quality of their living standards. They envisioned the high potential of this idea to ease the difficulty in reheating of food, as preferred by Japanese food culture. Despite the potential, the idea of microwave heating was not usable in Japanese households and the kitchen. Five feet tall, weighing almost 700 lbs, the oven was not accommodatable in small Japanese living spaces. Therefore, having access to this great idea was of no good to uplift Japanese living standards.
To make good use of microwave heating idea, Japanese company Sharp embarked on generating additional ideas. Their journey led to the invention of a far smaller microwave energy-producing tube. Subsequently, Sharp succeeded in redesigning the microwave oven in making it suitable for the Japanese kitchen. On the one hand, an increasing number of Japanese households kept enjoying a better quality of living standards due to Sharp’s success in producing additional ideas of making microwave oven compact and energy-efficient. On the other hand, Sharp’s success in exporting better quality microwave oven, even in the American market, at lower prices helped Japan earn foreign currency. Subsequently, the Japanese used that foreign currency, earned from ideas, to import other ideas for advancing their economic well-being. Hence, the import of microwave oven idea alone did not bring well-being to Japanese. Instead, the progress in generating additional ideas uplifted the economic situation of Japan.
Sony did not create economic fortune just by having access to ideas
We can also draw relevant evidence from Sony. Of course, Sony benefited from the import of ideas invented by America’s Bell laboratories. But the access alone created fortune neither for Sony nor for Japan. The transistor technology which Sony got from Bell, in 1952, was extremely primitive. It was not suitable to develop any electronics product to produce profitable revenue, let alone address Japan’s poverty. Sony had to undertake serious R&D effort to create the flow of knowledge and ideas. Subsequently, this advancement led to the innovation of compact transistor Radio and Television. Upon exporting ideas in the form these innovations, Sony helped Japan to create jobs and earn needed foreign currency for addressing poverty.
Sony’s success in electronic image sensor and digital camera also started from getting access to ideas by the USA’s Bell Laboratories. Like the Transistor, the image sensor idea what Sony got was extremely embryonic. The camera made from 8×8 sensor was not in a position to produce any revenue, let alone making Sony or Japan rich. Sony had to embark on more than a decade long R&D to create the required flow of knowledge and ideas for generating profitable revenue.
India’s automobile idea import led to the failure
Just right after independence, India wanted to grow as an industrial nation. Their strategy was to access state-of-the-art ideas of industrial products and the processes from advanced nations. One of the examples is in the automobile sector. India got the license of both the product and process from the UK’s Morris Motors to produce automobiles locally. Subsequently, Hindustan Motors started producing Morris Oxford Series, giving local name Ambassador.
But unlike Sony or Sharp, Hindustan Motors did not focus in generating additional ideas for making the Ambassador increasingly better and cheaper. On the other hand, automobile makers of advanced countries kept producing and adding ideas to make automobiles increasingly better and less costly to produce. As a result, India’s success in keep replicating imported ideas went on the declining path. Instead of focusing on generating ideas, India rather gave protection to the imported idea. Subsequently, it led to producing junk and closure of the production of imported ideas. Therefore, access to the idea of the the-state-of-the-art automobile did not help India craft a sustained path of economic growth. Well, the fallacy of economic growth by ideas gets further ground.
Samsung grew from idea importer to exporter
Still 1969, Samsung was a trading company. Through the replication strategy, it entered into an industrial economy. But the selling of labor by offering manufacturing service to Japanese electronics companies did not make Samsung a success story. Instead, Samsung rapidly focused on generating and adding ideas for improving production processes. The initial success came from the microwave oven production process innovation. Subsequently, Samsung scaled up its process innovation into the production of DRAM chips. It continued the expansion of adding value through the generation of ideas, leading to product redesign and innovation of smartphones. Consequentially, within 50 years of entry in the industrial economy, Samsung has occupied the 2nd top spot in the US patent office. Hence, Samsung’s success is not about just having access to ideas from industrial nations.
Reliance on foreign ideas is keeping poor nations poor: the fallacy of economic growth by ideas
Increasingly, ideas are playing a growing role in economic value creation. In many of the industrial products, the contribution of labor has come down to below 10% of the total cost. Similarly, the relative role of natural resources has been falling. Hence, poor nations’ ability to add value through labor and natural resources in the industrial economy has been declining. As a matter of fact, poor nations are poor because they rely on the import of ideas from the rich countries. They must get out of this situation to figure out sustained growth path out of idea generation, leading to poverty reduction and economic prosperity.
Of course, access to ideas helps to begin the journey. But that is not sufficient to create the path of sustained growth. They must focus on learning from Sony or Samsung. On the other hand, idea import-based strategy also creates a barrier to the capacity of idea generation and local demand creation of those ideas. Developing countries must focus on creating the capacity of idea generation and trading as part of product and process features in the globally competitive market. Therefore, it might not be unfair to conclude that access to ideas makes poor countries rich is a fallacy.