To attain sustained growth capability, developing countries must succeed in innovation. However, how to make and measure progress? The ultimate measure is to keep making progress in generating ideas and transferring them into economic outputs. In measuring progress in generating ideas, we use indicators like S&T graduates, R&D spending, publications, and patents. However, there is no natural correlation. Despite it, there has been a race among developing countries to make investments to show progress in such indicators. Unfortunately, often, such progress misleads us in attaining the capability of producing economic value out of ideas.
In the recently published Global Innovation Index, many developing countries showed progress in their ranking. Does it mean that they are equally progressing in deriving economic benefits from innovation? However, despite steady progress in the ranking, why are India and China, among others, suffering from slowing down economic growth? With the 14th position, even above Japan, will China be richer than Japan over the next decade? What takes for developing countries to succeed in innovation is worth pondering.
In producing economic outputs, we use three vital inputs: i. Natural Resource, ii. Labor and iii. Ideas. The journey begins with natural resources, followed by labor. However, the growth out of these vital factors saturates before a country becomes rich.
Moreover, the economic prosperity or per capita income gained from labor and natural resources run the risk of declining. The aging population, declining natural resource stock, and transient market value of these factors are the underlying causes. The remedy of sustained economic growth is in ideas. Attaining the ability to create economic value out of ideas is the only means for dealing with the limitations of the other two factors. Unfortunately, developing countries are failing to attain this vital ability.
Why cannot people of developing countries generate ideas?
Does it mean that people in developing countries cannot produce ideas? Of course not. The Innovation Foundation of India has recorded 315,000 grassroots innovations in India alone. However, India is no exception. Careful observation indicates that people in developing countries are highly innovative. They are outstanding in producing ideas in performing their jobs better than before. However, they cannot turn any of those ideas into a billion-dollar business opportunity. In fact, Intuition and tinkering driven ideas are not scalable.
On the other hand, Germany has become a rich country by virtually leveraging one idea–the automobile. In fact, Carl Benz’s idea of automobile alone generated $4 trillion in revenue for the global automobile companies in 2019 alone. Moreover, of this staggering amount, German behemoths grabbed $500 billion.
Don’t they have required human capital?
Invariably countries benefiting more from ideas have a strong human capital base. Therefore, developing countries started investing in them. Over the decades, they have made success in both quantity and also in quality. More or less, every developing country is now producing an increasing number of science and engineering graduates.
But unfortunately, these graduates find jobs in operating and repairing capital machinery imported from industrial nations. At best, they replicate or manufacture industrial products innovated somewhere else, making them labor workforce of the world like China. Some of them have also succeeded in exporting services out of their recently acquired knowledge in information technology. India is a notable example of exporting Knowledge-intensive IT services. But why cannot their human capital generate and trade ideas like the way American, European and Japanese companies are doing? Does it mean that their human capital is not at par? However, 9 India-born CEOs are leading global technology giants, like Microsoft, Google, and Nokia. And India is no exception. Many other developing countries like Bangladesh, Pakistan, and Vietnam have iconic figures to show.
R&D investment, publications, and patents are the other three often cited weaknesses of developing countries to profit from ideas. Over the last two decades, China accelerated its R&D budget, taking very close to the USA. In the race of publications and patents, China has surpassed all other industrial countries of the world, including the USA, and Japan. Although India is lagging behind in R&D investment and patents, India has made tremendous progress in scientific publications. India has even overtaken Japan in a number of Scopus indexed scientific publications.
R&D investment, publications, and patents—are they not enough for developing countries to succeed in innovation?
Such progress has placed China at the 14th position in the Global Innovation Index, even above Japan. India has entered into the top 50 most innovative nations. Over the last 5 years, India has steadily progressed from 81 in 2015 reaching 48 in 2020. However, both of these two countries are suffering from slowing down the economy. Does it mean that a staggering number of graduates, R&D investment, publications, and patents are failing to produce proportionate economic value? Does it mean that they cannot progress to open the door of sustained economic growth by making progress in these often cited as well as prescribed indicators?
Are weaknesses in infrastructure, the rule of law, and political stability holding them back?
Other often-cited weaknesses of developing countries are the rule of law, infrastructure, basic amenities, foreign direct investment, and political stability. In all these indicators, along with human capital, Malaysia has made tremendous progress over the last 50 years. Moreover, Malaysia made a very early entry into the high-tech industry. As early as 1972, just after 3 years of formation, Intel invested in Malaysia. Since then, Malaysia has been turning its paddy fields and palm gardens into well-developed industrial zones.
Moreover, Malaysia has turned the whole country into a highly infrastructure-rich country. To take advantage of it, more than 300 multinationals have established their manufacturing facilities. Furthermore, the 33rd position of Malaysia in the global index 2020, which has even progressed from 35th, may give the impression that Malaysia is progressing in innovation. However, despite having 48 years ago history, Malaysia is still today adding value out of labor. Malaysia has not succeeded in developing a globally known single high-tech company in producing economic value out of ideas.
Is FDI in high-tech a silver bullet for developing countries to succeed in innovation?
In the recent past, there has been competition among developing countries, including Bangladesh, India, Pakistan, Vietnam, and many more, of borrowing from foreign sources and developing high-tech parks or special economic zones. There has been a belief that such investments will lead to repeating the success of Silicon Valley. Although Intel established its first plant in Malaysia’s muddy paddy field, newly constructed industrial zones are failing to attract FDIs from high-tech multinationals. So, they have now in a race to offer fiscal incentives. Let’s assume that they succussed to populate their well-developed industrial zones with desired FDIs. Does it mean that this success will lead to attaining the capability of creating economic value out of ideas? Well, history tells that at best they could be like Malaysia, let alone Japan, Europe or the USA.
Are they following the wrong advice?
Nobel Laureate Economists, Multilateral lending agencies, Think Tanks, and even their own eminent citizens are providing the prescription that these countries should expand their door of importing ideas. Access to the flow of ideas will enable them to create economic value out of ideas. Hence, they have liberalized the import of capital machinery from advanced countries. They are using savings earned from labor and natural resources for paying the import bill of capital machinery. To exploit foreign ideas further, they have been condoning intellectual property rights issues. Rampant copy of software and infringement of industrial designs are of no offense in these countries. To take it further, they are providing incentives for pursuing import substitutions.
However, the freedom to copy foreign software has not created a single success story. The incentive-driven import substitution has made a few people rich by taxing the mass. However, it has not made any progress to create economic outputs through ideas of their own.
Developing countries to succeed in innovation–What about startups?
Recently, there has been a new craze: startup. With the hope of replicating the success of Silicon Valley, they have now jumped into the bandwagon of idea competition, setting up incubators or accelerators, providing risk capital finance, mentoring services, and many more. In terms of numbers, India appears to be a new start-up hub. On the other hand, Japan or South Korea is not on the scene. Does it mean that developing countries with recently growing vibrant startup activities will open the endless frontier of economic growth out of ideas over the next decade or so?
Furthermore, public service, open innovation, and grassroots innovation are also new trends in these countries. The reality has just started unfolding. However, the lesson from the history and applicable theories indicates that these newsworthy activities will not likely empower these countries to attain the capability of opening an endless frontier of growth out of ideas. Moreover, it’s running the risk of draining limited risk capital and making the youths frustrated.
To get into the race of winning Nobel Prize to replicate the success of Silicon Valley
Upon taking over the USA and Japan in the number of graduates, publications, and patents, we are not seeing any visible sign of replicating innovation success stories in leading developing countries. What is left to replicate for developing countries to succeed in innovation? What about chasing the race of winning the Nobel Prize in Physics, and Chemistry? It’s worth noting that the Nobel prize-winning invention of Transistor at the Bell labs started the process of creating Silicon Valley. Hence, should developing countries get into this race to replicate Silicon Valley like a success story? It might be an extreme measure for developing countries to succeed in innovation. Besides, this is not only a long but also a highly risky proposition. Moreover, in the absence of military linkage, the US-style linear model of innovation does not work.
Is the position in Innovation indices misleading to figure out the progress of developing countries to succeed in innovation?
Over the last 70 years, these developing countries have not kept any stone unturned to figure out how to create economic value out of ideas. They have been making progress in all well-cited indicators. Hence, many of these countries are making steady progress in the Global Innovation Index. China has even found the spot above Japan. India has overtaken Japan in Scientific publications. Starting from Malaysia’s twin tower to high-tech parks, they have been rapid progress in infrastructure. Savings from labor and natural resources trade and increasing borrowing from foreign sources are being invested to finance them. Unfortunately, there is no sign of progress of creating economic value out of ideas.
Stop wasteful investment and go back to basics
There seems to be no progress in crafting the pathway to start and keep generating increasing economic value from the flow of ideas. Such reality raises the question, what else do these countries do to solve this puzzle? This desperation is even leading to pumping hundreds of billions of dollars in venture capital funds from natural resource-rich countries. It seems that innovation has become an agenda of making a wasteful investment, instead of creating new wealth. This reality has started to surface a question: how to finance innovation? Hence, it’s time to go back to basics and start from a clean slate for empowering developing countries to succeed in innovation.