High-tech has been a lucrative industry. Notably, it has been at the core of driving the third industrial revolution. Moreover, it will remain at the core in unfolding the fourth industrial revolution. So far, many developing countries like Bangladesh have been customers of high-tech products. Of course, developing countries like Bangladesh should uplift their roles from being consumers to producers of high-tech value. However, for adding value in high-tech, how to enter into this industry and grow has been a strategic question. Moreover, there have been more than one option. Hence, strategies for building high-tech industry deserve investigation.
Although the journey started at the Bell laboratories of the USA, many countries are now active in the globally distributed value chain of the high-tech sector. Among ASEAN countries alone, there has been high-tech trade of more than $400 billion. Like many other countries, Bangladesh also has a dream to create a high-tech industry. Already, many developing countries have been developing special facilities. For example, Bangladesh has been working on developing 28 high-tech parks. But what should be the strategy in developing a high-tech industry around this initial investment in infrastructure? There appear to be multiple entry points and growth options.
Historical References to Strategies for Building High-tech Industry
In the 1940s, AT&T was experiencing difficulty in offering reliable telecommunication services to a growing number of American households. AT&T’s telecom network was suffering from the low reliability and high cost of maintenance of electromechanical switches. Moving parts of millions of switches used to get stuck or fail to make contacts. Hence, AT&T management asked its R&D wing, Bell Laboratories, to look for an alternative telephone switch–having no moving parts. This journey led to the invention of a solid estate electronic switch in 1947. As opposed to changing the physical components’ positions, this switch could be turned off or on by applying an electrical voltage. It’s name is the Transistor. Subsequently, three scientists inventing the Transistor got Nobel Prize.
With this invention, a long journey of high-tech industry started, subsequently fueling the 3rd industrial revolution. Due to the growing economic importance, many countries made entries into this industry. And they neither entered through the same door nor did they keep gaining benefit from doing the same kind of activities. Hence, it’s worth taking a look at the dynamics of strategies for building high-tech industry.
Scientific discovery and invention leading to new industry creation
Upon the invention, lead inventor William Shockley envisioned the commercial possibilities. Subsequently, he left Bell laboratories and went back to native Palo Alto, California, to found his company–Shockley Semiconductor Laboratory. Upon failing to attract his Bell Labs colleagues to join him, he recruited eight bright young graduates. Many of them had PhDs in engineering and physics. This cohort also included Gordon Moore—one of the founders of Intel. However, they found it quite difficult to work under the supervision of Dr. Shockley. Hence, they all left together and started Fairchild Semiconductor Company with plans for making silicon transistors.
By 1976, 65 different companies, including Intel and National Semiconductor, were started by 1st or 2nd generation teams that traced their origins in Silicon Valley’s Shockley Semiconductor. In 2014, Tech Crunch figured out 2,000 companies could be traced back to Fairchild’s eight co-founders, claiming 92 public companies of 130 descendant listed firms were then worth over US$2.1 Trillion.
Despite the tremendous success down the road, however, early initiatives found it quite difficult to find customers for their first-generation semiconductor products like transistor and diode. US military was the primary customer in the early days for the primitive as well as a highly expensive transistor. For example, Fairchild’s first marketed transistor was the 2N697 in 1958. Mr Moore developed it using silicon. However, each of the first batch of 100 transistors was priced at $150. IBM bought them for building a computer for the US Air Force’s B-70 bomber. More were sold to Autonetics to build the guidance system for the Minuteman ballistic missile. In the absence of these defense customers, it could have been quite difficult for them to get the lift to take off the silicon industry and forming the silicon valley industry cluster.
Early-stage entry, refinement, and innovation is one of the strategies for building high-tech industries
Without being part of the invention, firms or countries can significantly benefit from commercial exploitation out of innovation. However, the entry should be made at an early stage. As the technology remains in the premature form at the early stage, there is a need for further continued R&D for refinement for creating commercial success. For example, within 5 years of transistor invention, Sony took licenses from Bell Laboratories for its production and refinement. Unlike American start-ups like Fairchild, Sony did not have the military customers to buy its highly expensive primitive components.
Hence, Sony embarked on a rigorous R&D for making transistors smaller, less costly, and more capable of handling signals. Sony began commercial exploitation through the innovation of pocket radio. Subsequently, Sony innovated compact TVs. Through relentless refinement, Sony created huge commercial success in consumer electronics innovation within just 20 years. In fact, out of transistor, Sony pursued a disruptive innovation strategy, even making RCA bankrupt. The R&D effort was so deep that one of Sony’s team members got the Nobel Prize in 1974 for making a contribution to Transistor technology.
Another example is Sony’s journey in turning electronic image sensor invention into a commercial success story. Within just two years of the Charged Coupled Device’s (CCD) invention for capturing photons as electrons, Sony took the license from the Bell Labs. However, Sony had to pursue R&D over eight years to turn a primitive 64-pixel sensor into 120,000 pixels for starting the commercialization in 1979. Subsequently, Sony created a mega success story by releasing 8 mm camcorder (i.e. single-unit VCR and camera) with a 250,000-pixel CCD chip.
Knowledge-based service delivery strategy for building high-tech industry
Upon developing a strong footprint in semiconductor technology, some senior people take the lead of developing a team for offering design services to chip makers. Fresh graduates with a few months of training often qualify for producing useful design services. In certain cases, they also develop proprietary designs and get the chips produced by the 3rd party fabs. This segment of the semiconductor industry is known as a fabless semiconductor. The global revenue of this segment has already crossed $100 billion. The cohort consists of a few people small firms to large firms. Such firms exist even in countries like Bangladesh–in offering design services to global high-tech firms. Should aspiring countries like Bangladesh look into this entry as strategic and take serous effort to scale up this segment? However, China has been looking into the deign service as a strategic entry for developing a globally competitive high-tech industry.
For developing countries, labor centric value addition is a preferred strategy for building high-tech industry
In addition to knowledge and ideas, High-tech components and products also require labor to test, assemble, and package them. For example, semiconductor bonding and testing is already generating $30 billion in revenue. Moreover, there is a need to produce printed circuit boards, populated boards, plastic and metallic parts, and assembling sub-systems into final products.
Some countries like Malaysia, Thailand and Vietnam targeted this opportunity to enter into the global high-tech industry. They liberalized tax structure, developed infrastructure, and established needed training facilities to make their semi-skilled labor force attractive to multinational firms. Many of these firms have also established operations in special economic or high-tech industrial zones in these countries. For example, export from the operations of more than foreign 300 high-tech firms from Malaysia is around $90 billion. However, despite having close to 50 years long journey of foreign direct investment (FDI) in high-tech, Malaysia has been still adding value in high-tech through labor. There has been no tangible progress in adding value through knowledge-based design services and ideas for redesign and innovation. Moreover, despite Malaysia’s steady progress in the Global Innovation Index, occupying the 33rd position in 2020, Malaysia yet to create economic value out of knowledge and ideas in high-tech.
Assembly of consumer products for domestic consumption—is a strong enough strategy for building high-tech industry?
In many countries, the consumption of finished high-tech products has already reached a very high level. For leveraging labor-based value addition, locally producing these products by assembling imported components has become target entry point for some countries. For example, India and Bangladesh have been offering tax differentials and other incentives to assemble them locally. However, local value addition through the assembling of imported components in producing finished products is extremely low, as low as 5 percent.
Historical lessons tell that such a strategy does not offer a sustainable path to creating a high-tech industry. For example, in the 1970s and 1980s, there were several Radio and TV assembling plants in Bangladesh. But none of them has sustained—let alone growing as a globally competitive firm. Hence, such entry should be uplifted. There appear to be two major options. The first one is to leverage the assembling competence to offer contract manufacturing services to global OEMs. The next one is to acquire the redesign capability of the finished products they are assembling now. However, there is a significant hurdle to make redesigned products better and cheaper than what they are assembling now–by importing designs, components and capital machinery.
Capital intensive manufacturing
Due to vertical disintegration and the uprising of fabless semiconductor companies, offering semiconductor processing services started to emerge in the 1980s. However, setting up a state-of-the-art fab for processing semiconductors is highly capital intensive. Often it takes $5 to $10 billion for a single plant. Among others, Taiwan and Singapore took advantage of this opportunity. There are several such fabs in those countries. Fabless semiconductor companies find them very useful to process wafers as per their designs. Hence, embarking on component manufacturing does not appear to be appropriate for new entrants. On the one hand, it requires a very high scale advantage. On the other hand, labor-based value addition is extremely low.
Uplifting value addition from assembling to component manufacturing to ideas of the redesign
This approach appears to be highly challenging. The notable success story is Samsung. In 1969, a trading company Samsung entered into high-tech by offering labor-based assembling services to Japanese electronics firms like Sanyo. However, very soon, it entered into semiconductor component manufacturing, particularly DRAM. Subsequently, Samsung embarked on the redesign of household electronic products like TV, Microwave oven, and telephone sets. Instead of just keep selling labor to foreign firms, Samsung graduated in producing and redesigning finished products and components under its own brand. Samsung has been adding ideas, in addition to labor and capital, by redesigning products, subsequently making them better and cheaper. Samsung’s success in TVs, DARM, flash memory, and mobile handsets appear to be remarkable.
Strategies for building high-tech industry deserve careful attention
High-tech industry offers value addition opportunities out of labor, knowledge, capital, ideas, and also materials. New entrants should carefully look into prospects and figure out the entry as well as a growth strategy. Tax differentials and other incentive-based assembling produce an easy success of locally producing high-tech products. However, labor-based value addition is extremely low. Hence, incentive-driven import substitution often creates the illusion of success. The next addressable opportunity is to offer labor and knowledge-based services to the global value chain. However, the entry is highly competitive. In addition to labor, physical facility, and location, it also demands cluster advantage for being competitive. For opening the endless frontier of growth, the next door is adding value through knowledge and ideas. This is about redesigning products and components to make them increasingly better and also cheaper.
Hence, creating success in the high-tech industry demands a well-designed strategy and highly efficient implementation. The mission of creating scalable successes in high-tech demands far more than high-tech parks, incentives, and labor-based import substitutions. Therefore, we should carefully investigate the comparative analysis of different strategies for building a high-tech industry.