The value addition in high-tech at Silicon Valley of the USA, Hsinchu of Taiwan, or Kulim of Malaysia is not the same. Chips designed by Silicon Valley firms like Apple are processed by Hsinchu tenant TSMC, followed by testing, bonding, and packaging by high-tech parks’ tenants of Malaysia. On the other hand, mines in Africa are supplying rare-earth elements. Yes, tenants at all those high-tech parks are in high-tech business. But their nature of value addition varies. We trade ideas, knowledge, labor, and natural resources through high-tech. Based on what we trade, we can classify high-tech parks, their formation, growth, and complexity of replicability.
High-tech refers to those technologies which are at an early phase of growth. They are also highly scalable with the potential of fueling creative waves of destruction. Due to the high amenability of the progression, they rapidly grow with a flow of ideas. Hence, high-tech innovations have a tendency of rapid obsolesce. Besides, their rapid growth leads to growing diffusion. Such reality has been increasing the trade of high-tech products, creating growing business interest. For example, the trade of high-tech products among ASEAN countries has already crossed USD400 billion. Unlike many other industries, firms engaged in high-tech value chains are located in some designated areas; they are known as high-tech parks. Due to the high economic success of a few high-tech parks, there has been a growing interest in them.
Silicon Valley: the role model
Fertile farmland in the southern part of the San Francisco Bay Area has become the home of many well-known high-tech firms like Apple, Cisco, and many more. A few institutions, inventions, and programs resonated in creating the virtuous cycle of innovation and entrepreneurship. The first one is about the generous R&D spending by the US department of defense during WWII at Stanford University. The research and development programs of Ames Research Center, also known as NASA Ames, founded in 1939 at Moffett Federal Airfield, is the next one. Besides, Bay Area had long been an important site of United States Navy research. The technology developed out of it has also contributed. Furthermore, Aerospace firms like Lockheed located in the Bay area had also played a vital role. During WWII, research for advancing wireless communication and RADAR for the defense and space missions turned the Bay area into a wireless valley.
The last piece of the puzzle came from the invention of the Transistor. It began with the first successful demonstration of Transistor on December 23, 1947, at Bell Laboratories in Murray Hill, New Jersey. Scientists were after this device for replacing electromechanical telephone switches with a more reliable solid-state device. In the early 1950s, entrepreneurial activities to leverage this invention started in the New York and Boston areas. However, soon after winning the Nobel prize for this remarkable invention, one of the three inventors, Dr. Shockley, left Bell Labs to pursue the commercial opportunity of Transistor. His preferred location was Silicon Valley’s Mountain View, near Dr. Shockley’s hometown, Palo Alto.
Starting of a chain reaction of idea trading out of the scalability of silicon:
Shockley Semiconductor lab began the journey in 1956 with funding from Beckman Instruments. His first batch of recruits was the ‘infamous treacherous eight’. The departure of those eight in forming Fairchild semiconductor started the journey of commercial production of Transistor in the Bay area. However, a price tag of $150 apiece became the barrier to using this device for civilian innovations. But the space and defense institutions, programs, and contactors, located in the Bay area, found it a far better substitute to vacuum tubes.
Furthermore, the invention of photolithography process technology for producing multiple transistors and other passive devices on the same substrate opened the path of making transistors better and cheaper. The scalability of this process out of the knowledge of quantum mechanics gave birth to Moore’s law. Hence, a race started to leverage this potential, forming a chain reaction of innovation and entrepreneurship.
Graduation from defense contractors to silicon idea traders
In the beginning, firms in Silicon Valley were mainly defense contractors. They were developing customized solutions. However, the increasing scope of making transistors smaller and cheaper from the ideas of quantum mechanics knowledge about the design and production process led to idea trading of the valley firms. Hence, both the size and the number of firms witnessed accelerated growth leading to the formation of well-known Silicon Valley. This is a role model of high-tech parks. But unlike many other high-tech parks, Silicon Valley started the business of trading ideas out of the knowledge of quantum mechanics. Over the years, the footprint has been expanded in the area of communication devices, consumer electronics, software, and services. However, still to date, the focus has been on generating and trading ideas, and sourcing services of labor and knowledge, and natural resources from other parts of the world.
Malaysia’s high-tech parks: trading labor in the global high-tech value chain
By the end of the 1960s, the continued miniaturization and growing density of integrated circuits started accelerating labor demand for testing and bonding. Furthermore, due to the need for looking through a microscope, the bonding of miniaturized components with fine wire started creating eye-related health problems for the workers. Hence, chip makers like Intel started sourcing labor from Asia. To source cheap labor without paying much for the health issue, Intel’s Andy Grove ended up landing at the paddy field of Penang, Malaysia. In 1972, Intel opened its first facility outside of the USA.
It was a 5-acre bonding, testing, and assembling site in the Malaysian state of Penang, employing about 1,000 people. Over the years, this groundbreaking has grown into a crucial part of Intel’s manufacturing chain. Intel’s this facility started the chain reaction of having high-tech assembling establishments in Malaysia for global makers. Through the process, Malaysia has emerged as a global hub of high-tech labor sourcing.
Over the years, more than 300 multinationals have set up plants in the sprawling purpose build infrastructure—known as high-tech parks. Intel alone has invested so far $7 billion creating high-tech labor sourcing jobs for more than 9,000 people. Some of the high-tech parks in Malaysia are Kulim and Technology Park Malaysia. Although Malaysia’s high-tech export has reached close to $100 billion, the value addition is mostly in labor for testing, bonding, assembling, and packaging. By the way, due to automation, employment growth in this model of high-tech parks has been on the declining trend.
Taiwan: trading of knowledge and ideas of silicon processing
One of the notable high-tech parks in Taiwan is Hsinchu. In the 1960s, Taiwan was an improvised agrarian economy. For creating high-paying industrial jobs, in 1973, Taiwan set up the Industrial Technology Research Institute (ITRI). The purpose of ITRI was to assess the global trend of the industrial economy, detect emerging ones, assimilate business dynamics and technology, and pursue commercial opportunities. At the very beginning of its inception, ITRI targeted the semiconductor industry. It contracted American RCA to set up a tiny silicon chip fabrication plant and provide technology assimilation services to a group of engineers.
Upon detecting the discontinuity in the value chain of the semiconductor business creating the demand of 3rd party fabrication facilities, Taiwan’s commercialization journey of the assimilated semiconductor processing technologies started. It began in 1980 with the formation of the United Microelectronics Corporation (UMC). The Taiwanese Government started encouraging potential expatriates to return to take it forward. One of the notable ones was Dr. Morris Chang. Under his leadership, Taiwan Semiconductor Manufacturing Company (TSMC) got founded in 1987.
From the very beginning, Taiwan focused on advancing semiconductor knowledge and converting it into ideas of increasing the yield and advancing semiconductor processing technologies. To scale up this mission, Taiwan took the step in setting up Hsinchu Science Park. It is in the vicinity of two reputed research universities and a research establishment. National Chiao Tung University, National Tsing Hua University, and the National Space Organization started playing a role in conducting high-end research for supplying knowledge and high caliber human resources to fuel the idea trading of park tenants. Almost 400 tenants of Hsinchu have been contributing to as high as 10 percent GDP of Taiwan. TSMC, UMC, and MediaTek are among the tenants of this famous high-tech park.
Trading ideas through silicon processing
As high as 40 percent of employees of TSMC working in this park are in R&D. They are engaged in producing ideas for silicon processing. The success of the idea trade of Hsinchu has taken away the edge of silicon processing from Silicon Valley. Furthermore, due to idea trading success, the profit margin of TSMC and other Taiwanese high-tech firms operating at Hsinchu is very high; it has been as high as above 25 percent. The high density of knowledge and ideas in creating economic value makes this model quite challenging to replicate. Due to the high barrier, even the USA has been failing to take back the silicon edge.
Software Technology Parks in India (STPI):
In the 1980s, the growth of telecommunication, the proliferation of PCs, and the need for migration of legacy software applications started creating the opportunity for remote delivery of IT services. Among others, Indians were at the forefront. They embarked on the business model of training fresh graduates, housing them in suitable office spaces, and leasing them to American and European multinationals. Hence, India’s Ministry of Electronics and Information Technology started setting up software technology parks of India (STPI) to scale up this model. STPI’s business model has been developing physical facilities and leasing office spaces to tenants. These tenants are primarily in the business of training fresh graduates with some vendor certificates and leasing them to MNCs.
So far, this model of commercializing knowledge by leasing IT professionals to MNCs has brought significant economic success to India. In 2020, IT service and BPO exports generated an estimated USD 79 billion and USD 34 billion respectively for India. Due to high economies of scale and scope advantages, and growing automation, such a model does not appear to be replicable in other countries. Even 50 percent wage differential advantage is not good enough.
High-tech parks in less developed countries:
Upon witnessing the success of Silicon Valley, and the high-tech and software technology parks of Malaysia, Taiwan, and India, a few less developed countries have aspired. They have embarked on developing physical facilities under the name of high-tech parks. For example, in Bangladesh, as of 2022, 39 hi-tech parks have been under construction. So far, they are busy developing physical infrastructure. It seems that they do not have a clear understanding of how to start the chain reaction in populating those high-tech parks.
Their value propositions are low-cost labor, lucrative incentives, and well-built physical infrastructure. Besides, they have also a generic supply of graduates and growing domestic demand for high-tech consumer products. But with the given economies of scale, scope, and externality effects of existing high-tech parks, those offerings are inadequate. They are also busy giving generic training with vendor certification. But due to the lack of a scalable business model, those training activities are failing to populate their high-tech parks.
Although a few domestic IT firms have been operating in those high-tech parks, scalability is an issue. So far, creating the success of trading knowledge and ideas is virtually absent. Besides, scalable growth of trading labor in the global high-tech value chain is yet to take off. The challenge is to find a scalable growth model in creating value in the high-tech value chain. Unless they fund it, the recent craze of high-tech parks in less developed countries runs the risk of failing to meet expectations. In addition to physical facilities, we need a smart strategy and policy framework to profit from high-tech possibilities.
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