There are a few standard things from Silicon Valley to Gothenburg, among the top 100 innovation clusters. These are (i) a well-developed education system, (ii) research universities, (iii) venture capital funds, (iv) high-tech firms, (v) research centers, (v) high publications and patents per million population, and (vi) rich infrastructure. These clusters are contributing to economic growth from the production of ideas and their conversion into product and process features. As different regions and nations are after driving economic growth out of innovation, they are after developing all those building blocks forming regional or national innovation system. They have been investing billions and offering incentives to allure high-tech firms as anchor investments. Unfortunately, there is no natural correlation between the advancement of those building blocks and economic growth.
For example, as high as 94 percent of patents do not find any applications. Similarly, upon being at the top, Silicon Valley has lost its edge in silicon processing to Taiwan. On the other hand, India’s skyrocketing scientific publications have little to do with its weakening economy. Furthermore, according to WIPO statistics, institutions in Delhi published far more scientific articles than those in Helsinki, Oxford, Hefei, and Austin. Does it mean that Delhi is deriving more economic benefits from innovation than those areas of the world? On the other hand, far more high-tech multinational corporations operate in Malaysia and India than in Taiwan. Does it mean that Malaysia and India are ahead of Taiwan in creating semiconductor value out of ideas?
Instead of Taiwan’s success in creating economic value from high-tech ideas through homegrown firms, high-profile multinationals have been sourcing labor and low-end knowledge-based service from India and Malaysia. To get further clarity, let’s decode the formation of the innovation system and driving forces in different regions.
Defining national innovation system:
It consists of a set of institutions and the interaction between them for supporting the profit-making competition of the formation of ideas and their conversion into economic value. Hence, it begins with the education system and research centers. The ownership of ideas also necessitates intellectual property framework and corresponding services. The exploitation of ideas demands incubating firms, risk capital supply, and large high-tech firms’ presence for licensing ideas. Conventionally, the national innovation system is conceived to support the production and commercialization of ideas in a linear model. Unfortunately, it does not function if it’s developed with the hope of follow-up innovation activities. Hence, creating a national innovation system to drive innovation-led growth does not function despite its immense importance.
The formation of Silicon Valley created the model of a national innovation system:
Neither Stanford University nor well-developed infrastructure was the precursor to the formation of Silicon Valley. Similarly, the venture capital funds of Sandhill Street had nothing to do with the growth of Silicon Valley. Before transforming farmland into Silicon Valley, Stanford was not a research university either. To the surprise of many, Silicon Valley did not start forming as all other building blocks were in place. Instead, the chain reaction in forming Silicon Valley began to build all of them. The forces that triggered and sustained that chain reaction are the underlying cause of the formation of all those building blocks of regional or national innovation systems. Ironically, the innovation edge of Silicon Valley grew in the absence of many of those building blocks, and it started to show the sign of decaying at the peak of maturity of many of them.
Before 1956, Silicon Valley was farmland. There were a few defense contractors, a naval research establishment and NASA’s space research laboratory, and universities like Sandford and the University of California, Berkley. But Silicon Valley did not grow out of the spillover effects of those establishments. Instead, it started to grow with the profit-making journey of refining Transistor. Ironically, the transistor was not invented by any of the Valley tenants. The seed of Silicon Valley came from the east coast—Bell Labs. The journey of Dr. Shockley to profiting from the refinement of the transistor led to the formation of Shockley Semiconductor Lab in Mountain View. This lab triggered the chain reaction, and it was sustained due to profit-making competition out of refinement. This journey led to turning Stanford into a research university, generating publications and patents, and developing high-end human capital, high-tech firms, and venture capital funds.
Model of national innovation system failing to keep the edge of innovation of Silicon Valley:
One of the flagship companies forming the Silicon Valley is Intel. Due to the PC wave, Intel kept profiting from refining Transistor and increasing chip density. But despite having a regional innovation system, Intel failed to comprehend the uprising of the Foundry model and switching to it—let alone driving it. As a result, Intel and no other Silicon Valley tenants can keep pace with Taiwan’s TSMC in processing Silicon. On the other hand, American firms lost the edge despite early progress in lithography. Subsequently, a firm born in a wooden hut in the Netherland has grown into a global monopoly for 5nm silicon lithography. Hence, a robust national innovation system is no guarantee of sustaining innovation success—let alone creating new ones.
The rise of TSMC, Largan and many others have created Taiwan’s national innovation system:
In the 1960s, Taiwan was an agricultural economy. But Taiwan is now prosperous due to its success in creating economic value from high-tech ideas. Its success stories are TSMC in semiconductor manufacturing, Largen in Lens making, and Giant in bicycles. How are these companies producing economic outputs? Unlike many others, they are in the business of creating ideas and trading them as product and process features. Due to it, in addition to growing volume, their gross profit is very high, ranging from 50 to 70 percent.
Furthermore, they have become global monopolies. But how did Taiwan succeed in developing such companies? Before they happened, did they establish national innovation systems and high-tech parks like Taipei-Hsinchu? Surprisingly, NO.
TSMC made a humble beginning with imported technologies and know-how. Similarly, Largan Precision started the journey of making simple lenses without having any proprietary ideas. So did Giant in making a cycle for foreign brands like Schwinn. But unlike many other companies, TSMC, Largan, Giant, and a few other Taiwanese firms focused on generating ideas and integrating them into their products and processes. Subsequently, they started engaging in R&D and demanding research partnerships with universities and research centers. As a result, different building blocks of the national innovation system began to form. Hence, Taiwan’s preplanned prior development of a national innovation system did not develop Taiwan’s innovation success stories. Instead, the journey of pursuing ideas in creating excellence in even conventional products out of ideas has created the national innovation system.
Lesson from bicycles:
A national innovation system aims to facilitate economic growth out of ideas. However, it doesn’t necessarily mean that we need to invent and pursue out-of-the-box ideas. Here is the lesson of creating a highly profitable business out of ideas for advancing an age-old hardware invention—the bicycle.
The bicycle was invented in 1817, neither by the Taiwanese nor the Japanese. A German baron named Karl von Drais made the first significant development by inventing the bicycle. But once we talk about a bike with a carbon fiber frame, Taiwanese Giant shows up. Japanese company Shimano has a 70 to 80 percent global market share for the gear and many other modern bicycle components. Without inventing, how have these two companies established monopolies? The answer is plain and simple. They have done it through the cumulative power of incremental advancement.
Due to attaining market power out of ideas, Shimano reported $462 million profit on $2.93 billion revenue (2017). On the other hand, Giant reported revenue of $2.85 billion in 2021. Furthermore, these two companies are not located within a well-developed innovation cluster. Hence, profiting from ideas does not always demand a high-tech innovation system and out-of-the-box startup ideas.
Stop wasting investment for uplifting ranking in innovation indices:
There has been recent development of innovation ranking of countries and economies. Among them, Global Innovation Index (GII) is very popular. GII measures and compares countries along 80 indicators. Many of these indicators are linked with the building blocks of the national innovation system. As GII ranking is perceived as the measure of innovation ability, there has been a race among less developed countries to increase investment in research funding, publications, patents, infrastructure, number of STEM graduates, and many more. But unfortunately, these countries can’t transfer those outputs into economic value. Those outputs have no or little relevance to how they focus on creating economic value. Hence, despite the continued progress of Malaysia in GII ranking, there is no progress in Malaysia to graduate from labor to idea to add value to the semiconductor.
Like Taiwan, Japan succeeded in creating a national innovation system for pursuing commercial interest out of ideas. Starting from Sony to Toshiba, numerous examples have shaped the building blocks of innovation capacity out of the mission of pursuing refinement out of ideas. Hence, aspiring less developed countries must stop improving innovation indicators to have a better position in the ranking. Instead, they should focus on improving their products and processes out of the flow of ideas. They should also focus on making a lateral entry in the innovation race of existing products, whether through reinvention or superior incremental advancement. This journey of creating economic value out of ideas will keep giving the shape of strengthening and forming the critical building blocks of the national innovation system.
Focus must change
Hence, the focus must change from supply to the necessity of driving growth out of innovation. As opposed to waiting for significant inventions out of a well-developed national innovation system, the focus should be on creating economic value from a humble beginning and strengthening the innovation system to meet the requirement of the mission.