Our growing living standards and GDP are attributed to the industrial economy. Besides, the rise of natural resource-poor economies like Germany, Japan, South Korea, and Taiwan to high-income status has been due to the industrial economy. Industrial economy refers to deriving economic benefits from scalable inventions and innovations created by a Flow of Ideas stemming from STEM. Hence, the industrial economy offers far higher prosperity than our ancestors had during the pre-industrial age. Science, Technology, Engineering, and Mathematics (STEM) play a crucial role in inventing, innovating, and scaling them up. The industrial economy has emerged due to our success in deriving increasing value from labor and natural resources by advancing and leveraging STEM. Hence, the importance of STEM is immense in driving prosperity.
However, that does not necessarily mean a natural correlation exists between the success of driving prosperity and acquiring STEM competence. Besides, there are multiple ways of developing an industrial economy.
Unfortunately, there is a wide variation of economic benefits depending on how we pursue the industrial economy. Notably, the way less developed countries have been chasing it has not been for leveraging STEM to create Wealth. Hence, despite progress in creating low-skilled jobs in the industrial economy, their prosperity has not been on the path of reaching high-income status. Besides, such a labor-centric approach has been preventing high-income job creation for STEM graduates.
Pre Industrial Economy
In the pre-industrial age, our ancestors were as creative as us. Like us, they were after a relentless journey of improving their quality of living standards through innovating better means of Getting jobs done. Unfortunately, their innovations were not scalable. They could not keep increasing the quality and reducing the cost by adding a flow of ideas. The underlying cause was reliance on intuitive knowledge, tinkering, and Craftsmanship. Thus, they could not keep increasing their living standard. Besides, informal production techniques organized as a cottage industry were preferred due to low scalability. Hence, the pre-industrial economy could not scale up wealth creation from natural resources and labor. For this reason, despite having far less population, better natural resource stock, better quality environment, and harder work, their living standard was far poorer than we have today.
Industrialization and Economic Development
Due to the development of empirical methods for investigating natural phenomena and the creation of mathematics for presenting knowledge as variables and relations, at the dawn of the 18th century, the human race succeeded in inventing scalable knowledge production means. Furthermore, Newtonian Mechanics and Thermodynamics led to mechanical engineering for optimizing steam engine design and advancing production mechanization. As a result, a scalable path of wealth creation out of ideas emerged. The race to profit from integrating ideas into products and processes to improve quality and reduce costs triggered industrialization. Thus, ideas’ role in increasing economic value from natural resources and labor started driving rapid economic development through industrialization. Consequentially, UK-led Europe experienced rapid growth in the 18th and 19th centuries.
Subsequently, the development of new technology cores like electrical energy, internal combustion engines, electrical communication, semiconductors, sensors, software, and a few others expanded industrialization. Innovators leveraged them by reinventing existing products and processes and innovating new ones. Consequentially, due to a far greater scalable path of wealth creation from ideas from labor and natural resources, the market value of labor and natural resources kept rising. Furthermore, the race to profit from idea production and commercialization started creating high-income jobs for STEM professionals and college graduates.
Scaling Up Grassroots Innovation
One of the ways of developing an industrial economy has been scaling up grassroots innovations. In retrospect, the industrial economy started to grow in this way in the UK and the rest of Europe. However, grassroots innovations in the pre industrial age could not scale up due to the absence of systematic knowledge and idea production.
For example, although the Steam Engine, known as the hero engine, was invented by Hero of Alexandria in 1 BC, it was not scalable. Due to reliance on tinkering and craftsmanship, the inventor could not keep making it a better and cheaper energy source. Hence, it could not industrialize energy production due to a lack of scalability. However, after almost 1800 years, Thomas Newcomen and James Watt started scaling up this invention with ideas from thermodynamics and mechanical engineering. Similarly, cotton yarn production and weaving started as grassroots innovations. For the same reason, these crucial inventions could not scale up like the Hero engine. However, the transfer of tinkering and craftsmanship into Mechanical Engineering started flowing ideas from STEM for scaling up yarn and fabric production through mechanization. As a result, the first industrial revolution started forming the industrial economy.
Like Hero Engine, Handlooms, and Charka (India), many grassroots innovations scaled up in Europe and America, forming an industrial economy. For example, electric light bulbs and telephones started the journey as grassroots innovations. Unfortunately, despite being fertile ground for Grassroots Innovations, none of them scaled up in South Asia. Although South Asia and many less developed countries have been graduating high-caliber STEM graduates, they are failing to leverage them to scale up their grassroots innovations. Inevitably, they fail to find a bottom-up approach to building an industrial economy. Hence, they are yet to open the path of creating wealth from the domestic production of idea flow.
Seeding Industrial Economy through Weapon Sharpening
France, Germany, the UK, America, Russia, Japan, and others seeded industrial economies through weapon-sharpening inventions. For example, the initial purpose of improving computers in the 1940s and 1950s was to simulate the trajectories of bullets, detect missiles and fighter jets, and serve other weapon-sharpening agendas. Similarly, the initial usage of airplanes was to carry and drop bombs. The mobile phone found its first practical use in the war field. After WWII, America made its national strategy through the Defense Advanced Research Agency (DARPA).
Like the Western Countries, the former Soviet Union, present-day Russia, developed an industrial base for the purpose of military. However, unlike the Western World, Russia could not scale up them due to a lack of competition in serving civilian purposes. Hence, the agenda of sharpening weapons did not succeed in developing a similar industrial economy in all the countries. On the other hand, in weapon-importing countries, the industrial economy got little push from staggering spending for military hardware.
Command-Driven Industrial Economy
Building an industrial economy appears to be a linear model in a command-driven economy. The Government would recruit scientists and engineers to invent and innovate, serving the purpose of military and civilians. To make copies of those innovations, the Government would set up factories. Through rationing, the Government would control the diffusion of those innovations. Hence, in a very straightforward way, the Government would succeed in developing an industrial economy; however, such a model falter due to a lack of competition in profiting from refinement. As a result, inventions and innovations would experience slow growth and suffer from premature saturation. On the other hand, profit-making competition will accelerate their number and drive the evolution through incremental advancement and reinvention. For this reason, Russia could not leverage STEM to drive wealth creation to improve the living standards of its people.
Linear Model–scientific discoveries to fuel inventions and innovations
The linear model of innovations refers to following a linear path from discovering science followed by inventions and innovations, thereby creating an industrial economy. Of course, scientific discoveries lead to inventions–offering the path of endless prosperity. Such inventions form the backbone of innovations. For example, the discovery of nuclear science has led to the invention of nuclear technology and innovations in energy and medical devices. However, such a path of creating an industrial economy is quite long. Besides, irrespective of greatness, inventions emerge in primitive form. As a result, innovations out of them invariably show up in primitive form. Often, the military finds them relevant. It takes a long pathway of advancement to reach the state of fueling an industrial economy serving the civilian benefits. Hence, for many countries, such an approach is not suitable for creating wealth by building an industrial economy.
Industrial Economy through Import Substitution
One commonly practiced strategy for developing an industrial economy has been to pursue import substitution. It refers to locally making copies of the products which are being imported. Among many others, India undertook a massive import substitution initiative right after independence to build the industrial economy. Value addition occurs through the local supply of natural resources and labor in making copies of imported products. Due to labor wage and tariff differential, such a strategy shows quick progress. Despite early success, such a strategy fails to drive prosperity through the industrial economy as it does not focus on improving those products through local production of ideas. Hence, due to increasing labor costs and the absence of incremental advancement, locally produced products keep losing steam in driving economic prosperity.
Import Substitution through Subsidy Race—an alarming development
Unfortunately, despite the structural flaws and failure in the past, even today, many less developed countries, along with India, are after import substitution. Due to the decreasing role of labor and increasing capital expenditure, even these countries have been pumping staggering subsidies for showing success in building industrial economies out of import substitution. For example, India offered 70% subsidies to offset capital expenditure and 6 percent production-linked incentives to American Micron Technology in 2023 to locally produce memory chips for domestic consumption. India offered a similar incentive to Foxconn to assemble iPhones in India. Among other less developed countries, Bangladesh showed quick results in mobile phone assembling by offering above 40 percent import duty differentials. Unfortunately, due to the eroding role of labor, growing capital expenditure, and increasing Economies of Scale, import substitution-based industrial economy development lost economic viability long ago.
However, there has been an exception. Unlike India and many less developed countries, China focused on adding value through ideas in addition to labor. Hence, China accelerated STEM investment to drive local innovation of once-imported products. Thus, China has successfully created high-income jobs for STEM graduates to imitate and innovate imported products. This is one of the reasons behind the faster economic growth of China, turning its per capita GDP 5 times higher than India’s in 2022.
Export-Oriented Manufacturing for Industrial Economy
During the 2nd half of the 20th century, export-oriented manufacturing got traction in building industrial economies in labor surplus less developed countries. Due to increasing automated tools, production lines, and job division & specialization, the role of factory workers was reduced to supplying Innate abilities. Hence, a low-skilled workforce, without having education, training, and experience, became eligible for factory work. Therefore, to take advantage of the wage differential, multinational corporations of advanced countries started sourcing manufacturing services from Asian countries like Malaysia, Philippines, Thailand, Indonesia, Bangladesh, and China. Hence, these countries witnessed a rapid growth of labor centric jobs in the industrial economy. Unfortunately, unlike China, none of these countries succeeded in innovating and adding value to those products with their ideas. Hence, due to limited and eroding value addition out of labor, none of these countries succeeded in driving prosperity to reach high-income status.
However, instead of just supplying labor, China has focused on adding value by imitating and innovating components to manufacture products for MNCs for the export market. Hence, China succeeded in idea-based value addition in the value chain. Thus, China crafted an idea economy around export-oriented manufacturing.
Reinvention Waves for Transforming Industrial Economy
In Asia, Japan is the first country to demonstrate the building of an industrial economy out of the migration of innovation epicenter through the reinvention of matured products. After WWII, upon being defeated, Japan faced many limitations in rebuilding the industrial economy. It lost the option of leveraging the military to develop products and mature them for the civilian market. Hence, it targeted reinventing existing products, like consumer electronics, by changing the vacuum tube with emerging semiconductors. To drive the reinvention waves, Japan had to create a flow of ideas from STEM advancement, creating an idea economy. Consequentially, Japan succeeded in developing high-paying jobs and a high-value-added industrial economy. By following Japan, South Korea, and Taiwan have successfully built industrial economies from the reinvention strategy. Notably, the success of Taiwan and SK in building an idea economy in the semiconductor industry has been remarkable.
Reverse Engineering and Frugal Innovations
A temptation to build an industrial economy through reverse engineering and frugal innovations does exist. Reverse engineering refers to designing and making all the components of existing products and assembling them without looking into the original design. Yes, such an approach succeeds in making copies independently. Of course, the initial success of reverse engineering offers a sense of achievement in developing an industrial economy. However, if those reverse-engineered products do not keep evolving, they will lose the business edge. That does not necessarily mean that there are no success stories of building an industrial economy through reverse engineering. For example, Canon’s founder started the camera-making business by reverse engineering Leica’s camera. Initial success stems from low-cost labor advantage. However, long-term success emerged from Canon’s founder’s endeavor of advancing the reverse-engineered camera through newly developed in-house R&D activities.
Frugal innovation refers to making strip-down versions of existing products. Thereby, frugal innovations may emerge as lower-cost alternatives. For example, Honda entered the automobile industry through frugal innovation by retrofitting small engines with bicycles. Similarly, Tata came up with the Tata Nano as a frugal, innovative alternative to a family sedan. However, Tata learned a lesson by losing more than $100 million. The underlying reason has been that instead of pursuing ideas for increasing value for money, it focused on the brute force method of reducing cost by removing and making features inferior. For sure, Honda’s initial bicycle fitted with two-stroke engines did not contribute to developing an industrial economy. Instead, the focus on refinement led to a flow of ideas that led to high-performing automobile innovation and manufacturing business.
Superior Performance in Incremental Advancement
Starting an industrial economy through imitation, technology licensing, and reverse engineering in making copies of existing products is plausible. Low-cost labor advantage may lead to a profitable business. Despite this, early success will not scale up due to a lack of incremental advancement. On the other hand, by accelerating the incremental progress of both products and processes, a follower can outperform the original innovators. Consequentially, followers may emerge as leaders by taking away innovation edge. For example, upon entering the hard disk business 20 years after its invention, Toshiba outperformed IBM and turned IBM into its importer. And Toshiba is not alone. Like Toshiba, Taiwan’s TSMC focused on R&D to improve silicon wafer processing at a faster rate than Intel or others. Inevitably, Taiwan has succeeded in developing an industrial economy and creating value from STEM R&D findings.
Leveraging Technology Transfer for the Industrial Economy
Yes, technology transfer helps in developing an industrial economy. It opens the door to entering the value chain of existing products. Besides, technology transfer is vital for accessing emerging technologies for pursuing a reinvention strategy. However, if you just make copies of transferred technologies, no success shows up in creating value from ideas. Upon having access, success depends on further advancement through Incremental innovation. Without organized in-house R&D, no amount of technology transfer will lead to a developing industrial economy for creating economic value from ideas stemming from STEM.
For example, Apple’s innovation strategy highly relies on accessing technologies from the outside. Apple does not just integrate transferred technologies into its products to take advantage of them. Instead, Apple focuses on refinement to increase the value through the flow of ideas. Similarly, Sony did not create success by making copies of the technologies like Transistor and Charge Coupled Devices (CCD) it licensed from the Bell labs. Instead, relentless refinement through extensive R&D led to fueling reinvention waves in Radio, TV, Camera, and many more consumer electronics products. Unfortunately, such an important lesson is often missing in technology transfer discourse in less developed countries and international development institutions like the UN and UNDP.
Leveraging STEM Competence for Building Industrial Economy
As explained, the industrial economy emerged due to scaling up inventions and innovations through a flow of ideas stemming from STEM R&D. Due to our success in making products better and cheaper through the advancement of STEM, the industrial economy has been advancing. It’s a human’s success in creating wealth from STEM—forming idea economy. Unfortunately, this basic lesson is missing in less developed countries’ development, policy, and STEM agenda.
Instead of focusing on improving inventions and innovations for creating a market for STEM, less developed countries have looked upon the industrial economy as a vehicle for commercializing labor and natural resources. Hence, they have been after import substitution, export-oriented manufacturing, reverse engineering, frugal innovations, imitation, intellectual property infringement, and brute force methods of technology transfer. Due to such reliance on imports for ideas, poverty persists. On the other hand, STEM proponents have been pushing the agenda of increasing investment in STEM education and R&D to produce more graduates, publications, and patents.
Unfortunately, there is no natural correlation between STEM competence and economic value creation out of the industrial economy. Besides, due to the growing role of imported advanced technologies, local value addition out of labor in making copies has been falling. Hence, in most less-developed countries, value-adding in the industrial economy has been falling, and unemployment among STEM graduates has been on the rise. Furthermore, without giving the focus on scaling up grassroots innovations with ideas flowing from STEM, there has been a growing trend of patronizing grassroots innovations.
This article is part of a book, Engineering Economics and Management–Modern Day Perspective.