The unfolding row between the US and China over the technology edge, massive subsidy packages for attracting foreign investment, and the development of high-tech parks in less developed countries indicate how high-tech is gaining prominence. Furthermore, global awareness about the unfolding of the fourth industrial revolution and the urgency of preparing for it also underscores the importance of high-tech. High-tech refers to a broad set of technologies that are rapidly progressing and have the potential to fuel the reinvention of a range of products and processes, causing creative and disruptive innovation effects. Some examples are semiconductors, robotics, electric vehicle, and intelligent machines. Hence, there has been an increasing importance of high-tech in economic development and national prosperity.
Moreover, high-tech has been affecting the competitiveness of labour and natural resource of even less developed countries. Therefore, there is a growing urgency among less developed countries to make an entry into the high-tech value chain. But what are options and their comparative scopes of economic value creation?
OPERATING AND REPAIRING IMPORTED HIGH-TECH PRODUCTS: Due to the growing comparative advantage, less developed countries find high-tech products and processes increasingly attractive. Hence, they have been importing semiconductor-rich smartphones and many other electronic products. They are also compelled to import high-end automation and robotics to produce goods, which used to be perceived as labour-intensives. Hence, they have been entering the last link of the high-tech value chain-operation, maintenance, and repair. Yes, it has been creating jobs, low-end ones. But its implication on economic value creation is limited. Furthermore, with the growing role of high-tech in production facilities like factories and power plants, the role of local labour and knowledge in creating economic value has been falling. Hence, limiting the entry at the last link of the high-tech value chain does not offer much growth opportunities to less developed countries.
ASSEMBLING FOR DOMESTIC CONSUMPTION AND EXPORT: Due to the growing consumption of products like smartphones, LCD television, and many more having high-tech components, less developed countries are after an age-old import substitution strategy. They have been developing specialised infrastructures, offering tax differentials, and other incentives for encouraging local assembly of high-tech products. Yes, such a strategy has yielded quick results regarding the made in label attached to high-tech products. For example, according to the media report, in 2021, 75 per cent of 30.5 million mobile handsets sold in Bangladesh were assembled locally. In addition to local companies, multinationals like Samsung, Vivo, and Xiaomi have assembling plants in Bangladesh. But what are the means of local value addition? As usual, labour in assembling imported components is the primary source of local value addition.
Unfortunately, in most high-tech products like smartphones, value addition out of labour at the assembling level has reached as low as 2 per cent of the total cost of the product. Hence, Bangladesh has offered as high as a 42 per cent tax differential to create profitable scope for local assembling. Of course, such an entry does not provide much room for less developed countries to generate value in high-tech. Furthermore, less developed countries have also targeted local assembling of imported components to increase export. But as tax differential and 2 per cent value addition are insufficient, they have come up with cash incentive. For example, Bangladesh offers a 10 per cent cash incentive to export locally assembled mobile handsets with made in Bangladesh label. As a result, the success of exporting locally assembled high-tech products through cash incentives runs the risk of weakening foreign currency reserves.
FOREIGN DIRECT INVESTMENT FOR MANUFACTURING:
To increase local value addition out of manufacturing, a few countries are after attracting foreign direct investment (FDI) of specialised high-tech firms. But tax waivers, low-cost labour, free land, a growing number of graduates, subsidised utilities, protected access to the local market, and even specially developed infrastructures are not attractive enough. Hence, there has been a race to offer substantial cash incentives. For example, India has budgeted as high as $30 billion to allure foreign firms in critical high-tech manufacturing like semiconductors and displays. As a result, smaller, less developed countries have been in an increasingly disadvantageous position to make an entry into the component manufacturing segment of the high-tech value chain. Furthermore, due to massive subsidies, there is a risk that the net economic benefit of high-tech FDI could be negative.
ACQUIRING FOREIGN FIRMS: As the entry barrier in high-tech manufacturing is very high, the option of taking over foreign firms could be an entry route. For example, China has been aggressive in acquiring foreign high-tech firms. According to FP news, in Sweden, between 2014 and 2019, Chinese buyers acquired 51 Swedish firms and bought minority stakes in 14 additional ones. First of all, it requires enormous amounts of foreign currency. Not all aspiring, less developed countries can afford it. More importantly, it demands deep insight and management competence to govern acquired facilities for expanding the high-tech footprint. Furthermore, advanced countries are increasingly getting allergic to such a move.
SETTING UP DOMESTIC FACILITY FOR MANUFACTURING: Often, there has been a temptation to set up a domestic facility to manufacture components. The first concern is about component manufacturing level value addition. Due to high-level automation, the role of labour is very low. The 2nd one is the growing capital investment need. For example, a high-end silicon processing plant costs around $15 billion. Such significant capital expenditure demands high economies of scale advantage. Furthermore, the rate of obsolesce is very high. Hence, recovering investment within a few years is a big challenge. Domestic demand in most countries is insufficient to justify profitable local manufacturing of most high-value high-tech components. For this reason, Apple prefers to source all the physical components from outside suppliers. Even Apple encourages suppliers of significant components like sensors, lenses, and displays to sell the parts to competitors to take advantage of economies of scale.
DETECTING DISCONTINUITY AND INCUBATING DOMESTIC FIRMS: Major high-tech success stories are the outcome of detecting the tendency to grow new branches and nurturing them into a new industry. For example, Taiwan's semiconductor success has been leveraging the embryonic beginning of 3rd party fab service providing model. Similarly, Japan's high-tech sector grew upon detecting and leveraging the invention of the transistor. They made a humble beginning and kept creating the flywheel effect. For example, Japan's semiconductor industry started by paying Bell Labs a $25,000 licensing fee. Similarly, Taiwan's semiconductor industry began with the payment of $10 million to RCA for transferring semiconductor technology know-how and a fab. Their success has been due to nurturing embryonic possibilities through a flow of ideas generated from systematic R&D.
EMBARKING ON REINVENTION-DRIVING CREATIVE DESTRUCTION AND DISRUPTIVE INNOVATION: The high-tech successes also emerge from reinventions of existing matured products and processes with the emerging high-tech core. For example, Japan reinvented many electronic products through the transistor, seeding the high-tech base.
Yes, high-tech has been diffusing in every nation, irrespective of economic status. They have been diffusing as stand-alone and embedded components. The effect of high tech has been taking the form of creative waves of destruction, transforming industries and economies. But value creation out of labour in high-tech has reached a negligible level. Furthermore, capital investment, economies of scale, subsidies, and obsolesce rates are exponentially growing. Hence, despite the growing size, the entry barrier to high-tech has been increasing. The only option left for aspiring less developed countries in the high-tech value chain is to detect discontinuity, make a humble beginning, and create a flywheel effect through a flow of ideas.
Rokonuzzaman, Ph.D is academic and researcher on technology, innovation, and policy.
