When basic education is in question, why should developing countries talk about investing in building innovation universities? Instead of building export processing zones for creating jobs for unskilled labour force, why should developing countries focus on building Entrepreneurial Universities? Do they make sense?
Trade liberalisation of 1960s led to the globalisation of manufacturing. To benefit from such emerging opportunities, many countries including Malaysia and Thailand, developed special economic zones. In these economic zones, companies of advanced economies established manufacturing facilities to benefit from the supply of low-cost labour. In course of time, these host countries also invested significantly in infrastructure, primarily in road, port and power. Being pioneer, some of these countries derived attractive return on investment. To follow this model, other developing countries, including Bangladesh, have been investing in developing infrastructure to attract some of these manufacturing facilities to create demand for their raw labour.
Due to competition and high cost of infrastructure, return on investment to replicate such model appears to be very low now. Such model of growth does not appear to be sustainable as well--which is termed as middle-income growth trap. Upon investing US$28 trillion borrowed money in infrastructure to become factory of the world, China has learned that its economy cannot grow further following this model. To address the limitation, China has ramped up its investment in R&D, jumping from US$33 billion in 2000 to US$336 billion in 2013--almost 10 times, in comparison to 1.4 times, global growth.
Moreover, in the absence of managerial capability, a large portion of income earned from these export processing facilities of developing countries is also remitted back to other countries. For example, just over 200,000 foreign nationals are remitting back US$5 billion from Bangladesh- primarily from the country's US$26 billion export earnings of the RMG sector.
With the emergence of low-cost sensors, computing devices, display devices, and mobile communication networks, a new technology core is gaining the potential to cause disruptions to many existing industries. But, there is hardly any non-consumption for outputs of these industries in advanced economies. For example, healthcare services provided by existing industry serve everyone in advanced economies. At early stage, health innovations out of this emerging technology core will be in primitive form, which will like have no demand in advanced economies. But these innovations can grow in developing countries by addressing strong non-consumption. In course of time, these innovations will grow as strong substitute to existing ones, even in advanced economies.
To take advantage of this emerging opportunity, instead of investing in export processing zones, developing countries should rather invest in upgrading their universities, from just degree production factories to incubators of innovative products and firms. Instead of targeting export market, these firms will focus on domestic market at the early stage of life cycle. Once success is shown, foreign VC fund and management insights will start flowing in these firms to develop their products further and expand the market, eventually causing disruptions to corresponding industries of advanced economies.
Instead of forgetting, we should rather draw lesson from mobile phones. Although cellular phone technology originated in the West, but interestingly markets of developing countries were the nurturing ground of mobile phones to cause disruption to wire line phone industries of advanced economies. Due to access of wire line phone connection by every household, customers of the advanced economies did not show large-scale interest in cellular phones to take off. At the early stage of life cycle, cellular phone was primitive in many forms in comparison to wire line services; cost of cellular was higher offering poorer quality voice service.
As most of the households of developing economies did not have access to wire line connections, so market of developing countries offered the profitable opportunity of deployment of large-scale mobile networks. The economy of scale of developing markets attracted the finance, both revenue and investment, to develop the product further to make it strong substitute to wire line telephone services, across the world, including advanced economies.
Instead of replicating the old model of attracting FDI (foreign direct investment) for developing export-oriented manufacturing industries, it's time for smart developing countries to focus on creating the ecosystem, having innovation universities at the centre, to nurture products and firms to cause disruptions to industries of advanced economies--creating much larger export opportunity than the conventional ones. It's high time to change the export growth strategy--migration from replication to innovation should be the focus, certainly not other way around.
