Where will the next Silicon Valley emerge? A quick internet search of this question generates a huge range of answers: Estonia. Rwanda. India. Germany. China. Israel. Nigeria. Ecuador. Cambridge is there, too, with its nickname of ‘Silicon Fen’. Countries across the globe are determined to become the new global centre of tech innovation, and are accordingly investing in supportive infrastructure like high-speed internet, tertiary education and tech hubs. But where are investors looking to give funding support? Can any developing country catch up to today’s tech superstars? And if not, what other options exist for innovation?
Economists have long focused on innovation and technological progress as a mechanism for generating economic growth. Improved technology means a country can produce more with its given resources, generating faster rates of economic growth even without increases in capital, land or labour. Countries that have high rates of technological change have developed faster production processes, more efficient ways of developing natural resources, and higher labour productivity. High levels of investment in research and development (R&D), arising from both government and the private sector, allow these countries to attract the most qualified researchers, scientists, engineers and designers, who develop innovative products and design new technological processes. Private investors provide the investment capital to support the development of new research, and bring these new developments to the market. Governments can encourage private investment in R&D through the creation of tax incentives for investment, or through the provision of infrastructure in support of universities, tech hubs and other centres of R&D.
Countries that have developed these sectors successfully over the past century, such as the USA and Japan, now have high concentrations of technological research centres and hubs that produce new technologies, products and processes at a high rate. Industries that require high levels of technological innovation in order for their companies to remain competitive, such as the automotive and aviation industries, have developed large R&D structures that interlink research, production, testing, marketing and design into systems that span the entire supply chain. As economists such as Peter Nolan argue, the large firms that dominate high-tech industries such as Boeing, GM and Toyota have strong incentives both to invest heavily in R&D, and to integrate that R&D as closely as possible with their production processes. This means that the innovative new designs that are developed by researchers are those that most closely match the innovation needs of these large firms. In this way, large, industry-dominating firms generate substantial investments in R&D, the results of which help to keep these large firms at the top of their industries. This circular process is increasingly concentrated in developed countries, with almost all of the large, industry-dominating firms such as SAB Miller, Citi, Google, and The Coca-Cola Company headquartered in high-income countries.
So where does this leave developing countries? How can they be competitive if high-tech industries are dominated by firms that are concentrated in developed countries? Within developing countries there is enormous diversity, with countries ranging from rapidly-industrialising emerging economies to countries that are struggling to develop their economies beyond basic manufacturing and agriculture. The options they have for being competitive in a high-tech world are likewise diverse.
The principal exports of many developing countries, particularly those in sub-Saharan Africa, are dominated by agricultural products or raw natural materials, with comparatively little high-tech components or inputs. Most developing countries see relatively little private-sector investment, other than foreign direct investment, and many developing-country governments lack the fiscal resources to invest substantially in R&D. In addition, in an increasingly globalised labour market, the most highly skilled and educated scientists and designers from developing countries are subject to ‘brain drain’ from their home countries: they have the option to relocate to higher-income countries, working for the same giant firms that dominate global industries. For the governments of these countries, then, the challenges that must be overcome to compete in the global marketplace are substantial.
But innovation is not impossible, and many developing-country governments have recognised that improvements in agricultural productivity are an important first step in the development process. Many agriculture-based economies are working with international researchers and entrepreneurs to develop innovations in farming, with the goal of replicating the Green Revolution that transformed farming in South and South East Asia in the 1960s. For example, in Burkina Faso the government has permitted the production of genetically-modified (GM) cotton, which has benefitted many local farmers by reducing crop losses due to disease and pests. While the scale of farming using GM crops in Burkina Faso is not likely to ever rival the scale of production in Argentina or the USA, the extra profits generated by more-productive farming can then be re-invested in technological improvements, putting into motion a positive cycle of profit generation and re-investment in technology and innovation.
Over the past several decades, some of the world’s highest rates of economic growth have been generated by rapidly-industrialising countries such as China, Nigeria and Mongolia. These countries have seen very high rates of economic growth, with correspondingly high demand for consumer products and investment opportunities. Companies such as Nokia increasingly recognise that some of the highest rates of demand growth for their high-end consumer products are in emerging markets. Analysts are increasingly recognising that the emergence of a large middle class in emerging countries, particularly in Asia, will have a significant effect on consumption growth, particularly as the major world economies are currently experiencing slow economic growth.
In response to this growth, innovators have been looking for opportunities to develop products that will address the needs of consumers in emerging markets, using locally-available technology. For example, as rates of smartphone ownership have increased, a new range of phone-based technologies has emerged that address the needs of residents in emerging countries. One of the most well-known and successful, M‑Pesa, which launched in Kenya in 2007, allows customers who had otherwise been locked out of financial services to transfer money and pay bills using their mobile phone. The enormous success of M-Pesa – with 17 million accounts now active in Kenya alone, and expansions into Tanzania, Uganda, South Africa and India – indicates that technological innovations that use locally-available technologies and that address local economic constraints can enjoy substantial commercial success.
So how can emerging markets generate greater innovation and compete with developed economies’ technological output? Investment remains a key roadblock, with investors remaining wary of new and perhaps unfamiliar markets in the emerging world. Comparatively weak protection of intellectual and physical property rights, poor infrastructure, unpredictable outcomes from legal systems and comparative skill gaps in the labour force are some of the factors preventing emerging economies from becoming investment destinations for tech entrepreneurs and researchers. Governments of emerging economies can improve these areas through improving the enabling environment for business, and by providing transparent and accountable governance, a stable macroeconomy, a transparent legal system, and low transport and business-operations costs. Governments’ investment in education provides the basis for innovation, particularly investments in the tertiary education sector and in skills training in tech-oriented academic fields. They can attract private-sector investment by investing in supportive infrastructure, such as the Kenyan government’s plans to provide high-speed internet connections and improved road networks to support high-tech firms’ regional hubs in Nairobi. Furthermore, governments can directly invest in R&D that will support the development of high-tech industries, such as support for research in automotive engineering and design offered by the South Korean government in support of the country’s car industry – now one of the world’s largest car producers. While infant-industry protection has long been dismissed as a policy tool by many economists, in a world in which many industries are dominated by giant, monopolistic firms based in developed countries, tech developers in emerging markets may need the support of investors in both the private and public spheres if they are to establish a toe-hold in the global innovation economy.
There are also opportunities for greater international collaboration and information-sharing between developing and developed countries. In the past, foreign-direct investment (FDI) has been associated with Western-headquartered companies outsourcing their low-tech production processes to developing countries, with little transfer in technical knowledge or training for locally-employed staff. However, there are signs that this is beginning to change, with emerging economies increasingly demanding that large corporations invest in higher-technology production processes from which local staff can learn. Many emerging economies can still offer lower labour costs than developed countries, meaning FDI remains an attractive option for large international companies, even with this push for higher technology use in the recipient country. For example, the development of internationally-oriented IT hubs in cities such as Bangalore indicate that developing countries are increasingly filling international demand for high-tech but still labour-intensive service industries. Engineers and researchers in emerging economies can also import high-tech pieces of infrastructure from developed countries and then use reverse-engineering to learn to develop the same technology. This was done during the establishment phase of the Chinese telecoms firm Huawei, followed by investment in R&D to expand on tech knowledge to develop new products. Finally, international partnerships between universities, such as those in the Cambridge-Africa Programme, provide a platform for knowledge-sharing and collaborative research between the developed and emerging worlds, and contribute to the globalisation of the innovation process itself.
Overall, while the challenges facing today’s developing economies are considerable, they are not insurmountable, and there remain many opportunities for emerging economies to compete in a world of rapid innovation in high-tech industries. The private sector is increasingly looking to the fast-growing consumer markets of emerging economies for its next investments, with many of the largest firms, like Nokia, developing innovative products specifically for these markets. Governments in developing countries are investing in supportive infrastructure and pro-innovation business-enabling environments, and support for high-level education and skills training. International partnerships like the Cambridge-Africa Programme are bringing designers, engineers and researchers together across international borders, furthering the global spread of collaborative innovation. As communications technology allows for the development of globalised, interconnected innovation networks, we may see the rise of something bigger than “the next Silicon Valley”: the new Silicon Economy, worldwide.