Often development planners get bewildered by the challenge of finding a sustained growth path for guiding countries like Bangladesh to reach high-income status. Conventional prescriptions of infrastructure development, import substitution, incentives for export, and investment in education mostly fail to craft a sustained growth path. The question could be: what is missing? It seems that World Bank's Growth Commission could not offer a satisfactory answer. But why has Taiwan been growing and reaching high-income status? But why could not Malaysia or other developing countries do the same?
Once Taiwan was poorer than Malaysia. In 1970, its per capita GDP was $396. Since then, it has been growing, reaching 33,059 USD in Dec 2021. But Malaysia could not keep pace, turning it now poorer than Taiwan. What is the underlying cause of Taiwan to keep growing reaching such a high-income status? Why did it not get caught in the middle-income trap? Research finds that the underlying reason has been Taiwan's graduation from labour and natural resource to ideas for creating economic value.
More than 25 per cent net profit in export earnings of major Taiwanese companies like TSMC or Largan is intriguing. The question could be-- what has Taiwan been exporting? Unlike many other countries, instead of natural resources, labour, and even knowledge, Taiwan has been exporting ideas. These ideas are embedded into high volume products and services such as semiconductors, lenses, and bicycles.
Graduation from idea importer to the exporter is the ultimate success for an economy to sustain growth. According to some economists like Paul Romer, it opens endless growth opportunities. Unlike natural resources, wealth creation out of ideas is not limited to fixed stock and its current market value. Similarly, economic value creation out of labour and knowledge is limited to the supply of how many people are employed. As human beings have an unlimited capacity to discover knowledge and turn it into ideas for improving quality and reducing costs, trade competitiveness faces endless growth opportunities.
Furthermore, unlike natural resources and labour, ideas are non-rivalry. The same idea could be copied into millions of products and put into action to create economic value simultaneously. Hence, ideas enjoy potential endless scalability. The challenge is to produce, integrate them into products and export them.
The race of idea production and exploitation for increasing the quality and reducing the cost simultaneously leads to price setting monopolisation capability. This is a vital capability for increasing export revenue and enhancing profit. It appears that Taiwan has done an excellent job in showing the path of development through idea production, exploitation, and export. To clarify how to graduate and leverage ideas in gaining a competitive edge and monopolising the global market, let's look into two case studies.
LARGAN PRECISION: Largan is a plastic lens-making company. During the start in the 1980s, Japanese companies had a high level of dominance in intellectual property ownership in the global lens industry. Largan had only a labour-based lens-shaping option for creating economic value. But Largan deliberately avoided that option and kept looking for a window of opportunity of generating revenue out of lens innovation. In its prolonged scanning exercise, Largan spotted the newly growing mobile phone camera as a new market for creating and trading micro-lens ideas. Upon spotting it, Largan marshaled all its resources to create a flow of ideas for innovative high-precision lenses for forming ever growing high-resolution smartphone image. Consequentially, Largan attained monopolistic market power in the high-end smartphone lens market, resulting in as high as a 70 per cent gross margin.
TSMC: In 1987, Taiwan Semiconductor Manufacturing Company (TSMC) was born to offer silicon wafer processing services. TSMC started the journey by importing all foundry equipment and expertise to operate the plant for producing and exporting services. TSMC could have kept following this path in creating economic value from capital, knowledge, and labour. Unlike firms of many other developing countries, TSMC did not follow this path. From the very beginning, TSMC focused on R&D in generating ideas for process yield improvement. Due to successful integration of those ideas, TSMC kept improving its wafer processing quality and productivity through a flow of ideas. Consequentially, TSMC's revenue and profitability kept growing out of the flow of ideas. To support it, as high as 40 per cent of TSMC employees work in R&D for process yield enhancement and to move to the next node faster than competitors. Institutionalisation of this approach of idea production, integration, and exploitation has led to TSMC's monopolistic position in high-end chip making, resulting in more than 28 per cent net margin.
Let's now figure out the underlying forces driving the graduation of Taiwan from a labor and natural resource-based to an idea economy. At the end of the civil war in 1949, Taiwan benefited from the human capital influx of two million Mainland Chinese. They were primarily intellectuals and skilled workers, putting the island on a good starting point for growth. In the 1950s and 1960s, Taiwan's economy was mostly around commodity production and import substitution. Upon realising that import substitution would not offer a scalable growth path, the government quickly moved toward export-promoting policies. Such policy led to establishing export processing zones (EPZs) in the 1970s and 1980s. But very soon, Taiwan came to figure out that rising wages and limited technology transfer would eventually lead to a decline in the usefulness of EPZs. Hence, in pursuit of a scalable growth path, the government moved to create an idea economy. Consequently, the focus changed from EPZs to Science Parks in the 1980s.
By the way, the establishment of ITRI (Industrial Technology Research Institute) in 1973 helped Taiwan to understand the growth and value creation dynamics of different industries. The finding of ITRI and technology assimilation led to the spin-off of UMC (united microelectronics corporation) and TSMC for exploiting the idea economy in the global semiconductor value chain. Since the beginning, Taiwan has focused on ideas for process innovation instead of labour for the operation of imported capital machinery to profit from semiconductor opportunities. Hence, R&D, patents, and technology management were vital in building its semiconductor industry. Such an idea focus has been offering far more significant growth prospects than what Malaysia and Vietnam have created out of the labour-based semiconductor and electronics industries.
Unlike most developing countries, Taiwan understood the limited growth opportunities it could have out of labour-based farming, import substitution, and export-oriented manufacturing. Hence, very consciously the government came up with the strategy, policy, and institutional capacity for detecting entry opportunities in the global chain and exporting idea-based value. In Taiwan, such conscious realisation and policy decisions have been the causes of graduation to the idea economy, creating a scalable growth path reaching high-income status. Hence, a lesson should be drawn instead of using proceeds out of labour for importing infrastructure, expanding education, setting up export processing zone, giving incentives for import substitution, and hoping that such a path will lead to high-income status. It's high time for aspiring developing countries to make conscious decisions to graduate to the idea economy to meet cherished dreams of being an advanced economy.
M. Rokonuzzaman, Ph.D is academic and researcher on technology, society and policy.
