Nobel Laureate Paul Romer has popularised the idea that economic outputs are a function of ideas and objects. Objects comprise of raw material, labour, energy, land etc. Ideas form the recipe of mixing ingredients. By improving ideas or adding more objects, we could expand economic value creation. As developing countries are running short of objects in driving their economic growth further, it's time for them to focus on ideas. Moreover, improved recipe through the addition of ideas also reduces environmental degradation and facilitates growth. Due to such a reality, development planners often make a call to developing countries to upgrade from factor-driven economy to innovation economy to keep progressing with economic growth. Failure of doing so runs the risk of being caught into the growth trap. The challenge is how to generate ideas and convert them into economic outputs-generating increasing revenue and profit.
Industrial economies are success stories of generating and translating ideas into economic value. Knowledge is gathered to generate ideas of deriving increasing economic outputs from given inputs. Often those ideas emerge as product and/or process features to get the job done better as less cost, preferable, causing less harm to the environment. How to generate those ideas is often a mind-boggling question. Ideas of light bulb or smartphones often give us the impression that only a genius can come up with great ideas. Idea generation is often conceived as a sudden spark in the creative mind of a genius. Does it mean that it's a random outcome? Is it just the act of genius? If only genius like Steve Jobs or Edison can show this magical outcome, should we wait for the emergence of those of mythical characters to create an idea economy?
Investment in basic research leads to the discovery of scientific knowledge. Ideas are often formed from this newly discovered science. But only a small fraction of scientific knowledge is converted into ideas for getting jobs done better. Those ideas are the underpinnings of global economic growth. The journey of startups in turning such ideas into profitable business has created many remarkable success stories. But the upfront investment in scientific research in producing high-value ideas is very high. Moreover, such journeys are long, and also the outcomes are uncertain. Often the return on investment from this journey is also very low. For example, upon spending $5.7 billion on research and development (R&D), Canadian universities generated less than $75 million from licensing their innovations (687 patents) in 2017. That's an average return on investment (RoI) of 1.3 per cent. Although this RoI is far higher in the USA, it will likely be negligible or virtually zero in most of the developing countries, including Bangladesh. There is a need for strong industrial capacity to transfer those ideas into economic output. Due to the weakness of local industry, despite being a G7 economy, patents produced by Canada's rich education and research capacity, and high-tech SME's are increasingly being sold to foreign firms. Share of IP invented and owned by Canadians transferred to foreign entities more than doubled from 18 per cent to 45 per cent during the 1998-2017 period.
Success stories of major industrial economies like Japan are basically due to the commercialisation of ideas. The success of Japan's industrial economy does not appear to be the act of genius like Edison or high investment in basic research either. Often it is argued that Japan succeeded in borrowing or copying ideas from the USA and Europe. But how do Japanese firms succeed in selling those ideas in those markets? Why don't intellectual property rights laws create a barrier to Japanese innovation? Moreover, why are American innovation icons like Apple are buying idea-intensive components to roll out their magical ideas? Although we have been taught to believe "don't reinvent the wheel", success of idea economy is largely in the journey of reinventing the wheel for offering better wheel at less cost. Fortunately, this journey of reinvention is not about showing magic. Moreover, magical outcomes are also basically the culmination of repeated reinventing acts. Successful companies have created more or less a deterministic process in generating ideas and turning them into economic output, improving their market share, revenue, and also profit to revenue ratio. To them, it's not about waiting for sudden sparks. Rather, it's about following a methodical process of analysis, knowledge accumulation, idea generation, cost-benefit analysis, screening ideas, and integration of potential ideas into product and process features.
It is not only in Japan or Korea that the underpinning of the success of industrial economy is the capability of redesigning existing products. Major industrial products like cars, washing machines, microwave oven, software applications, TVs, or door locks are going through a series of redesigns. These redesigned products are better, as well as cheaper. Producers succeed in selling redesigned products at a lower price to more customers for making greater profit. Redesign skill of making products better as well as less costly to produce is the key to create idea economy, consequently creating endless growth path. So far, skill development focuses on making. Such skills primarily focus on producing the same product following the same process, using a given set of machinery. As a result, we do not succeed in turning ideas into economic output. Fortunately, redesigning skills could be nurtured among those who are not necessarily genius by birth.
Some of the major redesign options are: (i) replace mechanical parts with electromechanical or electronics components, (ii) reduce the number of parts through pursuing integration, (iii) replace the role of hardware with software, (iv) delegate more roles from human to machine for both using the products and processes of making them, and (v) develop a part which could be used in multiple products, for leveraging scale. Analysis of existing products and figuring out the scope of exercising these redesign options lead to generation of ideas in making those products better, as well as cheaper. The progression of technologies, even in other industries, often creates such redesign opportunities. For example, microprocessors, sensors, and software technologies were not developed by the automobile industry. But automobile companies are seriously leveraging such technologies in redesigning their products. For example, like many other products, automobiles have been going through redesigns. One of the major redesign strategies is to replace the roles of human and physical components with software. According to a report by an international consultancy, software value addition in automobiles will keep growing at a rate of 7.0 per cent per year until 2030, far higher than 3.0 per cent overall growth of the sector. Similarly, electric vehicle is a redesign example by exercising the option of delegating role from mechanical engines to electrical battery and motors. This trend will likely see the value of software in this sector nearly double from $238bn to $469bn.
By adding just raw materials and labour in producing products through imported design and machinery, developing countries can no longer keep growing. Neither minimum wage fixing for income growth, nor subsidy for the expansion of export offers the sustainable path of economic growth. Similarly, digitisation through import of technologies, and professional services through growing public expenditure do not also create an idea economy. It's time to focus on redesigning products, which are being produced now, and also to redesign processes to produce them so that profitability of firms keeps increasing with the success of offering higher quality products at lower cost. In the absence of attaining the capability of redesigning skills in creating the market of ideas, in making products better as well as cheaper, developing countries like Bangladesh will likely face a daunting challenge to keep growing.
M Rokonuzzaman PhD is an academic and researcher on technology, innovation ands policy. [email protected]