Entry routes into the high-tech value chain
Mr. Rokonuzzaman |
07 November 2022 21:13:49
The unfolding feud between the United States and China over technological advantage, massive subsidy programs to attract foreign investment, and the development of high-tech parks in less developed countries indicate how high technology is gaining in importance. In addition, the global awareness of the unfolding of the fourth industrial revolution and the urgency of preparing for it also highlights the importance of high technology. High tech refers to a wide range of technologies that are rapidly advancing 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 vehicles and smart machines. Consequently, there has been an increasing importance of high technology in economic development and national prosperity.
Moreover, high technology has affected the competitiveness of labor and natural resources in even less developed countries. Therefore, there is an increasing urgency for less developed countries to enter the high-tech value chain. But what are the options and their comparative perimeters for creating economic value?
OPERATION AND REPAIR OF IMPORTED HIGH TECHNOLOGY PRODUCTS: Due to growing comparative advantage, less developed countries are finding high technology products and processes increasingly attractive. Therefore, they imported semiconductor-rich smartphones and many other electronic products. They are also forced to import high-end automation and robotics to produce goods, which were once perceived as labor-intensive. Therefore, they have entered the last link in the high-tech value chain – operation, maintenance and repair. Yes, it has created jobs, low end jobs. But its involvement in the creation of economic value is limited. Furthermore, with the increasing role of high technology in production facilities such as factories and power plants, the role of labor and local knowledge in creating economic value has diminished. Therefore, limiting entry to the last link in the high-tech value chain does not offer many growth opportunities for less developed countries.
ASSEMBLY FOR DOMESTIC CONSUMPTION AND EXPORT: Due to the increasing consumption of products such as smartphones, LCD TVs and many others with high-tech components, less developed countries are looking for a strategy century of import substitution. They have developed specialized infrastructure, offering tax differentials and other incentives to encourage local assembly of high-tech products. Yes, such a strategy has yielded rapid results with regard to the made in label attached to high-tech products. For example, according to the media report, in 2021, 75% of the 30.5 million mobile phones sold in Bangladesh were assembled locally. In addition to local companies, multinationals like Samsung, Vivo and Xiaomi have assembly plants in Bangladesh. But what are the means of local promotion? As usual, the assembly work of imported components is the main source of local added value.
Unfortunately, in most high-tech products like smartphones, the added value of labor at the assembly level has only reached 2% of the total product cost. Therefore, Bangladesh offered up to 42% tax gap to create profitable leeway for local assembly. Of course, such entry does not leave much room for less developed countries to generate value in high technology. In addition, less developed countries have also targeted local assembly of imported components to increase their exports. But since the tax gap and the 2% added value are insufficient, they have come up with a cash incentive. For example, Bangladesh offers a 10% cash incentive to export locally assembled mobile handsets bearing the “made in Bangladesh” label. As a result, success in exporting locally assembled high-tech products through cash incentives risks depleting foreign exchange reserves.
FOREIGN DIRECT INVESTMENT FOR MANUFACTURING:
To increase the local value added of manufacturing, some countries seek to attract foreign direct investment (FDI) from specialized high-tech companies. But tax exemptions, cheap labor, free land, growing number of graduates, subsidized public services, protected access to the local market and even specially developed infrastructure are not attractive enough. Therefore, there has been a race to offer substantial financial incentives. For example, India has budgeted up to $30 billion to attract foreign companies into essential high-tech manufacturing like semiconductors and displays. As a result, smaller and less developed countries have been at an increasingly disadvantageous position to enter the component manufacturing segment of the high-tech value chain. Also, due to massive subsidies, there is a risk that the net economic benefit of high-tech FDI will be negative.
ACQUISITION OF FOREIGN COMPANIES: Since the barrier to entry into high-tech manufacturing is very high, the possibility of acquiring foreign companies could be an entry route. For example, China has been aggressive in acquiring foreign high-tech companies. According to FP news, in Sweden, between 2014 and 2019, Chinese buyers acquired 51 Swedish companies and bought minority stakes in 14 others. First of all, it requires huge amounts of foreign currency. Not all aspiring and less developed countries can afford it. More importantly, it requires in-depth knowledge and management skills to manage acquired facilities to expand the high-tech footprint. Moreover, advanced countries are becoming more and more allergic to such a decision.
ESTABLISHING A NATIONAL FACILITY FOR MANUFACTURING: Often there has been a temptation to set up a national facility to manufacture components. The first concern concerns the added value at the manufacturing level of the components. Due to high-level automation, the role of labor is very small. The 2nd is the growing need for capital investment. For example, a high-end silicon processing plant costs around $15 billion. Such large capital expenditures require high economies of scale benefits. In addition, the obsolescence rate is very high. Therefore, recovering the investment in a few years is a big challenge. Domestic demand in most countries is insufficient to justify the cost-effective local manufacture of most high-value, high-tech components. For this reason, Apple prefers to source all physical components from outside vendors. Even Apple encourages suppliers of important components such as sensors, lenses and displays to sell the parts to competitors to take advantage of economies of scale.
DETECT DISCONTINUITY AND INCUBATE DOMESTIC ENTERPRISES: The great successes in the field of high technology are the result of detecting the tendency to develop new branches and transform them into a new industry. For example, the success of Taiwan’s semiconductors leveraged the embryonic start of the third-party fab service delivery model. Similarly, the Japanese high-tech sector grew by detecting and exploiting the invention of the transistor. They got off to a humble start and continued to create the flywheel effect. For example, the Japanese semiconductor industry started by paying Bell Labs a license fee of $25,000. Similarly, Taiwan’s semiconductor industry started with the payment of $10 million to RCA for the transfer of know-how in semiconductor technology and a factory. Their success is due to the development of embryonic possibilities through a flow of ideas generated by systematic R&D.
ENGAGE IN CREATIVE DESTRUCTION AND DISRUPTIVE INNOVATION DRIVEN BY REINVENTION: High-tech successes also emerge from the reinvention of existing mature products and processes with the emerging high-tech core. For example, Japan reinvented many electronic products through the transistor, sowing the basis of high technology.
Yes, high technology has spread to all nations, regardless of their economic status. They spread as stand-alone and integrated components. The effect of high technology took the form of creative waves of destruction, transforming industries and economies. But the value creation of labor in high technology has reached a negligible level. Additionally, capital investments, economies of scale, subsidies and obsolescence rates increase exponentially. Therefore, despite the increasing size, the barrier to high tech entry has increased. The only option left for aspiring less-developed countries in the high-tech value chain is to spot the discontinuity, start small, and create a flywheel effect through a flow of ideas.
Rokonuzzaman, Ph.D is an academic and researcher on technology, innovation, and policy.