Porter Diamond Theory of National Advantage (Porter's Diamond model) spells out five forces explaining why some countries, industries, and also firms are competitive and others are not. These forces are - i. bargaining powers of suppliers, ii. bargaining powers of buyers, iii. threat of substitution, iv. threat of new entrants and v. industry rivalry. Developing countries so far have used low-cost labour advantage and tax differential, and also cash subsidies, to counter these forces. But due to eroding labour advantage, primarily driven by technology progression, such measures are getting weaker day by day. Moreover, investment in infrastructure is also reaching saturation. For example, despite lowering corporate tax, expanding cash subsidies, and improving infrastructure, manufacturing firms in Bangladesh lately shrank. A study finds that the number of medium-sized industries in Bangladesh declined by 51 per cent over seven years, reaching 3,014 units in 2019 from 6,103 in 2012. The number of large firms has also declined during the same period.
Attaining the capability of offering better quality products at lower cost appears to be a core competence to address competition forces as outlined by Prof. Porter. One of the strategic options in addressing these conflicting variables, higher quality at a lower cost, has been to keep adding intellectual assets to the product and also the processes in producing them. We have been using the same type of raw materials, but by adding a growing amount of knowledge to them, we are creating increasing wealth. This strategy has been at the core of advanced countries' capability to keep succeeding with the industrial economy. It's the challenge for developing as well as countries graduating from LDC (least developed country) status to attain this capability. To achieve this capability, it does not necessarily mean just to keep increasing intellectual assets (IA) by making publications and filing patents. The purpose is not just producing those assets. Adding IA to products and processes for improving quality and reducing costs is the ultimate purpose.
To capitalise on the IA strategy, developing countries should address a number of challenges. The first one is about creating the management capacity for leveraging IA. Often, they are used to import labour-saving IA intensive-capital machinery to counter competitiveness pressure. But such measure neither opens the opportunity of creating quality jobs for producing IA, nor does it offer a unique competitive advantage in the globally connected value chain. On the other hand, the dearth of skilled human resource to undertake industry-focused R&D (research & development) becomes a serious bottleneck. To address this HR (human resources) issue, it appears that local academic institutions are not of much help. The limited research capacity of universities is primarily engaged in undertaking academic research, often having no relation to local industrial challenges, for the purpose of making publications in internationally reputed conferences and journals. It's also disappointing that public R&D institutions, such as Bangladesh Council of Scientific and Industrial Research (BCSIR), are primarily involved in undertaking research for the purpose of inventing technologies and innovating new products. As a result, both academic and Government's research laboratories are neither producing IA for addressing the industry's challenges, nor are they developing a competent HR pool for undertaking industry-focused R&D assignments.
Here are a few strategies and policy options for strengthening both the demand and supply of IA for addressing the competitiveness issue. The first one is to demonstrate that local capacity could be developed to produce and integrate IA to products and processes. As a result, existing productive activities would succeed in improving the quality and reducing the cost simultaneously. And this demonstration should be done in partnership with the industry and academic research capacities. Upon doing so, the Government should give an unambiguous signal to the industry that conventional incentives such as tax differential and cash incentives will gradually be phased out. Instead, incentives should be expanded for encouraging industry and research facilities to undertake collaborative R&D to address the competitiveness issue through adaptation, production, and integration of intellectual assets. Once the model of R&D investment in producing IA and turning it into profitable outputs is fine-tuned, incentives should be given to firms to develop their corporate R&D capacity for addressing competitiveness; it does not matter whatever they produce.
It's worth mentioning that Korea's success in the industrial economy has been due to very carefully Government's strategy and policy intervention in creating local market of IA. Although the process started in the 1960s with mostly Government's finance, the success of turning R&D investment into profitable return has been encouraging the industry to undertake growing share. For example, private firms are now making almost 90 per cent of massive R&D investment, reaching 4.3 per cent of gross domestic product (GDP). Such success has not only been creating a sustainable industrial base, but most importantly, it has been creating an increasing number of quality jobs for science, engineering, and management graduates. Similarly, Japan's initial success of replication has been extended to innovation, and also in the invention, by creating the institutional capability of producing and integrating IA.
Upon graduation from LDC, newly emerged developing countries will be deprived of many preferential trading agreements. On the other hand, the emergence of higher-level automation during the fourth industrial revolution is rapidly reducing low-cost labour advantage. Amid such challenging situation, intellectual asset-based capacity development for addressing the competitiveness in the globally connected value chain appears to be the only option. Unfortunately, significant stakeholders like the Government, industry, higher educational institutions, and research establishments of these countries do not have the track record of creating the IA market to keep driving the economic growth. To address this void, investment in education or research alone will not be sufficient.
Creating the local market of IA for addressing competitiveness issue in the global value chain is a vital success factor for developing countries for driving growth. Moreover, such a success is going to create high-paying quality jobs for their growing number of university graduates. On the other hand, acquiring such a unique capacity will be accelerating the expansion of industrial economy offsetting labour-intensive job loss. Conventional approaches will not succeed in creating this vital capacity. It's time for developing countries to focus on creating local market of IA for driving industrial economy and creating quality jobs. Such a capacity is the underpinning for the continued growth, avoiding income traps, and offering quality jobs.
M. Rokonuzzaman, Ph.D is Academic, and Researcher: Technology, Innovation and Policy.