Thursday, March 12, 2009

"Innovated in Asia" – Globalization’s Next Tidal Wave

[NOTE: An edited & abbreviated version of this post appears in Singapore's Straits Times today]

A key feature in the last two decades of globalization of the world economy has been the massive shift of production activities to Asia. This “Made-in-Asia” wave is most pronounced in the case of electronics/IT manufacturing activities: my research shows that non-Japan Asia accounted for only 8% of world production in 1985, but increased its share to one-quarter by 2000 and as much as 45% by 2007.

I predict that the next twenty years will see a similarly massive shift of innovation activities to Asia. Just as the “Made-in-Asia” wave of the last twenty years has profoundly re-shaped the global economy and indirectly contributed to the massive trade imbalance that is one root cause for the current financial crisis, this “Innovated in Asia” wave will have an even more profound impact on the world.

In many ways, innovation has been among the least globalized economic activities in the world economy, with most forms of innovation activities – whether measured in terms of R&D expenditure, scientific publications, intellectual property (IP) creation, and sales of new products embodying such IPs – still being dominated by North America, Western Europe and Japan. But the picture is changing fast. For example, my own research shows that, while only 0.6% of the cumulative number of patents granted by the US Patent Office between 1976 and 1990 involved a first inventor based in non-Japan Asia, this had increased to 4.1% for patents granted over 1991-2000, and 9% for the 2001-2007 period. While indigenous Asian firms have been a strong driver of this shift, so too have global high tech firms from the western nations: my research shows that, among the top 500 global firms in terms of US patent ownership, over 6% of their patents granted since 2000 were invented in non-Japan Asia, vs. just 0.1% for the period 1976-90.

The surge in innovation activities across Asia is not evenly distributed. The three Asian NIEs (Korea, Taiwan and Singapore) led the first wave of growth in the late 1980s; today, these three NIEs have all spent a higher share of their GDP on R&D than UK and France. Since the late 1990s, China (and to a smaller extent India) have been leading the second wave of growth. Although China’s R&D expenditure to GDP ratio is still less than 1.5%, after adjusting for Purchasing Power Parity (PPP), China is now spending almost as much as Japan in R&D.

The drivers for the recent surge in innovative activities in Asia are many. One is the shift towards Made-in-Asia itself: before one can learn to innovate, one needs to learn how to master the use of existing technology first. The massive growth of increasingly technology-intensive production activities in Asia – especially manufacturing in China and software programming in India – has thus built the foundation upon which many innovative activities can be carried out. While it is true that much of these new innovation activities are still incremental in nature, they do contribute significantly to enhancing Asia’s competitiveness.

Another contributing factor has been the dramatic spread of internet access around the globe and its substantial impacts on lowering the geographic barriers to information flow. This not only shortens the diffusion time-lag of new knowledge from the advanced nations to Asia, but also hastens cross-border research collaboration. Increasingly, Asia is becoming integrated not just in terms of physical supply chains linking components production to final assembly, but also in terms of product design and its manufacturing. For example, two of the top three creators of US patents in China are Taiwanese firms, which also have substantial manufacturing operations in China.

A third factor is the surge in educated talents across Asia. Today, Asia graduates more technically trained manpower than Western Europe and USA combined. Although much of the tertiary-education in Asia remains of lower quality, peaks of excellence are emerging as many Asian governments increasingly pursue policies to make their leading universities globally competitive.

I predict that the current global economic recession will hasten the shift of innovation activities to Asia. Firstly, the severe financial meltdown will accelerate the return flow of the Asian diasporas in the advanced economies back to Asia. Already, many Asian high tech entrepreneurs are leaving Silicon Valley to look for venture funding and market opportunities back in Asia.

Secondly, the market demand for innovation will shift more rapidly to Asia. As highlighted by my other NUS Business School colleagues in earlier articles, while poor governance of the banking systems in the US and Europe has been the proximate cause for the dramatic collapse of the global financial system, it is the massive build-up of huge and rising imbalance in global financial flows that makes the current global system unsustainable.

In essence, while easy consumer credit has fueled the demand for a wide range of consumer goods-related innovations in the rich economies, over the next decade, I believe that we will see a substantial re-balancing of the global economy, with domestic market growth in Asia becoming a much bigger part of world demand.

This will in turn not only drive more innovations in Asia, but more importantly, it will also transform the nature of innovation activities on a global scale. “Innovated in Asia” will not be just about shifting innovation activities to Asia; it will be about creating new organizational models and financing methods of innovation to create new products and services that are more appropriate for the Asian socio-economic context. For example, innovation to meet the needs of low-income population in emerging economies – what C.K. Prahalad had called the “bottom of the pyramid” – will feature more prominently in the future. So will the “Open Innovation” model, especially the use of open source technology for disruptive cost innovation.

Bangladesh pioneering micro-financing. The Aravind Eye Hospital in India overtaking the leading hospitals in UK in eye surgery operations. Korea’s NCSoft and China’s Shanda dominating the global online game industry. Taiwan’s Giant becoming the world’s leading bicycle innovator. And Slumdog Millionaires winning the Oscars. These “Innovated in Asia” wavelets will gather momentum and coalesce into tidal waves over the next two decades.

8 comments:

Anonymous said...

Professor,

I thoroughly enjoyed reading your post. You might have come across this already:

http://www.economist.com/specialreports/displaystory.cfm?story_id=13063298

I have been going through the NUS web pages looking for an export on telecommunications regulatory matters in the Asia-Pacific to interview for my blog:

www.coconutwirelessfiji.com

Again, very nice post... keep them coming!

jaya said...
This comment has been removed by a blog administrator.
Anonymous said...

Thanks, I just look for an article about globalization in Asia conference article. And fortunately I found this one.

Marmalade said...

Prof: “The three Asian NIEs (Korea, Taiwan and Singapore) led the first wave of growth in the late 1980s”

Moving forward, I wonder what we can do for Singapore not to fall too far behind Korea and Taiwan in innovation and entrepreneurship?

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