Articles / Rubric: Global

Neo-Industrialization and the Age of Innovation Shine in Emerging Markets
September 2013 | Global

The recent economic slowdown has shifted markets globally. While developed markets are still passing through tortoise-like sluggish recovery, emerging markets are moving at a faster pace. The last few decades have witnessed rapid growth of the world economy driven by a faster rise in international trade because of technological developments and concerted efforts to reduce trade barriers. This is a term known as neo-industrialization. An IMF survey published in June 2013 shows that when a country shifts from being an agrarian economy to a service- or industry-based economy, it undergoes a structural change, as has happened to some Asian countries.  But what is neo-industrialization, and how would it be beneficial to the countries themselves?

The new industrialization is a knowledge economy which is based on human capital and information networks. Unlike conventional economies, which were based on raw materials and automotive industries as key sectors for development, the dominant sector in the new industrialization economy is the convergence of computing, telecommunications, and content industries, as knowledge spreads through people, products, and firms.  In the past, people used to work with their hands, but nowadays the majority of the workforce uses their minds rather than their hands to produce. This has generated huge production and higher productivity to meet the increasing demand worldwide.

Today’s industries and factories are different from those of the past. The new industrialization’s plants are no longer the craft shops of agrarian economies, but rather digital economies based on innovation, which leads to new tools, new wealth, and social development, and where trade, communications, business transactions, science, and research are the pillars of the new economies. The economy has become more based on molecules and clusters of individuals and firms, while the old, traditional economies were disaggregated.  In the past, the main economic unit was the firm or the entity, while now knowledge has become the main resource of economic activity.

Neo-industrialization is globally known among economists and experts as a digital and knowledge-based economy, something that world leaders have to face, as this era is unprecedented and necessitates certain developments in any country in a short time, particularly those with rare natural resources.  The recession and financial crisis which the world is still undergoing has caused tectonic and seismic transformations that are reshaping the world’s business roadmap and global positioning system (GPS) from the West to the East; in other words, a new economic world order has been formed.

The West is undergoing slow growth, while the BRICS countries (Brazil, Russia, India, China and South Africa now have stronger economies, with upturn trends that hasten their adoption of key technologies such as social media, business intelligence, cloud computing, and mobility. This has helped these countries to shift from being on the margins to being leaders in the world economy, who have their say globally, benefitting from the very great wealth that this new sector of business has created in these countries.

The emerging markets in general and the BRICS economies in particular have taken new cutthroat positions and harvested new market shares in a number of industries, setting the stage for tougher-than-ever rivalry. Since the new economies, such as the BRICS and other emerging markets, can easily shift from one to another due to the flexibility of these newborn economies, they will be introducing new business models and innovative networks that benefit from technology advances. However, this is very hard for the developed economies in the West, because they do not have the flexibility to shift in a short time: It would take years. This explains why these countries are now giving patents to other countries in the East to manufacture their products.

At the Astana Economic Forum in Astana, Kazakhstan, in May 2013, Asset Isekeshev, Deputy Prime Minister of the Republic of Kazakhstan, Minister of Industry and New Technologies, said that any country needs a fundamental renewal of its prime drivers to transfer it to a new stage of development that will ensure diversification of its economic resources and help to adopt new industrialization techniques, including digital, high-tech and technetronic, among others.   He said that neo-industrialization is a key instrument of new strong economies, since it integrates business, science, and the government – a trend which is known in economics and sociology as the “triple helix” model.

Economic growth and technology are inextricably connected, and the recent financial crisis has forced many countries to enhance their investments in technology. Since the emerging markets have started to increase their demand for technology to promote growth, and since the advanced markets in the West are seeking out new ways to decrease costs and fuel innovation, it has become a must for the emerging markets, particularly the BRICS states, to adopt the “triple helix” model. This means involving government, academia, economists, and businessmen in a formula that helps them benefit from the fall of the “West in technology,” through  better education, innovative training, and efficient employment of capital and resources, leading to further economic development.

Digital Technology in the Emerging Markets

The brisk embrace of new digital technology in emerging markets is vividly expressed by the tendency toward global mobility of telecommunications. The International Telecommunication Union (ITU) estimates that there are about 5.3 billion mobile phone subscribers worldwide. The most stunning statistic is that about 3.8 billion of these (73%) are in the developing world, with China and India driving most of the growth. Both China and India in 2010 added more than 300 million mobile phone users, which is more than the total number of mobile phone subscribers in the USA. The meteoric growth of digital technology will continue. By the end of 2012, the number of mobile users in China alone was 900 million, and this number will jump to more than 1.06 by 2015; in India the number of mobile subscribers will leap from 600 million by the end of 2012 to more than 900 million by 2015.

Neo-industrialization is a new concept, which does not depend on traditional investment methodologies. It relies on scoping out and meeting the requirements of the new generations. According to the ITU, the number of people who have mobile access to the Internet will exceed desktop web access by 2015.  At present there are about 500 million mobile Internet users, and this number will more than double by 2015, reaching more than 1 billion, with many users coming on the scene from the emerging markets, which currently have a bigger Internet user base than do the industrial economies. The ITU confirms that there are 642 million web users in the BRICS, compared with only 409 million in the four top advanced industrial states (U.S., Japan, Germany, and France).

A report by eMarketer estimates that more than 1.8 billion (about 28%) of the world’s population now uses the Internet, and that more than 2.8 billion people (more than 38%) will be doing so by 2015, with the biggest percentage coming from Asia, with more than 50% of world Internet users by 2015.   In addition, a French technology research firm, IDC, expects that the total e-commerce at the international level will be US$16 trillion by the end of 2013, and the total size of the digital economy is likely to reach US$20.4 trillion, approximately 13.8% of all world sales.  This reflects the enormity of the digital economy and that the world is now witnessing the so-called neo-industrialization age.

According to IDC, the world will witness sweeping changes in the next five years, mainly in IT, telecommunications, entertainment, media, publishing, retail, banking, and life sciences.

“Industries will continue to see sweeping changes over the next five years, particularly in IT (72%); telecommunications (66%); entertainment, media, and publishing (65%); retail (48%); banking (47%); and life sciences (38%). For many companies, technology is taking on a new role – as a driver of revenue and enabler of new business models.”
With serious investments in China and India recently, some world tech leaders say that the main reason for their shift from West to East is the very great potentials of the East. However, there is a need to invest in building digital literacy and skills, and creating smart, transparent regulatory standards in order for businesses to take up a systematic and disciplined trend towards innovation.

Industrial Innovative Development

Economists believe that if an economy depends on its raw materials as a main source for its GDP, this will not be competitive and will have no future. Therefore, there has to be an efficient use of modern technologies to bring about a shift into a new model that helps change the way of life and improve living standards. Countries are advised to invest in industrial innovation and development of clusters of structures to preserve the excess of the industry growth by investing in knowledge, R&D, and so on. Countries should form territorial scientific innovation clusters, such as science cities. Some countries spend more than 2% of their GDP on R&D to improve knowledge, which will lead to the development of the economy as well. The USA allocates 2.5% of its GDP for R&D, Germany 2.3%, Japan 2.8%, France 2%, Italy 1%, and the UK 2%. 

It is expected that China and India, whose disposable income growth is soaring at a rate of 8%, will allocate bigger shares of their GDPs to R&D. By 2020, India will allocate about 7.5% of its GDP to R&D, China 1.9%, Germany 3.1%, Russia 2.9%, UK 2.4%, France 2.2%, Italy 1.8%, Brazil 2.8%, Japan 4.3%, and the USA 3.3%. This shows that there will be a declining share of world GDP among the G7 states, and there is a shift in economic balance towards the BRICS economies.

Innovation Clusters to Develop

These are new fields that countries would benefit from by investing in technology innovation clusters, to enhance competitiveness worldwide; these would have a remarkable effect on the economy. The first field is nanotechnology, which includes nano-electronics, nano-materials, and nano-techniques. The second is cell biotechnology, which has to do with genetic engineering and biomedicine. The third area is information technology, which includes telecommunications, software, and math modeling, among other things.

Address the Future

It is believed that innovation helps increase productivity by 2.5-3% annually, and helps increase per-capita income by 65%. Among the direct impacts on the economy will be labor productivity, an issue which has to be addressed, as digitization leads to a drop in the number of laborers.  The digital economy is based on workers with certain skills who can use the new technology to produce more, and products of high quality. The digital industry generates skills and services essential to the transformation of businesses and technology; it accelerates the emergence of new values that promote the competitiveness of other sectors outside the sphere of the digital industry itself. Any industry has direct and indirect impacts on growth, employment, and regional reorganization.  Neo-industrialization will help every country to get out of its doldrums.

Studies show that by 2020, many sectors, including telecommunications, entertainment, media, banking, retail, health care, and technology, will have to be reshaped by information technology, upending business models by means of a digital economy that absorbs both technology and globalization requirements. Speedy economic development, along with mounting populations and income levels, have placed the emerging markets at the core of business development strategies. Stimulated by swift-growth economies and new technologies, the ever-changing world marketplace has hastened the tempo of most corporate activities, from product development to customer reaction.

As economic power swings to the East, cash-rich firms and entities in the developing countries have started to invest heavily in technology, outpacing the developed countries, creating an aggressive competitive challenge to the Western economies. This has driven major Western companies to move away from present decision-making process to an organic and market-like network formula, in order to function on the global digital market where they have many rivals.  These firms will face profound implications in the coming few years, taking into consideration some imperatives including an avant-garde mobile communication strategy for emerging markets and means of improving data analytics to foresee speedy global market transformations.

Since 1990s, the world has started to witness tectonic shifts in the global economy, resulting in leaps in technology which have helped transform the world in 20 years more than in the previous 600+ years. Since the 2008 global financial crisis, new phenomena have come on the scene, including greater business insecurity and risks, transformation of industries, greater consumer cost-consciousness, and globalization of markets. While the Western economies are still under the pressure of the economic crisis and the financial crisis of the Euro Zone, the emerging markets have been witnessing industrial booms, mounting wealth, and rising populations, which ramp up the demand on technology. Unlike the advanced economies, firms in the emerging markets seek to flourish within the market, with cost savings and greater innovation locally, by building their soft infrastructure, such as mobile communications, as technology is very significant to economic development and the betterment of living standards. 

Some countries, like China and India, have already started to introduce new technologies to mobilize their communities. Such technologies will help innovate and increase productivity, which will be reflected in the livelihoods of the populace. Such infrastructure includes mobility solutions, cloud computing, and analytics to fuel demand, giving a birth certificate to new business models of education,  finance, and science in alignment with the “triple helix” model. This creates a pressing need to form innovation clusters to develop a new economic growth strategy, in order to further develop other sectors of the economy that are advantageous to any country, through high technologies and services.

Neo-industrialization helps to handle many issues such as unemployment, the environment and ecosystems, energy, and resources. It also helps to speed up market reform and to encourage invention and creation. Neo-industrialization helps to intensify resource and energy management and helps the business enterprise to be the main location of technical innovation and development.

Emerging Markets, Global Economic Growth Engine

Nowadays, the emerging markets function as the world’s economic growth engine, and they have become the darlings of the international media.  In the past, the emerging markets were lucrative as sources rich in raw materials and natural resources. At present they provide very good investment opportunities, as promising markets with their rapid population growth, sustained economic development, and the surge of the middle class, making Western companies vie for these markets.

The Organization for Economic Cooperation and Development (OECD) estimates that 70% of world economic growth in the coming few years will stem from emerging markets. China and India will account for 40% of it. Moreover, the International Monetary Fund (IMF) forecasts that the total GDP of emerging markets will overtake that of the developed economies by 2014.

According to the IMF, emerging markets will attract almost 50% of global inflows of foreign direct investment (FDI) in the future. The Fund reports that the best spots are Africa, the Middle East, the BRICS countries, and some other Asian markets, and expects that by 2020, the BRICS will account for nearly 50% of all global GDP growth.

By 2050, the world’s population is expected to reach 9.1 billion. It is estimated that the combined purchasing power of the global middle classes will more than double by 2030 to US$56 trillion. Over 80% of this demand will come from Asia, which alone needs approximately US$7.5 trillion in investments by 2020, with innovation and high technology becoming the battleground. Billions of new middle-class consumers in the emerging markets will need new sectors of the economy to address their needs, using innovation and high technology to improve their living conditions.  Among the biggest trends in the coming few years will be a shift towards virtualization technologies and digitization, whereby many businesses will shift towards cloud computing and high technologies, as these have proved much more efficient and productive. This will help create more jobs and enhance growth. 

Thus, tomorrow’s workforce will have to focus on how to develop their skills, to be able to work productively and continuously. Technology can create mammoth empowerment, while the core of globalization and neo-industrialization is the reduction of time and space in global business deals through platforms of new technologies and innovations.
 Text: Shehab al-Makahleh

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