Focus on trading ideas

In the world of abstraction of Prof. Paul Romer, economic outputs are driven by mixing objects with ideas. On the other hand, in the world of globalisation, trade dominates economic growth policies. Should we focus on trading objects or ideas? Historically, developing countries have focused on trading objects like raw materials and labour, followed by capital. But advanced countries looked for ideas.

To facilitate the creation of the market of ideas, more than 500 years ago, European governments started introducing a legal framework in the form of patents. Patents were routinely granted in Venice since 1450. The English patent system recognising intellectual property in order to stimulate invention became the foundation for crafting patent law in countries with a common law heritage -- like the United States, Canada, New Zealand, and Australia. Similar patent laws were introduced in European colonies, including the Indian sub-continent, for preventing infringement of patents primarily granted to Europeans. The economic model followed during the colonial periods was that colonies would supply raw materials and labour, and they would be mixed by patented ideas of the Europeans. As a result, Europe attained far higher growth out of ideas than raw materials and labour supplying colonies. Since 1950, the trend of globalisation has simply scaled up this model, though in the absence of colonisation.

Is it time for developing countries to focus on trading ideas to create a sustainable growth path of their economies?

Why is an idea so powerful in creating wealth and making individuals, firms, and the country as a whole far richer than others? Raw material supply is limited by the natural endowment, and the supply of labour depends on the availability of the workforce as well as demography? As a result, per capita income growth out of raw material, as well as labour, is often limited and does not appear to be scalable as well as replicable.

 Now let's look into the power of an idea. Let's imagine that a farmer in Bangladesh succeeds in coming up with excludable ideas for which his dairy farm's milk production costs less than 10 per cent of his competitors'. By capitalising on this non-imitable as well as non-rival capability, he can succeed to continue production and increase profit. If everything else is constant, his ideas will keep making money from every liter of milk produced. With the capability of offering higher quality milk at a lower cost, he will keep increasing his production and income from trading ideas. If an idea is so powerful, why cannot every individual, firm, and country focus on succeeding in creating and treading ideas?

We often perceive that only the genius succeeds in generating ideas. It seems that every human being has the inherent capability of creativity, leading to idea generation. To get the job done better at less cost, more or less everyone, now and then, shows up with ideas, whether that's a new recipe for preparing egg omelet or retrofitting electric motor with rickshaws. India's innovation foundation has recently come up with a database of more than 300,000 grassroots level ideas of getting jobs done better. And many of them are being already used.

Despite such innate capability of human beings, why cannot every individual, firm, or country equally benefit from ideas? Irrespective of the greatness of the idea, the economic benefit from idea largely depends on the scale and scope advantage. As ideas are non-rival, the value of idea does not diminish with the scale-up of its use. On the other hand, the challenge of benefiting from ideas is to succeed in scaling up the sale of products produced with ideas.

Despite having high potential, often, a single idea does not offer profitable revenue generation by scaling up the sale. For example, Carl Benz's idea of developing automobile by fitting an internal combustion engine with a wagon, or Tesla's idea of changing polluting gasoline engines with electric battery and motors itself did not start producing profitable revenue. Ironically, both these two ideas, like many other great ideas, started generating loss-making revenue, consequently piling up the loss with the scale. In order to turn a great idea into profit, often a flow of ideas is needed. For example, both Tesla and Panasonic have been generating ideas in improving the quality and reducing the cost of the electric vehicle, making it a better substitute to gasoline cars.

Similarly, Carl Benz's automobile idea was complemented by a flow of ideas to succeed in developing large-scale, profitable businesses out of the automobile. It's worth noting that Germany has grown as a rich country by developing millions of cars out of Carl Benz's idea of the automobile. On the other hand, some creative people in Bangladesh and India also attached motorcycle engines, electric motors, or low-cost water pump engines to locally produced wagons, but none of them grew as a large-scale, profitable business.           

 There is also another challenge to profit from ideas. Once an idea starts showing the possibility of producing profitable revenue, despite having the patents and other barriers, competition starts showing up in the form of replication, imitation, innovation, and also substitution. To counter such competition, innovators need to have the capacity to keep generating ideas and releasing a subsequent better version, preferably at lesser cost. On the other hand, an innovative idea also needs to benefit from externalities like complementary goods and services, infrastructure, and network effects. Irrespective of the greatness of ideas and strength of the underlying technology core, innovators need to risk investment in the midst of uncertainties caused by diverse factors such as technology progression, customer preferences, the response of competition, infrastructure readiness, and policy as well as the regulatory situation. 

During the colonial period, it was well understood that colonies were not in a position to develop the capacity of generating and trading ideas. After independence, the USA undertook a serious effort in developing the capacity of trading ideas in the form of goods and services. After World War II, Japan created the success story over 50 years in creating idea based economic capacity, which is being followed by South Korea and Taiwan. In recent years, China has been showing aggressive steps in developing the capacity of generating and trading ideas in the global market. After independence in 1947, India pursued the policy of replicating imported industrial products. But due to the lack of focus on creating a globally competitive idea economy, India's strategy of import substitution did not succeed in making India a strong economy. On the other hand, some other developing countries by following India's footstep of protection for import substitution could not also create a scalable growth path for them. The success of Malaysia, Thailand, and other countries in the export-oriented industrial economy has been trading labour and raw material as opposed to ideas. As a result, these countries are getting caught in income growth traps.

In order to create a sustainable as well as scalable growth path, the challenge for developing countries is to develop the capacity of generating and trading ideas in the global market. To leverage this opportunity, the focus should be on pursuing a holistic redesigning of industrial and economic strategies, education and research capacity, incentive framework, and establishing linkages among actors, as opposed to pursuing ad hoc, isolated measures.

M Rokonuzzaman PhD is an academic and researcher on technology, innovation and policy. [email protected]

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