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Capital goods: Focus on technology absorption capacity

M Rokonuzzaman | Published: February 05, 2017 20:30:37 | Updated: October 25, 2017 05:08:44


Developing nations, like Bangladesh, have been increasing investment in technology usages-primarily in the capital goods. In the globally connective economies, competition force is driving the usages of more technology intensive manufacturing facilities than ever before. As a result, import of capital machinery in developing nations has been expanding at a rapid space. For example, in Bangladesh, import of capital machinery rose by over 14 per cent to $3.53 billion in 2016. Similarly, in a report of India's National Capital Goods Policy 2016, it has been mentioned that the share of imports in the Indian capital goods market has increased from 34 per cent in 2009-10 to 40 per cent in 2014-2015. Despite such growth of capital machinery import, utilisation factor of already installed manufacturing capacity in many developing nations is far from satisfactory. 
There is no denying that manufacturing is the key area for developing nations like Bangladesh to create jobs, particularly higher paying jobs. In support of labour-intensive manufacturing-led development programme, like many other developing nations, Bangladesh has provided diverse incentives, including negligible or zero import duty, to support capital goods import. But due to the higher role of technology in capital goods, the need for labour in producing manufacturing outputs has been falling. As a result, some developing nations are under the threat of premature deindustrialisation. On the other hand, growing number of science and technology graduates of these nations are failing to get productive employment to add value to economic growth through technology.  Should such reality be a cause of concern for policy makers of these nations? 
There has been a growing trend of adding technology value to capital goods to delegate roles from human operators to machines to produce better quality products at lower cost. Due to such changing reality of the nature of technology in capital goods and labour requirement in operating those machinery, developing nations are facing extreme difficulty in meeting manufacturing job creation target. For example, even India has been failing to meet the target of manufacturing in economic growth. For example, as opposed to India's manufacturing policy that envisaged manufacturing to contribute 25 per cent to GDP and create 100 million jobs, till 2016, manufacturing activity contributed just 17 per cent to India's GDP. But despite the growth of import of capital machinery, the technology value addition capacity of developing nations in capital goods has not been making satisfactory progress. In India, capital goods sector production has grown at a rate of 1.1 per cent per year over last three years as opposed to the Planning Commission's targeted growth rate of 16.8 per cent. 
It has been observed that countries which are commonly cited as success stories in industrial economy are far more capable in capital goods value addition than others. For example, in a recently released report of McKinsey&Company, it has bee mentioned that India's value addition to capital goods stood at 0.6 per cent of GDP as opposed to 2.8 per cent in South Korea, 3.4 per cent in Germany and 4.1 per cent in China-as of 2015. Although data for Bangladesh in capital goods value addition are hardly available, common sense tells that such number would highly likely be insignificant. Should developing nations, under the circumstances, re-strategise their manufacturing agenda?  It appears that policies in support of capital machinery import-driven industrialisation strategy need serious rethinking. 
Unlike many developing nations, Korea and China gave significant emphasis on absorption of capital goods to reengineer and innovate. Particularly, Korea's success to graduate from an undeveloped status to become a member of OECD (Organisation of Economic Cooperation and Development) within just 40 years is primarily due to the smart technology absorption strategy. Instead of just giving incentive for import of capital machinery and supplying labour to operate them to drive manufacturing job creation, Korea undertook carefully designed measures to increase the absorption of imported technologies, in the form of capital goods. Korea rapidly improved the absorption capacity from operation, to maintenance to reengineering of imported capital machinery. Due to the lack of focus of absorption of imported capital machinery technology, many developing nations having industrial base superior to Korea in 1960s, have not succeeded in the same space. 
It appears that in many developing countries like Bangladesh, two schools of thoughts are prevalent. One school of thoughts is under the impression that increasing the science and technology base in the form of education and research, following the model of the USA and other advanced nations, will lead to the higher role of science and technology in economic growth. Another school of thought is driving the agenda of capital goods import-driven labour centric manufacturing to progress in industrial economy. Within the given context, it appears that both of these two schools of thoughts are failing to create the path of the acquisition of sustainable capacity in increasing the role of industrial economy in GDP growth. On the other hand, in the absence of the due role of manufacturing, these developing nations run the serious risk of facing stagnant economy, once debt driven infrastructure projects and demographic dividend come to an end. 
It's high time Bangladesh and other developing nations brought a change in industrial policy. Incentives given for easing the import of capital machinery should gradually change to accelerate the absorption of imported capital machinery. On the other hand, in addition to increasing the supply of science and engineering (S&E) graduates, we should also focus on engaging them in technology absorption and process innovation capability. For example, the market value of S&E graduates has been eroding in Bangladesh. On the other hand, more or less every productive activity whether producing shrimp, sugar or jute products is losing competitiveness; cost is growing and quality is falling. To keep them afloat, the government has been giving fiscal incentives, including cash subsidy. Although, the growing number of S&E graduates could be employed to deliver process innovation solution to make virtually every production process more competitive, these graduates are largely unemployed. Question could be: why can't market take the role to harness this potential? 
It has been found that market failure is very prevalent in technology absorption and engagement of mental capacity of university graduates to innovate. The government has a strong role to address this market failure. A series of policy reform needs to be carried out to create the market of technology absorption to derive intended benefit from industrial economy. Such policy reform should take into consideration intensifying supply and demand of local technology value addition to capital goods. While it is the government that needs to provide R&D funding, it should be carefully limited to priming the innovation pump. In the absence of carefully done policy reform and smart incentives, there is risk of loosing booth manufacturing-led job creation opportunity, and wasting R&D financing in the name of technology absorption and innovation. 
M Rokonuzzaman, Ph.D, academic, researcher and activist on Technology, Innovation and Policy, is Professor, Department of Electrical and Computer Engineering,North South University, Bangladesh.  zaman.rokon.bd@gmail.com
 

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