High-tech products comprising densely populated tiny semiconductor devices have become a new battle as well as an opportunity ground. From trade friction between the USA and China to the emergence of Taiwan as an advanced economy to Vietnam's exponential export growth, the semiconductor has been the underlying force. Semiconductor devices have been the growing technology core of all major industrial products, from smartphones to automobiles. In the exponential export growth of Vietnam from $2.3 billion in 1990 to $279.7 billion in 2019, finished high-tech products out of assembling of imported semiconductor components contributed $90.4 billion in 2019. Similarly, Malaysia exported $92 billion worth of electrical and electronics products in 2020. On the other hand, in 2020, the export revenue of semiconductors manufactured in South Korea amounted to around $99.2 billion. With $103 billion in semiconductor exports in 2020, Taiwan has been a shining silicon island. Of course, these numbers and expanding future demand are good enough to draw attention. No country can overlook the high-tech trade to address the aspiration of expanding export, driving economic growth, and increasing local value addition.
Semiconductor intensive high-tech industry started the journey in 1947, with the invention of transistor by USA's Bell Labs. Its value chain comprises of seven significant segments: (i) refined silicon and rear-earth materials, (ii) design of chips, (iii) intellectual properties, (iv) processing equipment and fine chemicals, (v) testing, bonding, and packaging, (vi) innovation of finished products out of silicon chips, and (vii) assembling of components as finished products. The nature of value addition in each segment varies from knowledge, ideas, labour to natural resources (rear-earth materials). Not all successful countries from Asia are equally active in these segments. As a result, there has been significant variation in per person value addition and economic prosperity. Here is a brief overview.
Japan: Soon after the invention of the transistor, a few Japanese companies, including Sony, embarked on assimilating and adopting it for innovation. However, despite the potential shown over the decades, transistor emerged in primitive form, and many American electronics firms, including RCA, did not show much interest. Surprisingly, Japanese companies became aggressive in exploiting its latent potential. As opposed to just importing components from the USA or producing copies of the licensed technology, Japanese companies got into the race of refining transistor. Among others, Sony's adventure is remarkable. While American firms were not finding much value in infant technology, Sony embarked on reinventing radio and television out of transistor. However, these reinventions appeared as inferior to radios and televisions made by American and European firms out of matured vacuumed technology core. Hence, Sony accelerated the refinement of transistor, leading to outperforming incumbent products, causing destruction to American firms, fueling Japan's economic growth, and winning Nobel prize by one of its R&D team members in 1974. From the very beginning, Japanese firms targeted this technology to create economic value from the advancement of science and use it to produce ideas for making better quality transistor at less cost, leading to creating global innovation success stories out of producing and exporting ideas. The utilisation of transistor in reinventing major industrial products led to empowering Japan as the major supplier of next-generation industrial products, global leader in semiconductor components, provider of high-end process equipment, and supplier of refined silicon, rear-earth material as well as fine chemicals.
South Korea: In the 1960s, South Korea targeted the semiconductor industry. It began the journey with the investment made by U.S. firm Komy for sourcing low-cost labour from Korea for testing and bonding silicon chips. Among other initiatives, Samsung's entry in electronics in 1969 is notable-for offering assembling services to Japanese firms like Sanyo. However, very soon, Samsung became very aggressive in both processing silicon chips and redesigning electronic products. It penetrated semiconductor processing by acquiring a stake of Hankook semiconductor in 1974. It also began the product-level innovation by redesigning the microwave oven. Such steps started the journey of South Korea from offering labour to American and Japanese firms for semiconductor component testing, bonding, and packaging, and assembling of finished products to creating economic value out of knowledge and ideas through the advancement of semiconductor processing technologies, redesigning chips, re-innovating electronic products. Such a change of value addition led to a jump in R&D spending to 4.55 per cent of GDP in 2017. On the other hand, due to migration from labour and natural resource-based value addition to production and export of ideas, per capita GDP has been experiencing sustained growth-making it more prosperous than Malaysia and some OECD member countries.
Malaysia: In the pursuant of finding low-cost labour for testing and bonding silicon chips, Intel's past chairman Andy Grove found his car caught in mud on his way to visit Intel's first factory in Malaysia's paddy field in 1972. Since then, Malaysia has been witnessing spectacular growth, making it a high-tech success story of Asia. But, unlike South Korea, Malaysia could not graduate from labor-based value addition to knowledge and ideas. Still today, more than 300 multinationals have been sourcing labour from Malaysia, having their plants located in high-tech parks of Penang and other parts of the country. Malaysia's failure to uplift from exporter of labour-based value to producer and exporter of ideas appears to be the root cause for failing to keep pace with the GDP growth of South Korea and getting caught in the middle-income trap.
Taiwan: Unlike South Korea and Malaysia, Taiwan did not start the high-tech journey for selling low-cost labour to American, Japanese, or European firms. Instead, it started the journey with the assimilation of semiconductor processing and setting up facilities for being 3rd party silicon processing or foundry service provider. It started the commercial journey with United Microelectronics Corporation (UMC) and Taiwan Semiconductor Manufacturing Company (TSMC). Form the very beginning, TSMC has been demonstrating the path of advancing science and producing ideas out of it for improving the processing technology. TSMC's model has been replicated by many other Taiwanese firms, including fabless semiconductor firms, lens makers, and bicycle producers. Instead of labour, Taiwan has been creating a high-tech success story out of knowledge and ideas. Hence, more than 40 per cent of the workforce employed by 487 firms operating in Hsinchu Science Park in 2016 were in R&D. While many countries are struggling to increase industrial value add over 30 per cent, major Taiwanese firms, including TSMC, have been reporting more than 25 per cent profit, in large-scale export. Such success has been at the root of the graduation of Taiwan from idea importer to exporter, making it an advanced economy.
Vietnam: Vietnam has been a recent success story. While in the 1990s, Japanese and South Korean firms were looking for a low-cost labour force for assembling finished products out of imported components, Vietnam responded with the requirements. And the journey started with the establishment of Canon's factory in a paddy field. Subsequently, a chain reaction started due to economies of scale and scope effect. Despite the exponential growth in export volume, Vietnam's local value addition out of labour is extremely low, as low as 10 per cent. Besides, productivity growth from $892 per employee output to $3505 in 2019 indicates decreasing labour content and increasing import of high-end capital machinery. Can a country craft a sustained growth path to be a high-income country by replicating Vietnam's success? Are there ways for Vietnam to increase local value addition? Like South Korea, can it graduate from labour provider to idea exporter?
Bangladesh, India, and many other less developed countries are eager to replicate such a success. With the aspiration of being an advanced economy, who should countries like Bangladesh follow? Is there a natural progression from a labour-based value addition approach, like the way Vietnam and Malaysia have been doing, to graduate to be idea exporters like Taiwan, South Korea, or Japan? But unlike the past, offering of low-cost labour for alluring MNCs to set up factories in paddy fields is not good enough. Hence, there has been a race of (i) developing high-end infrastructures, (ii) setting up high-tech parks, (iii) offering incentives, (iv) negotiating free trade agreement, (v) upgrading ports, (vi) pursuing economic diplomacy, (vii) improving ease of doing business index, (viii) investing in education and skill development, (ix) giving one-stop service, (x) offering favorable taxation regime, (xi) forming trading blocks, (xii) increasing R&D investment and many more. But, unfortunately, success is yet to show up. What else is missing deserves attention.
M. Rokonuzzaman, Ph.D is academic and researcher on technology, innovation, and policy.