May 1, 2006

Keys to technology-driven economic development, Part 1

In connection with a forthcoming panel for the TechLeb conference, I posed some basic questions about tech industry economic development, and promised to also take a crack at them myself.

Well, it turns out those basic questions are pretty hard – especially for me, since I’m going to try to generalize based on what I know of several decades of software and other technology industries pretty much around the globe. Truth be told, I don’t really know much detail about the rise or non-rise of the tech industry in any country but the US, and here in the States it’s being going along quite nicely much longer than the quarter-century that I’ve been an industry analyst. And by the way, in the US almost every region has shown the ability to grow a tech industry.

All disclaimers aside, however, I’d like to suggest a framework for thinking about barriers and aids to technology industry growth. Most of the important factors fit into three categories:

Let me briefly expound on a couple of those points.

Cost/risk. Generally, when we think of developing countries competing with the developed, cost is the big potential comparitive advantage. And indeed, much developing country tech industry success has depended on low costs. Prominent examples include engineering in India, Eastern Europe, China, etc.; call center staff in Ireland, India, etc.; interest costs in Japan in the 1970s/80s; and general low cost of manufacturing in various East Asian countries.

But the flip side to cost is risk. For example, unless there’s a high assurance of political and legal stability over the time required to justify an investment, few people will invest in a developing country’s tech industry. There are too many other places they could go instead. Countries that are less stable will only, at best, get ventures with low barriers to entry/exit (e.g., pay-as-you-go contract work), and/or a high degree of portability (it’s easier to get a bunch of programmers out of a country if war breaks out than it is to move a whole factory).

Convenience. A large fraction of tech industry employment is in sales, marketing, and customer service. And a lot of that – especially the sales and services — occurs geographically near the customers, and in the customers’ language. In many cases, that’s a primary engine of growth. The big Indian outsourcers started serving their domestic markets. Ireland has benefitted greatly from being a cheap, English-speaking country that has easy access to Europe. And SAP’s founders got their initial experience working at IBM.

A great deal of Asian outsourcing success has depended upon convenience too. India didn’t have much of an outsourcing business until it got its telecommunication infrastructure straightened out; nobody relies on people they literally can’t talk to. But once that was in place, universal knowledge of English was a major advantage. And if it weren’t for cheap international air freight, Asian contract electronics manufacturers would surely have been demolished by Mexican ones (and European, etc.) long ago.

I’ll stop here for now. Watch this category for a post on innovation/talent soon, among other subjects.


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