How not to be taken over by Asia
March 26th, 2007 by tijana
Two weeks ago nEUrosis reported about the winners of two major innovation competitions in Europe. Central and Eastern European (CEE) countries, despite their dynamic economies and educated population, were underrepresented and left empty-handed. According to our modern, 21st century ideas, lack of innovation means sluggish growth and trouble, which is often envisioned as being taken over by Asia. It is partly true, except for a little ‘but’ that lurks in the shadiest corners of popular perception.
CEE countries need not worry too much: innovation itself does not bring significant productivity growth. It is the indirect spillover effect to other related industries that creates wealth. The Information and Communication Technologies (ICT) industry has accounted for a minute share of the productivity growth in the past decade but the implementation of IT solutions in sectors like retail, energy, aviation or telecom has added massive value, making processes much more efficient and revealing opportunities that were unavailable before the advent of the computer. ICT innovation has made Silicon Valley a playground for millionaires but the real effect of it has been felt globally, everywhere where it has made sense to implement those innovations. In our globalised world knowledge travels faster than ever and innovation is adopted in various industries across all continents. It is the spillover effect that makes the difference, and a country will be successful if it is open to new technology and can efficiently adopt innovation.
On the other hand, the problem with innovation is that it tends to become obsolete and if we fail to remain on the cutting edge, we will be, say, taken over by Asia. An adopter of innovation may get easily stuck in an low-growth industry after the effect of innovation fades. Businesses optimise on profits: if the effects of innovation are exhausted and it becomes more efficient to move production to Asia, they will not hesitate to do so. With no way out, there will be dramatic lay-offs, political haggling over the dead body of the industry, cries for government support and everything we have already experienced in EU over textile and agriculture, for example. To make this point clear, Slovakia adopted the technology and is now touted as the hotbed of the European automotive industry. However, sooner or later producing cars in Slovakia will become less competitive as salaries go up and the Chinese learn how to engineer better models. By th e time Slovakia starts to lose its competitive edge, it will have nurtured a generation or two of automobile specialists, it will have invested enormous money in production facilities, and re-specialisation will become extremely difficult and painful.
So, why is innovation so important? Too much specialisation is doomed to bring about structural problems once the effect of new technology is exhausted. Building up a culture of innovation, specialising in invention of cutting-edge technology remains the only strategy that will guarantee Europe’s global leadership in the long-run. CEE countries should rise up to the occasion and try to win something at next year’s innovation competition.
