Economics of Technological Leapfrogging

Abstract

One of the key issues of latecomer economic development is whether they should follow the path of forerunners or whether they should create a new or follow a different path of development. An emerging view (Lee and Lim, 2001; Lee, 2013) is that latecomers do not simply follow advanced countries’ path of technological development but occasionally skip certain stages or create their own path which differs from that of forerunners. This observation is consistent with the idea of leapfrogging (Perez and Soete, 1988), according to which some latecomers may be able to leapfrog older vintages of technology, bypass heavy investments in previous technological systems or stages, and make pre-emptive investments in emerging technologies to catch up with advanced countries in new markets. The answer to the question whether the 4IR represents a new window of opportunity for leapfrogging or whether it constitutes a source of further risks for latecomers is that this depends entirely on the country’s response and readiness, i.e. its industrial policy, digital literacy, the skill and education level compared to wage rates, as well as domestic market size and position in the GVC. We identify three groups of countries. The first group of economies have a manufacturing basis and seems to be the group with the most promising potential for proper leapfrogging from Industry 2.0 (mass production) to Industry 4.0 (smart factories) and bypass the intermediate stage of Industry 3.0 (automation). The second group of economies have an FDI-based manufacturing sector, where leapfrogging hinges on MNCs which have several options at their disposal, such as relocating to other economies in search of cheaper wages or reshoring back to home countries. The key factor for success in this context are the local institutions – if they foster the training and upskilling of the local workforce, they can persuade MNCs to remain in the country. The last group includes latecomer economies that have the potential of making promising 4IR-related strides in the service sector or in servicitized manufacturing industries. It is quite plausible that success in services may have a boosting effect on local manufacturing. Policy recommendations for leapfrogging can also be made for different types of firms with different levels of initial capabilities. We divide the firms in an economy into ‘incumbents’ and ‘start-ups’. The former comprises three types of firms, namely leaders, followers and laggards, depending on their level of capabilities. Path-creating type leapfrogging is more likely to take place in start-ups because they have invested the least in existing modes of technologies or business models. In other words, diverse technologies associated with the 4IR can be a source for product (or business model) innovations; process innovation, on the other hand, is more relevant for incumbents. Leader or follower type firms in emerging economies tend to have some experience with technology and absorptive capacity and are thus likely to be in a position to skip one or several stages, while remaining aware of the risks associated with leapfrogging. Lastly, laggard firms should not attempt pre-mature leapfrogging but should first build some absorptive capacity in their niche area and upgrade by moving up the higher end of the GVC.