Tag Archives: BRIC countries

A Socio-Economic Theory of Emerging Economies and Technology Development

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By:  Michael Kaiser

Old Sailing Ship

Understanding the socio-economic forces that drive the economies of international customers will help your company’s growth overseas

The Historical Precedent
In a previous article (New Globalization Trends = New Startup Opportunities) I described
globalization and its continuous fine-tuning of technologies, business and society. But globalization is not a recent geo-political or geo-economic phenomenon. Rather, we can safely say that the concept of trade between nations as we know it started with the Phoenicians, who were among the greatest traders of their time and owed much of their prosperity to their talent for commerce. Centuries later, international trade continued with Marco Polo’s trips to Asia, especially China. They preceded the onset, and set the tone, for present day global business standards by centuries. These two historical examples serve as an advisory to emerging economies that global trade is serious business (pun fully intended).

Two socio-economic theories, and the winner is…?
The late Neil Postman, a professor and media critic at New York University, postulated that “technological change is not additive; it is ecological. A new technology does not merely add something; it changes everything”.

A respected humanist and media critic, one wonders if Postman reluctantly conceded that the old conflict between Dependency (Dependency Theory) and Modernization (Modernization Theory) ended in favor of the latter. Whereas Dependency can be described as a social model that condemned economic colonialism, Modernization is a closer model of evolving economies and technological development. Unlike Dependency, which reached its apogee in the 1960’s and 1970’s, Modernization remains a viable and applicable model to this day.

Basically, Modernization defines the positive impact of technology on societies where poverty is the standard rather than the exception. It is worth mentioning that Modernization preceded the advent of Dependency, but paradoxically, it was its failure of viable social and economic solutions that led to the rebirth of Modernization, with its eye to the future. Dependency had a legitimate socio-political argument, but one that attempted to find solutions to narrow the chasm between developed and under-developed or emerging economies at a time when PC’s, cell phones, internet, and the sundry information technologies assisting international communications in business and social affairs where not even available in developed countries. The first IBM PC was marketed in 1981, and by then Dependency had seen its better days. The next decades, to the present day, witnessed advances in technology and financial clusters that can be best described as moving from days and hours to mere nanoseconds.

The rebirth of Modernization is due to its emphasis on transplanting information and other technologies, higher education and communications to those countries approaching or designated as ‘emerging economies’. It can be argued that one unexpected contribution of Dependency lies in the very targets it was addressing, (the periphery or semi-periphery) because those countries  disavowed the theory itself and were forced by overwhelming new technologies and communication tools to modernize, instead of blaming the wealthy, developed countries for their perceived ‘westernized exploitation’ supremacy.

The example of two BRIC countries
Globalization has been the force that changed the policies of growing economies. Nowhere was the case for Modernization more evident than in two BRIC countries: India and Brazil. The most populated democracy in the world, with a population exceeding 1 billion, India is a country divided by politics, areas of abject poverty or great wealth, religion, social origin and language differences (although English remains the language of business and international relations). Starting in 1991 and continuing to the present day, the two major rival political parties of India committed to improve the economy and development of the country, and thus, India set an example for modernization success. The Indian Institutes of Technology, spread over several locations, not only compare with the most advanced ones in the Western economies, but earned a reputation for their rigorous R&D. The wave of information technology and life sciences specialists from India started in the early 1990’s and created a new wave of entrepreneurship and global companies, e.g., the TATA Group, InfoSys, Wipro, Cognizant, Mahindra Group, and international pharmaceutical companies like Ranbaky, Sun Pharma, Dr. Reddy, Lupin, Torrrent, etc. In addition, India hosts some of the largest American and European corporations.

Brazil is a different case, but equally interesting because it actually used to be at the center of Dependence theory led by local sociologists, as well as André Gunder Frank, Dependency’s most prominent academic author and analyst.

Their very different cultures not withstanding, India and Brazil made the decision to make radical changes to their economies in the early and middle 1990’s. By 1994, when Fernando Henrique Cardoso became the country’s President, the social theory that fought against the imposing strength of developed centers against the countries of the periphery and semi-periphery no longer played a role in the economic future of Brazil. In Henrique Cardoso’s two terms as President, the Brazilian economy took a significant leap forward and when Luiz Inácio Lula da Silva, a union leader and head of the opposition Worker’s Party became President, he kept his country on an evolving economy track. Like India, Brazil is also known for dramatic, visible differences between the poor, the middle class and the well-to-do, despite being ranked as the most important economy in Latin America and one of the largest one in the world (Economy of Brazil) as well as a top automotive and international aerospace manufacturer, Embraer.

The University of São Paulo and the Oswaldo Cruz Foundation are advanced academic institutions of research. The Butantan Institute is the largest producer in Latin America (and one of the largest in the world) of immunobiologicals and biopharmaceuticals. In 2001 it produced approximately 110 million doses of vaccines and 300 thousand vials of hyper immune sera. The institute produces 90% of the vaccines used in Brazil. The anti-hypertensive ACE inhibitor, lisinopril, is a synthetic structural analog of a peptide derived from the venom of the ‘jararaca’, a Brazilian pit viper (Bothrops jararaca). The Vale Corporation and Petrobras (Petroleo Brasileiro, S.A) are global giants, Vale in mining and Petrobras in oil and gas. This year a new wave of social discontent is emerging, one that could compromise Brazil’s hard-won economic growth. Time will tell.

Brazil’s close to 200 million inhabitants cannot compare with India’s 1.2 billion, but it has a significant advantage over its Asian partner: Brazil was and still is a country of immigrants. From the early Dutch and Portuguese, to Italians, French, German, Syrian, Lebanese and other nationalities, Brazil has benefited from that international influx, comparable to the U.S., Canada and Australia. India, on the other hand, stands out for its unique expertise in the field of information technology, pharmaceuticals and its thousands of entrepreneurs spread overseas.

Epilogue
Although the notion that America is the easiest country for technology startups and innovation financing is being challenged, it still deserves its place as the source of opportunities, innovation and entrepreneurial spirit, qualities that seem to hark back to the need for achievement, described by David McClelland in his 1961 magnum opus “The Achieving Society”.  Worth recalling Neil Postman’s observation that: “… A new technology does not merely add something; it changes everything”. Does that mean that we are experiencing Aldous Huxley’s somber, satirical “Brave New World” and “Brave New World Revisited”? Or will countries with different cultures decide to adopt policies of rapid development for the benefit of their people?

Globalization was the target, the objective of both Dependency and Modernization. The evolution of communications and travel facilitated the improvement in the health care of both poor and emerging societies; this in turn increased the number of able workers in countries that could not absorb all of them, forcing large emigrations to the developed countries. By contrast, the developed countries witnessed the meteoric demand of their citizens for more goods and higher living standards as the prerogatives of better education and high-technology. Based on the importance of comparative advantages and their connection with free trade agreements between countries, it is safe to predict that Modernization will continue to fall under the magnifying glass of social and economic analysis and evaluation.

Recommended topical sources

Modernization Theory

Dependency Theory

Globalization

Indian Institutes of Technology

Brazil

Picture credit: Wikimedia Commons, Nanban Carrack

New Globalization Trends = New Startup Opportunities

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globe over water

Issues of outsourcing and insourcing become especially critical during the growth phase of any startup.

By:  Michael Kaiser

For at least two decades, if not more, globalization has become the ‘karma’ for social, economic and political discussions.  And yet, the “jury is still out”.

What Is Globalization?
The impact of technology on globalization as been extensively reviewed and will continue to be so for the simple reason that technology is developing faster than globalization. I have chosen two slightly different interpretations of globalization:

1. Globalization refers to processes that increase world-wide exchanges of national and cultural resources. Advances in transportation and telecommunications infrastructure, including the rise of the Internet, are major factors in globalization, generating further interdependence of economic and cultural activities.

The term globalization has been in increasing use since the mid-1980s and especially since the mid-1990s. In 2000, the International Monetary Fund (IMF) identified four basic aspects of globalization: trade and transactions, capital and investment movements, migration and movement of people and the dissemination of knowledge. Further, environmental challenges such as climate change, cross-boundary water and air pollution, and over-fishing of the ocean are linked with globalization. Globalizing processes affect and are affected by business and work organization, economics, socio-cultural resources, and the natural environment.  Globalization | Wikipedia

2. The tendency of investment funds and businesses to move beyond domestic and national markets to other markets around the globe, thereby increasing the interconnectedness of different markets. Globalization has had the effect of markedly increasing not only international trade, but also cultural exchange. The advantages and disadvantages of globalization have been heavily scrutinized and debated in recent years. Proponents of globalization say that it helps developing nations “catch up” to industrialized nations much faster through increased employment and technological advances. Critics of globalization say that it weakens national sovereignty and allows rich nations to ship domestic jobs overseas where labor is much cheaper.  Globalization | Investopedia

Outsourcing and Insourcing
One of the key roles that globalization played for the United States, and one that generates to this day intense pro- and con- arguments is the issue of outsourcing.  Its negative impact on the manufacturing industry of the country has been thoroughly discussed and needs no repeating.

Now some good news have emerged for the opponents of outsourcing, and simply put, is the opposite: insourcing. In the December 2012 issue of The Atlantic magazine James Fallows and Charles Fishman explore this trend in separate articles that point with examples to a return of manufacturing in the United   States.

But can it be argued that outsourcing was always a negative one-way process, and thus represented all that was bad about globalization? The fact is that insourcing was already visible in the automotive industry of the country, with Toyota, Hyundai, BMW, Mercedes-Benz and other foreign car manufacturers establishing advanced manufacturing facilities in several states. The same was the case with some foreign pharmaceutical companies like Roche and Novartis who built large R&D and manufacturing facilities.

In both industries, automotive and pharmaceuticals, insourcing represented a two-way street in favor of the local and national economies, to the benefit of contractors, parts manufacturers and clinical research organizations.

There is no doubt that the wave of outsourcing in the last two decades led to irreversible losses to the number of manufacturing employment all over the US, including household needs and clothing; the reason was the cost of local manufacturing vs. foreign ones. Countries like China, India, Mexico, Brazil, Thailand, Viet Nam and other emerging economies eagerly answered to the demand for cheaper (but brand name) products. The US was not the only client, the European Union was not far behind and so were a limited number of Latin American nations. It was clear that globalization led to a major socio-economic shift, and more significantly a political one between the US and China, the latter emerging as the single most important competitor and provider to nascent and developed economies.

China and…
It cannot be ignored that the demand described above had a beneficial effect for the elephantine supplier that China became across the globe (and to a lesser degree two other BRIC countries, India and Brazil).  The local demand for the goods that it was producing for its clients changed Chinese society in a way that could not be predicted in the early 1990’s. A plethora of entrepreneurs and foreign manufacturers from General Motors and Apple to Italian and French clothing emerged
in response to its emerging middle class demand for Western goods. Chinese tourists started slowly showing up, in a manner reminiscent of the Japanese tourists in the late ‘50s and early ‘60s. But there was a significant difference: information technology in the form of internet, mobile phones, tablets, etc. which the Chinese eagerly adopted, a form of cybernetic tourism. But let me dispel the notion that all is roses, and for that no one better than James Fallows, not only in last December’s article, but in his many previous ones during his years in China as a reporter for The Atlantic magazine. His description of the brutal working conditions in many manufacturing facilities, even like the Foxconn one, is sobering to say the least.

As Charles Fishman describes in his article, the return of General Electric’s important home appliances business to their original Ohio base became necessary because the cost of outsourcing to China had reached a higher level than manufacturing in the United   States. (The Insourcing Boom | The Atlantic)

James Fallows explains why insourcing is returning back to the United States:

“Through most of post–World War II history, the forces of globalization have made it harder and harder to keep manufacturing jobs in the United States. But the latest wave of technological innovation, communications systems, and production tools may now make it easier—especially to bring new products to market faster than the competition by designing, refining, and making them in the United States. At just the same time, social and economic changes in China are making the outsourcing business ever costlier and trickier for all but the most experienced firms.

For Americans, the most important factor is the emergence of new tools that address an old problem. The old problem is the cost, delay, and inefficiency of converting an idea into a product. Say you have an idea for—anything. (For me, the list would start with silent leaf blowers, which I’d give to all my neighbors as gifts.) Before you can earn the first dollar from the first customer, you have to decide whether the product can be built, at what cost, and how fast, so you can beat anyone else with the same idea.”  Mr. China Comes to America | The Atlantic

This is not a case of a business analogy of “The China Syndrome”, the eponymous 1979 movie with a cast led by Jack Lemmon, Jane Fonda and Michael Douglas. Rather one should see insourcing as a corrective issue at a time of global financial dislocation, and the notion that China is folding its arms should be immediately discounted from this analysis. As a matter of fact, and paradoxically so, the American insourcing trend frees China to further develop and provide its global customers with its own line of automotive, appliances and other products, very much like Japan and South Korea have done in the past and up to the present time.  For China, the legendary Middle Kingdom, this will be a very different challenge to its present role as the global outsourcing destination.

The Other One
Another case of outsourcing and insourcing is India. Together with its neighbor China, they are the two most populated countries in the world, with an increasing middle class that looks to the US and Europe as their standards of social and economic improvement. The advantage that India had over China was its use of English in all its scientific and business endeavors, but China is rapidly meeting the challenge in that area as well. America may have outsourced clothing and other cotton and synthetic materials, but it insourced a gold price from India: software expertise in the thousands and thousands. India’s domestic industry did not fold its arms either and was able to provide its own manufacturing of heavy equipment and automotives. The Tata conglomerate acquired that British treasure, the Rolls Royce car and generic pharmaceuticals where manufactured by dozens of Indian companies, who in turn moved some of their manufacturing facilities to, yes, you guessed, the US.

Epilogue
As far as globalization in general is concerned, its future development will be measured by how well advanced and emerging economies and societies interact with each other and how they manage contrasting socio-political theories.

Suggested Reading

Note: A personal “Thank You” to Andrew Johnson, Ph.D., for referring me to The Atlantic articles listed above.

Picture Credit:  MPR529 via photopin cc