The digital transformation process poses a tremendous challenge for developing countries. It implies technological upgrading in contexts in which firms primarily use (often ineffectively) technologies that are characteristic of the Third Industrial Revolution (3IR)—basic automation and information and communication technologies—or are caught in a trap of using technologies and production processes that are characteristic of earlier revolutions.1
Developing countries cannot simply leapfrog from a low industrial development base and skip the fundamental stages of adopting Fourth Industrial Revolution (4IR) technologies for productive processes to immediately capitalize on this new revolution. Instead, firms in developing countries must engage in a gradual process of learning how to create and accumulate the technological capabilities necessary to adapt, compete and succeed within the context of this new technological paradigm.2 Our framework identifies the stakes of this new technological paradigm to provide developing countries and their firms a straightforward roadmap that ascertains the size of their technological gap in terms of their readiness to embrace the 4IR.
In a first step, we conceptualize 4IR firm-level technological capabilities to be able to determine the implications for firms that wish to embark on the digitalization journey. Traditional frames of reference must be updated, and firm-level technological capabilities that evolve as a result of implementing advanced digitalization technologies must be better incorporated into these frames. We propose a technological capability building framework3 that differentiates between four increasingly complex levels of 4IR technological capabilities across six clusters of firms’ technological and organizational functions.
Our framework represents an initial stepping stone for reviewing micro-level technological capabilities at the firm-level, which reflect the 4IR readiness to maturity spectrum, and which firms need in order to effectively address 4IR challenges and take advantage of the opportunities embedded in 4IR. The focus on firms is justified by the fact that technological capabilities are created and accumulated by firms, which ultimately permeate their respective sectors and countries.
Foundations of the technological capability building framework
The technological capability building framework, developed during the 3IR, builds on the seminal work of Lall4, Bell and Pavitt5, and others. They operationalized technological capability levels based on revealed capability rather than identifying capabilities in terms of specific quantities and qualities of human resources, skills or knowledge bases. They established levels of increasing novelty and the significance of innovative activity, which inferred that different capability levels underlie different degrees and types of innovative activities6.
Their baseline framework starts at the lowest level of technological complexity, namely the operational/production capability level. At this level, firms’ capabilities are mostly concentrated in technology-using skills and in simple routine production tasks, which do not entail any form of innovative capabilities. The subsequent three levels are basic, intermediate and advanced innovative capabilities.
Building on the 3IR framework, and on a systematic review of recent 4IR-related literature, we conceptualize 4IR firm-level technological capabilities as the collection of human and organizational activities, skills, knowledge, and resources that firms need to generate and manage digitalization through the adoption of more complex 4IR technologies and processes. These are used to generate new technologies and develop new products and processes. As firms upgrade their technological capabilities along the readiness to maturity spectrum, they improve their ability to solve more complex intra- and inter-firm issues related to digital transformation.
Developing a 4IR technological capability building framework
First, we refine our framework by mapping six clusters of technological and organizational functions against four levels of 4IR technological capability. These clusters cover a range of human and organizational activities, skills, knowledge and resources that firms need to generate and manage digitalization and to join the 4IR.
Secondly, our framework consists of four levels of 4IR technological capabilities that are differentiated based on increasingly complex capability levels required by firms to join the 4IR.
The lowest level of 4IR technological complexity (Level 1) is the retrofitting and readiness capability stage, which entails the integration of 3IR legacy operations, technologies and production systems with retrofit kits and the development of pre-required skills, knowledge, experience and resources to launch the digital transformation. This level also involves the acquisition and implementation of new 4IR-ready industrial equipment.
The next level, the system integration capabilities level, is characterized by the implementation of 4IR technologies to integrate systems within the firm, i.e. physical-digital technology integration. At this level, firms can already establish intra- and inter-firm data integration networks, develop 4IR-specific accreditations and quality standards, and integrate more advanced 4IR technologies and systems in production. They can embed products with algorithms and software and engage in early smart product evaluation and prototyping. Event-based and data-driven information systems are used, and supply chain management and performance are optimized.
At the enhanced horizontal and vertical digitalization capabilities level, firms are able to identify critical digitalization needs and implement them horizontally and vertically across the firm. The implementation of digital technologies enables firms to benefit from data processing, advanced simulation and visualization technologies across operations. Firms develop and produce the first smart and 4IR product prototypes. Enhanced horizontal and vertical digitalization of the life cycle management of products and processes occurs at this level. Firms initiate the integration of advanced 4IR technologies across the entire supply chain and use advanced robotics and automation solutions.
The highest level of 4IR technological complexity (Level 4) is the smart – intelligent – capabilities level, which involves self-optimization and autonomization. The firm’s 4IR operations, technologies and production systems are fully integrated end-to-end, i.e. across the firm and supply chain. This level is characterized by end-to-end digitally integrated engineering and end-to-end virtual supply chain visualization. Systems are in place for scaling data management, for the mass-customization of products and for smart product and life cycle management. At this level, the manufacturing firm is, or closely resembles, the smart factory or digital factory.
The distinction between these four capability levels is blurred in practice, as the digital transformation process is extremely iterative in nature. During this transition from 4IR readiness to maturity, firms tend to recursively implement and build on different combinations of 4IR technologies and systems. This recursive digital transformation process also takes place at the vertical and horizontal level within the firm, and subsequently across the entire supply chain.
The building and accumulation of technological capabilities requires both purposive and sustained investments and learning by firms, including through interactions and collaborations with other systemic actors within the 4IR innovation system, as well as the creation of intra-firm knowledge.
We built our 4IR technological capability framework7 based on these premises, and populated each cluster with a set of refined human and organizational activities, skills, knowledge and resources required by firms to generate and manage digitalization and to join the 4IR. These are classified into four levels of increasing technological capability complexity, ranging from the retrofitting and readiness capability stage to the smart – intelligent – capability stage. As the 4IR domain and its technologies evolve, the framework can be updated with future studies that identify additional firm-level 4IR technological capabilities.
Our proposed 4IR capability building framework can be used to identify the firm-level technological capabilities required to move from 4IR readiness to the maturity level. It also documents the fact that the uptake and improvement of 4IR technologies by firms calls for active efforts to better understand the economic benefits of digitalization; to overcome low scientific capacities and competencies in automation and digitalization; and to upgrade human and financial resources and infrastructure, not only at the firm-level, but also among all systemic actors. This framework is a useful tool to inform firms’ decisions on which efforts to focus on to upgrade and to make the best possible use of 4IR technologies and processes, including through novel approaches to capacity-building.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
- UNIDO. (2019) Industrial Development Report 2020. Industrializing in the Digital Age. Vienna: UNIDO.
- Peerally, J.A., Santiago, F., De Fuentes, C. and Moghavvemi, S. (2021) Towards a firm-level technological capability framework to endorse and realize the Fourth Industrial Revolution in developing countries. Inclusive and Sustainable Industrial Development Working Paper Series. Vienna:UNIDO.
- Lall, S. (1992) Technological capabilities and industrialization. World Development, 20(2), pp.165-186.
- Bell, M. and Pavitt, K. (1995) The development of technological capabilities. In: I.U. Haque, ed. Trade, Technology and International Competitiveness. Washington, DC: The World Bank, 157–211.
- Bell, M. and Figueiredo, P.N. (2012) Innovation capability building and learning mechanisms in latecomer firms: recent empirical contributions and implications for research. Canadian Journal of Development Studies, 33(1), 14-40.
- For a comprehensive list of the technological capabilities by cluster and capability levels, please see our paper. Peerally, J.A., Santiago, F., De Fuentes, C. and Moghavvemi, S. (2021) Towards a firm-level technological capability framework to endorse and realize the Fourth Industrial Revolution in developing countries. Inclusive and Sustainable Industrial Development Working Paper Series. Vienna:UNIDO.