How developing countries can take advantage of the Fourth Industrial Revolution

The Fourth Industrial Revolution (4IR) is disrupting established manufacturing practices and creating new challenges but also opportunities for development. Technologies associated with the 4IR seem to be concentrated in a handful of leading countries for the time being. Notwithstanding that fact, adoption of 4IR technologies offers an opportunity for latecomer economies to accelerate their development by skipping some of the intermediate stages of industrialization. They can thus ‘leapfrog’ directly into using more advanced technologies.1

An often-cited example of this phenomenon is the relatively rapid adoption of cellular phone technology in countries that never even achieved large-scale landline coverage.2 Extrapolating this phenomenon to the industrial sector, the 4IR may represent opportunities for developing countries that have not made significant investments in earlier manufacturing technologies. Rather than gradually retooling old factories, new manufacturing installations can, theoretically, be built from the ground up based on smart factory principles.

Realizing this potential depends on a number of factors, including access to technology, workers’ skills and market conditions. We investigate these factors to determine how countries can successfully leverage the technological disruptions associated with the 4IR to break into manufacturing.3

The benefits of leapfrogging

Latecomer firms or economies often face barriers to entering an existing industry or market. First, simply following the leader means they will always be catching up, remaining one or more steps behind the incumbents. Second, they may be excluded by patents on existing technology, pushing latecomers to innovate ahead of forerunners, thereby ‘leaping over’ them.

Recent case studies4 address the advantages of leapfrogging, demonstrating that successful latecomer firms or economies—those that have successfully caught up with or overtaken leaders—have often skipped one or more stages of technological development. While they may have initially imitated the forerunners, they ultimately diverged from the path, forging an entirely different technological track. For example, Huawei, now a leading global IT company from China, relied on Ericsson’s patents as a source of learning in its early stages of development.5 Eventually, Huawei began to innovate based on its own inventions and newer, non-patent scientific literature, thus leaping ahead of the Swedish multinational.

Successful leapfrogging requires a certain level of capabilities

Several factors determine economies' ability to leapfrog development stages. First, a window of opportunity to exploit must become available for latecomers; this window normally opens during a period of disruption, such as the emergence of a new techno-economic paradigm or regulatory regime. Second, latecomers needs to build up a certain level of production and innovation capabilities, including absorptive capacity. These capabilities can be pursued by taking a number of ‘detours’. 

The first one is associated with loosening of intellectual property rights (IPRs). Stronger IPRs are generally considered to incentivize innovation by securing a return on investment for expensive research and development (R&D). This, however, is largely irrelevant to many latecomers that currently lack the appropriate R&D capabilities. Loosening IPR instead helps latecomers focus on minor imitative innovations, thus providing learning opportunities so they can diffuse technologies and eventually enhance their own innovation capabilities.

Next, latecomers may consider specializing in short-cycle technology sectors. Long-cycle sectors refers to sectors in which previous knowledge remains useful for a long period of time (e.g. pharmaceuticals), and presents a barrier to new entrants. Latecomers should therefore focus on short-cycle technologies (e.g. IT) which are characterized by frequent bouts of innovation that continually disrupt the dominance of any incumbent. The data support this observation, with ‘East Asian miracles’ such as China and the Republic of Korea preferentially investing in short-cycle technology sectors before turning to long-cycle technologies at later stages.6

Finally, latecomer economies may consider reducing their dependence on participation in global value chains (GVCs). While participation in GVCs is necessary and advantageous for learning in the early stages of development, latecomers should aim to increase their domestic value-added and thereby reduce their reliance on GVCs. This will help them build up their domestic value chains and move their industries into high-end segments of value chains and industries. Only once this has been achieved is it advisable to reintegrate into GVCs. Again, data show how China and the Republic of Korea disengaged from GVCs, later re-entering them under completely different economic conditions.

The risks and potential for leapfrogging in the context of the 4IR

There are, of course, risks associated with leapfrogging strategies. Innovation, by definition, is a foray into the unknown, with investors betting on the outcome of an untested technology or business model without a long and successful track record. Governments might mitigate this financial risk through targeted tax credits, subsidies, state-led investment or the formation of public-private R&D partnerships. There may also be competing technologies or standards that emerge within the same space, and the ultimate dominance of one technology over another may be as much due to marketing as to product quality. Governments also have a role to play here in setting national standards, thereby influencing the formation of markets.

The 4IR therefore offers a complex set of challenges for developing countries trying to compete on the world stage, yet disruption may actually allow them to forge ahead. Taking advantage of this opportunity while managing the associated risks will depend on the country’s characteristics, together with its industrial policies, levels of digital literacy, skill and education levels compared to wage rates, and domestic market size and their position in GVCs.7

Those countries that already have a national manufacturing base show the most promise in terms of leapfrogging into smart factories with the support of appropriate industrial policies to supply funding or technologies, or through public-private partnerships. Those whose manufacturing sectors are largely based on foreign direct investment (FDI) under the auspices of multinational companies (MNCs) are less likely to make this leap, but can still upgrade their level of automation, provided that they can leverage local skills and training institutions. National or regional education policies are particularly salient in this regard. Countries with a weak manufacturing base, however, have few realistic prospects of industrial leapfrogging, and would benefit more from focusing on 4IR-related service start-ups with innovative business models, or businesses that tweak existing models for local specificities. In such cases, access to initial financing and venture capital is critical for small, medium or micro-sized enterprises to enter the market.

Similarly, firms have different leapfrogging prospects based on their characteristics. Start-ups are arguably the most likely to create entirely new products or adopt and improve products, because they have invested least in existing or former technologies or business models. More established companies, however, are more likely to leapfrog in terms of process innovation, skipping some generations of technology such as traditional automation, and moving directly from mass production to smart factories, for example. Firms in developing countries that already have production experience and know-how are therefore more likely to leapfrog via process innovation, rather than by moving into completely new products or sectors. In either case, though, having the absorptive capacity and technological capabilities in place are crucial preconditions for firms to leapfrog and capitalize on the window of opportunity presented by the 4IR. Others are advised to focus on building their capabilities to move into higher end segments of existing GVCs.

This article is based on the UNIDO IDR 2020 Background Paper 'Economics of Technological Leapfrogging'.