Policy ecosystem for strengthening innovation capacities

39
Policy ecosystem for strengthening innovation capacities – seeing the big picture Int’l conference on emerging technologies for achieving sustainable development goals Kuala Lumpur, November 5, 2019 © Reddal Inc. This material is Reddal proprietary.

Transcript of Policy ecosystem for strengthening innovation capacities

Page 1: Policy ecosystem for strengthening innovation capacities

Policy ecosystem for strengthening innovation capacities –seeing the big picture

Int’l conference on emerging technologies

for achieving sustainable development

goals

Kuala Lumpur, November 5, 2019

© Reddal Inc. This material is Reddal proprietary.

Page 2: Policy ecosystem for strengthening innovation capacities

Drivers of economic growth – the role of population, productivity and

export, as well as the global macro environment overall

Development path of South Korea and Vietnam, and the role of

national policy

Real life innovation and the opportunities for emerging Asian

countries

Overview of policy ecosystem – key elements along the company

development journey

Key messages

© Reddal Inc. This material is Reddal proprietary. 2

Page 3: Policy ecosystem for strengthening innovation capacities

Finland, as a sample Western country, is showing signs of

stagnation

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GDP growth rate1 and GDP per capita – Finland (1960 - 2018)

-10

-5

0

5

10

15

35

20

0

5

15

10

30

40

25

45

50

55

19751965 1985 20051970

kUSD, current%

1960 1980 1990 1995 2000 20152010 2018

GDP growth rate

GDP per capita

1Based on constant local currency.

Source: World Bank (www.worldbank.com).

Global

financial

crisis

2007-08

Finnish

banking

crisis

1991-93

South Korea

2018, 31kUSD.

2013 Nokia

mobile phones

sold to

Microsoft

Page 4: Policy ecosystem for strengthening innovation capacities

South Korean growth is today only a shadow of what it used to

be – the economy is facing significant challenges

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GDP growth rate1 and GDP per capita – South Korea (1960 - 2018)

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

0

25

15

5

35

10

20

30

40

45

50

55

1970 1995 2018

kUSD, current %

1960 1965 1975 1980 1985 20001990 2005 2010 2015

GDP growth rate

GDP per capita

Global financial

crisis 2007-08

2008-13 Green

growth (Myung-

bak Lee)

Asian financial

crisis 1997-98

1962 Initiated gov’t lead

industrial policy (5 year plans)

(Chunghee Park)

1980 Gwangju massacre

(Doowhan Chun)

2013-17 Creative

econ. (Geun-hye

Park)

1982-92 5yr. economic and

social dev. plan.

1993-97 5yr. plan

for New Economy

Knowl. based econ. plan

Innovation driven dev.

Plan (2000-03, 2003-08)

Despite policies to

promote advanced

industries, GDP growth

has stagnated.

China 2018,

9.7kUSD.

1Based on constant local currency.

Source: World Bank (www.worldbank.com).

Page 5: Policy ecosystem for strengthening innovation capacities

Growth in China is still good, but clearly slowing down

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GDP growth rate1 and GDP per capita – China (1960 - 2018)

-15

10

5

15

-25

-20

-5

-10

0

0

10

15

2020

5

1960

kUSD, current%

1965 1970 1975 1980 20181985 1990 1995 2000 2010 20152005

GDP growth rate

GDP per capita

Great proletarian

cultural revolution

Start of Chinese

economic

reform

Hong Kong and

Macao handover,

Asian financial crisis

1997-98

Entry of

WTO

Global

financial

crisis

2007-08

Second

largest

economy in

the world

Belt and

road

initiative

Made in

China

2025

Vietnam 2018,

2.6kUSD.

1Based on constant local currency.

Source: World Bank (www.worldbank.com).

Page 6: Policy ecosystem for strengthening innovation capacities

Vietnam is maintaining good growth, although the level of growth

is clearly lower than China and South Korea at similar stage

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GDP growth rate1 and GDP per capita – Vietnam (1985 - 2018)

-10

-5

0

5

10

1520

10

0

2

12

6

4

8

14

16

18

kUSD, current%

1985 1990 1995 2000 2005 2010 2015 2018

GDP per capita

GDP growth rate

1Based on constant local currency.

*Bilateral Trade Agreement.

Source: World Bank (www.worldbank.com).

Đổi Mới reform Increasing export Asian

financial

crisis

1997-98

BTA* signed with

U.S. in 2000,

increasing FDI and

export afterwards

Global financial

crisis 2007-08

Mismanagement

of SOEs and

privatization

reform started

Strengthening

private-sector-

led growth

Page 7: Policy ecosystem for strengthening innovation capacities

13

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

1.5

5.5

3.0

2.5

0.0

1.0

0.5

2.0

3.5

4.0

4.5

5.0

6.0

6.5

7.0

(kUSD, current)(%)

1960 1965 1970 1975 1980 1985 1990

Vietnam’s recent growth has some similarities to Korea in the 70s, but

with markedly lower growth rate in GDP per capita

© Reddal Inc. This material is Reddal proprietary. 7

GDP per capita and GDP per capita growth rate

8

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

4.0

3.0

3.5

2.5

0.5

0.0

1.0

7.0

1.5

2.0

4.5

5.0

5.5

6.0

6.5

1995 20052000

(kUSD, current)(%)

1985 1990 2010 2015

Growth rate - Vietnam GDP per capita - Vietnam

Growth rate - Korea GDP per capita - Korea

5% gap

Source: World Bank (www.worldbank.com).

Vietnam (1985 – 2015)Korea (1960 – 1990)

Page 8: Policy ecosystem for strengthening innovation capacities

Iran is an aberration, due to high impact of global political

environment, but has demonstrated rapid growth at times

© Reddal Inc. This material is Reddal proprietary. 8

GDP growth rate1 and GDP per capita – Iran (1960 - 2017)

10

5

0

15

-25

-10

-20

-15

-5

20

0

5

20

10

15

25

kUSD, current

20001985 20151965 1995

%

19701960 1980 1990 2005 20101975

GDP growth rate

GDP per capita

Iran-Iraq warIran Revolution Rafsanjani government

(vast prioritization – foreign

investments)

Khatami government

(stable economy and

international relations –

foreign investments)

Ahmadinejad

government

(highest oil prices –

US sanctions)

Rouhani government

(nuclear deal – foreign

investments)

• After nuclear deal (2015) foreign investment reached

5BUSD (2017) and GDP growth rates peaked

• However, after US pulling out of deal, applying max.

pressure policy, local currency experienced large

devaluation 2017-18 followed by huge inflation rate (2018)

• Rouhani admin. managed to stabilise currency and control

the inflation (2019)

1Based on constant local currency

Source: World Bank (www.worldbank.com).

Page 9: Policy ecosystem for strengthening innovation capacities

Population growth is a key additive term in GDP growth – it and

GDP per capita growth is shrinking in many countries

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The role of population and per capita GDP in real GDP growth

Percent, 1990 - 2000, 2000 - 2015

Source: Peterson, The role of population in economic growth, SAGE Open Oct-Dec 2017, https://journals.sagepub.com/doi/pdf/10.1177/2158244017736094.

Piketty finds that global

long term values are

0.8% + 0.8% = 1.6%.

Solow studied US GDP

growth, and stated that

about 80% was driven

by innovation, and and

only 20% of factor

inputs.

Page 10: Policy ecosystem for strengthening innovation capacities

Change in exports is a surprisingly accurate predictor of GDP

change at least in the case of Finland

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Change of GDP vs. change in exports (Finland)

0

2

4

6

8

10

12

14

16

18

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

40000

42000

44000

46000

48000

50000

52000

2008 2012 2016

Finland’s export.

Finland’s GDP.

Finland’s GDP

assuming 1.1%

change in export

creates 1% change

in GDP.

Finland’s GDP per

capita assuming

2.5% change in

export/capita

creates 1% change

in GDP/capita.

GDP per person, USD

Finland’s

GDP/capita.

Source: Eero Byckling, Vienti vetämään – näin luomme uusia menestyviä vientituotteita (2018).

Page 11: Policy ecosystem for strengthening innovation capacities

These relationships hold well for our sample countries in general

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GDP growth and GDP per capita growth vs. parameters

-5,0

0,0

5,0

10,0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Vietnam 2009-2018

GDP per capita (%)

... vs. export growth rate (%) (ratio 1 : 2.5)

Pop. growth (%)

GDP growth (%)

-10,0

-5,0

0,0

5,0

10,0

15,0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

China 2009-2018

GDP per capita (%)

... vs. export growth rate (%) (ratio 1 : 2.5)

Pop. growth (%)

GDP growth (%)

-10,0

-5,0

0,0

5,0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Finland 2009-2018

GDP per capita (%)

... vs. export growth rate (%) (ratio 1 : 2.5)

Pop. growth (%)

GDP growth (%)

-2,0

0,0

2,0

4,0

6,0

8,0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

South Korea 2009-2018

GDP per capita (%)

... vs. export growth rate (%) (ratio 1 : 2.5)

Pop. growth (%)

GDP growth (%)

Page 12: Policy ecosystem for strengthening innovation capacities

Drivers of economic growth – the role of population, productivity and

export, as well as the global macro environment overall

Development path of South Korea and Vietnam, and the role of

national policy

Real life innovation and the opportunities for emerging Asian

countries

Overview of policy ecosystem – key elements along the company

development journey

Key messages

© Reddal Inc. This material is Reddal proprietary. 12

Page 13: Policy ecosystem for strengthening innovation capacities

Korea pursued substitution, while Malaysia, Taiwan and Vietnam

pursued complementary strategy – the choice had effects on SMEs

© Reddal Inc. This material is Reddal proprietary. 13

Comparison on national growth models

Note: MNC = multinational company, SME = small and medium sized enterprise, GLC = government linked company, SWF = sovereign wealth fund,

SOE = 100% state owned enterprise, Guangxiqiye = local business groups; China applies a modified substitution strategy, leveraging JVs to expediate tech

transfer process.

Source: Shin, Chang, Restructuring Korea Inc., pp. 11-22; Ha Thanh, Nguyen & Klaus Meyer (2004); Van Chung, Vu (2015); Reddal analysis.

State

Banks

Chaebols

SMEs MNCs

Industrial policy

Loan guarantees,

mutual assistance

Marginali-

sation

Korea

(substitution strategy)

Promotion

Banks

Govern-

ment

Public

enterprisesGuangxiqiye MNCs

SMEs

JVs

Support

Singapore and Malaysia

(compl. strat. – int’l model)

Taiwan and Vietnam

(compl. strat. – semi-int’l model)

Government

SMEs

Foreign

banksLocal banks

MNCsGLCs SWF

Vietnam pursues a semi-international complementary

strategy similar to Taiwan, yet with emergence of local

conglomerates and weaker links to SMEs. Unlike Japan, Taiwan and Singapore, Korean model

required large outside financing (debt and other funding).

Page 14: Policy ecosystem for strengthening innovation capacities

Korea used interventionist/protectionist strategy to drive manufactured

goods exports by subsidizing target industries and related chaebols

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Korean growth and industrial policy

1Includes LG, GS, LS and their affiliates; 2includes Samsung, Shinsegae, CJ and Hansol; 3Social overhead capital such as roads, schools and hospitals.

Source: ERRI, 재벌및대기업으로의 경제력집중과 동태적변화분석; Ahn, The outward-looking trade policy and the industrial development of South Korea.

8% 11% 12% 14% 19%11%11%

11% 12%13%

14%

5%6%

6%8%

9%

10%

5%

7%8%

9%

8%

5%

1%

3%

73%

65%

64%

57%

51%44%

1987

3%2%

5%

1992 1997 2002

4%

20122007

5%

100%

Rest of top 200

Lotte LG1

SK Hyundai

Samsung2

Period Main policy direction

1950s • Import substitution• Price stability

1962-1971 • Policy shift to export promotion (EP)

• Expanding SOC3

1972-1981 • Heavy and Chemical Industrialization under EP

• Administered credit allocation• Import substitution of parts

and components

1982-1991 • Industrial rationalization• Initial liberalization and opening• Shift to private sector initiatives

1993-1998 • Deregulation• Globalization (capital and foreign exchange

liberalization)• Fairness and transparency in industrial and

trade policy• Technology based industrial policy

Guided capitalism model Chaebols’ assets as a share of top 200 corporate

assets (1987-2012)

Page 15: Policy ecosystem for strengthening innovation capacities

5530 4035 45

85

50

50

60

80

70

0

30

90

40

45

55

75

60

65

35

0 65

France

Italy

Germany

Greece

U.K.

Japan*

Iran5

Korea

U.S.

Taiwan3

Finland

Yet a burning issue of Korean economy is that the SME sector is

extremely inefficient and employs a large share of the population

© Reddal Inc. This material is Reddal proprietary. 15

SMEs contribution to overall economy by country

*Used 2013 number of labor forces and 2016 GDP for Iran and 2014 data for Korea and the U.S.; **Used 2013 data for Korea.

Source: 1OECD, Compendium of Productivity Indicators (2016); 2OECD, Entrepreneurship at a Glance (2015); 3Ministry of economic affairs of the

R.O.C and The conference board total economy database; 4General Statistics Office of Vietnam; 5 Statistical Center of Iran (www.amar.org.ir).

SMEs share of total employment2 in 2012**

(%)

GDP per hour worked1 in 2015*

(PPP)

Page 16: Policy ecosystem for strengthening innovation capacities

90

15

75

80

55100 20 3525 30 405 45

85

50

30

50 60

65

80 85

0

25

45

55

60

70Hungary

Iceland*

Ireland*

Israel

Italy

Japan*

Korea

Lithuania

Mexico*

Netherlands

NorwayPoland*

Portugal

Russian Federation

Sweden

Slovenia

Slovakia

Latvia

Spain

Switzerland

Austria*

Turkey*

U.K.

New Zealand*

Taiwan3

Belgium*

Malaysia

Iran5

Czech Republic Denmark

Estonia

Vietnam4

FinlandFrance

Luxembourg

Germany

Greece

U.S.

Even in global terms, Korean SMEs poor productivity and role in

employment stands out

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SMEs contribution to overall economy by country (full list of countries)

SMEs share of total employment2 in 2012**

(%)

GDP per hour worked1 in 2015*

(PPP)*Used 2013 number of labor forces and 2016 GDP for Iran and 2014 data for Korea and the U.S.; **Used 2013 data for Korea.

Source: 1OECD, Compendium of Productivity Indicators (2016); 2OECD, Entrepreneurship at a Glance (2015); 3Ministry of economic affairs of the

R.O.C and The conference board total economy database; 4General Statistics Office of Vietnam; 5 Statistical Center of Iran (www.amar.org.ir).

Asia

Other

BACK-UP

Page 17: Policy ecosystem for strengthening innovation capacities

Productivity gap between Korean SME and conglomerates

continues to be a major issue

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Productivity index2: SME vs. large corporations

Note: 1SME includes companies with 10 – 300 employees; 2 Total productivity index, including labor and capital; 3Compounded annual growth rate.

Source: KEIT (2017).

20001990

0.35

19951983 20142005 2010

0.53 0.54

0.750.63

0.98

0.85

1.58

1.06 1.09 1.08

1.92

1.15

1.81

SME1 Large

Relative SME

productivity

CAGR3

66% 72% 65% 80% 69% 57% 64%

4.9%

1.5%

-1.4%

SME productivity has been lower

than large enterprises consistently

and has been growing at lower rate.

4.3%

Page 18: Policy ecosystem for strengthening innovation capacities

Vicious cycle of OEM trap

(focus on serving local conglomerates)

Korean SMEs are often locked in vicious cycle, as SMEs are complacent with

their role as supplier – transition to virtuous cycles requires internationalization

© Reddal Inc. This material is Reddal proprietary. 18

SME vicious vs. virtuous cycle

Bargaining power falls

Source: Interviews.

Virtuous cycle

(focus on internationally competitive

technology and products, and

expansion abroad)

“As local market is limited,

diversifying the customer base

globally is key for growth”

-CEO of local IT SME

Moving to virtuous cycle can be realized by providing SMEs with global-minded management

capability, competitive talents pool, and network and insights in international market

“Working with chaebols often

provides SMEs with solid skills”

-Manager of consulting firm

Profit falls

SME’s dependence on (Korean)

conglomerates

Inability to invest in development and attract new talent, morale

falls

Loss of competitiveness

Operations centered around conglomerates

Price squeeze

“Price squeeze is

inevitable and comes

by direct price-cut

request”

-Head of gov. agency

Better competitive advantage,

market position, ability to invest

and attract talent

Acquire new customers,

expand further

Operations based on market/

competitionOptimized resource allocation

Increased product/service differentiation

Bargaining power

increases

Ability to command

price premium

and maintain

profit

Page 19: Policy ecosystem for strengthening innovation capacities

Vietnamese growth model does not emphasize building strong local

companies to substitute MNCs nor strong SMEs to complement them

© Reddal Inc. This material is Reddal proprietary. 19

Comparison on national growth models

Note: MNC = multinational company, SME = small and medium sized enterprise, SOE = 100% state owned enterprise managed by respective line ministries

or local governments, GLC = government linked company as result of SOE privatization.

Source: Shin, Chang, Restructuring Korea Inc., pp. 11-22; Ha Thanh, Nguyen & Klaus Meyer (2004); Van Chung, Vu (2015); Reddal analysis.

Both SOEs and MNCs play a significant role in the Vietnamese

economy, typical of a semi-international model. Linkages with

SMEs are weak as their capabilities are not strong enough to

participate in the value chains.

Vietnam (compl. strat. – semi-int’l model)

Banks

Govern-

ment

SOEsEmerging local

conglomeratesMNCs

SMEs

JVs

(Returning)

Vietnamese expatriates

GLCs

Foreign

donors

Overseas

remittances

Foreign

banks

ODA • The Vietnam model is closer to Taiwan, with

JV between SOEs and MNCs a common

practice because of government

equity/license requirements in sensitive

sectors and unique access to local

knowledge and natural resources

• Vietnamese SOEs are not only owned but

also managed by respective line

industries/local governments with strong

political patronage

• Recent privitization and restructuring efforts

of SOEs are slowly turning them to GLCs,

which are closer to the Singapore model

• Recent reforms since 1986 ”Doi moi” and

influx of overseas remittances from

Vietnamese expatriates have also

encouraged the emergence of a few local

conglomerates

Comments

Page 20: Policy ecosystem for strengthening innovation capacities

Growing ties with returning ”Viet Kieu” and Vietnamese diaspora networks

overseas foster valuable ”soft factor” spillovers in terms of knowledge, skill

and human capital

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Leveraging international connections for acceleration – Vietnamese diaspora networks

Family-run

businesses

Entrepreneurial

start-ups

Financial funding

Technical and

managerial support

Diaspora network

• Business contact

networks

• Professional

associations

• Independent

research institutes

Vietnamese companies with

international connections

Valuable stakeholders in

host countries

Venture capitalists

Service providers

Consultants

Suppliers

Case example

• Vingroup

• Masan

Emerging

conglomerates

Case example

• My Lan Group

• Highland Coffee

Case example:

• Misfit

Case example

• Association of Overseas

Vietnamese Business Owners,

• Vietabroader (US-focused),

• Vietnam2020 (Singapore-

based)

Access to exclusive

”highly-skilled”

pool

Source: Pham (2010), Reddal interviews (2017), Reddal analysis.

Major host countries are US,

Russia and Eastern Europe,

France, Australia, Canada.

First wave of returnees after Doi Moi mainly focused

on leveraging local connections to capture local

opportunities while current waves act more as a

bridge between Vietnam and regional/global markets.

Page 21: Policy ecosystem for strengthening innovation capacities

Government policy

support

Market activities

Government policy aims to help local SMEs to become supplier to

MNCs

© Reddal Inc. This material is Reddal proprietary. 21

FDI spillover framework and policy implications

Source: Newman et al., European Economic Review 76 (2015), Reddal analysis.

Foreign firms

(FDI firms)

Mechanism to boost FDI spillover to domestic firms

Domestic

firms

Supplies

inputsSpillover

Increase spillover

potential

Develop absorptive

capacities

• Labor market regulations

• Investment policy and

promotion

• IP rights

• Education and training

• Access to finance

• SME development

• Trade policy

FDI contribution to Vietnamese

economy (based on 2015 data)

FDI companies contribution

to GDP: 18%

FDI companies contribution

to export: 70.5%

FDI companies contribution

to state budget revenues**:

14.1%

FDI companies contribution

to overall employment: 4.2%

Page 22: Policy ecosystem for strengthening innovation capacities

Foreign conglomerate led FDI has been a major contributor to Vietnam’s

national level indicators, but its spill over effect is limited

© Reddal Inc. This material is Reddal proprietary. 22

FDI investments and spillover effects in Vietnam

*As of 12/31/2015; **As of 2014.

Source: Vietnamese General Statistics Office, Ernst and Young, Private equity briefing: SEA (2016); OECD, Investment Policy Review of Vietnam (2016);

IMF (2002).

40%

22%

2012

22%

38%

40%

1,367

39%

22%

39%

2014

36%

38%

23%

2015

1,010100%

2011

1,221

26%

38%

37%38%

2010 2013

25%

38%

40%

830 924 1,095

Investments by types of ownership

(total in trillion VND)*

FDI contribution to Vietnamese

economy (based on 2015 data)

FDI companies contribution

to GDP: 18%

FDI companies contribution

to export: 70.5%

FDI companies contribution

to state budget revenues**:

14.1%

FDI companies contribution

to overall employment: 4.2%

Reflections

• FDI has been focused on

industrial manufacturing

sector

• It has contributed

significant amount to

GDP development

• However, its contribution

to employment has been

very limited

• IMF assumes that most

employments have been

made through

subcontractors and

suppliers to the FDI

companies; however, the

competitiveness of these

companies have much

room for improvement

(and many are foreign

owned)

Non-state State FDI

Page 23: Policy ecosystem for strengthening innovation capacities

Localization rate and local (Vietnamese) supplier quality assessments

highlight the competitiveness issue of Vietnamese players

© Reddal Inc. This material is Reddal proprietary. 23

Competitiveness of Vietnamese suppliers

Source: JETRO annual survey, OECD, press articles.

• Out of 32% Japanese local sourcing in Vietnam, 45% was

sourced from Japanese companies operating in Vietnam and

14% from Taiwanese companies operating in Vietnam

• Low localization rate has directly affected Japanese invested

companies’ profitability in Vietnam

• Vietnam has been cooperating with Japan since 2000s to

build supporting industries but have failed to realize two

planned supporting industrial parks after 14 years

Localization rate* of Japanese-invested

manufacturers by country, 2015

65%56%

41% 36% 32%

VietnamChina Thailand Indonesia Malaysia

*Localization rate is defined as % of raw material and intermediary goods sourced locally, **Based on OECD ranking of 140 countries.

Actual % purchased

from Vietnamese

companies is less

than 13,7%

Local supplier quantity

Lo

ca

l s

up

plie

r q

uali

ty

Thailand

Indonesia

Malaysia

Korea

ChinaPhilippines

Vietnam

Lao PDR

Cambodia

HighLow

Hig

hL

ow

There is still a big

gap in Vietnamese

local companies’

ability to

participate as

suppliers to MNCs

Local supplier quantity and quality**, 2015

Page 24: Policy ecosystem for strengthening innovation capacities

Avoiding OEM trap is even more critical for SMEs in developing nations

– advantage in manufacturing, arising out of cheap labor will diminish

© Reddal Inc. This material is Reddal proprietary. 24

Peak manufacturing employment share and GDP per capita when it peaked

Percent, constant 2005 USD

• Trade has induced productivity gaps to close faster

than gap in income as manufacturers must follow

similar international standards

• Manufacturing is becoming less labor-intensive

also in developing economies; thus peaked share

of manufacturing employment has declined

• Automation coupled with additive manufacturing

making OEMs from developing economies risk

becoming redundant

Peak share of manufacturing

employment below 20% for many

emerging economies

Observations

Source: GGDC-10 Sector database, World Bank Development Indicators, Citi Research in “Technology at work v2.0: The future is not what it used to be.”

Page 25: Policy ecosystem for strengthening innovation capacities

Drivers of economic growth – the role of population, productivity and

export, as well as the global macro environment overall

Development path of South Korea and Vietnam, and the role of

national policy

Real life innovation and the opportunities for emerging Asian

countries

Overview of policy ecosystem – key elements along the company

development journey

Key messages

© Reddal Inc. This material is Reddal proprietary. 25

Page 26: Policy ecosystem for strengthening innovation capacities

On organizing international operations in Vietnam*

Misfit combined local capabilities across multiple countries in a unique way

to fuel its growth

© Reddal Inc. This material is Reddal proprietary. 26

Leveraging international connections for acceleration: Misfit Wearables

About Misfit (now part of Fossil Group)

• Founded in 2011 by Sony Vu (CEO and

President), Sridhar Lyengar and former Apple

CEO John Sculley

• Offering: health tracker wearables

• Available in 20 countries (US, Canada Mexico,

Brazil, UK, Germany, Italy, France, Switzerland,

Spain, Sweden, Russia, Australia, China, Hong

Kong, Japan, Singapore, Taiwan, South Korea

and India)

• Acquired by Fossil Group at 260MUSD in

November 2015

Q: What prompted the decision to have so many employees here

[in Vietnam], aside from your background?

Vu: “So we have to get the best talent at the best price. So what

we've done is optimized our hiring to be in places where we have

an unfair competitive advantage”.

Vu: “If you just come here with a mentality, I'm going to get cheap

outsourced labor, then that's exactly what you're going to get…So

we really give them [the Vietnamese staff] a lot of authority…And

people rise up to the challenge”.

• Product design

• Funding

• Marketing and sales

• Manufacturing

• Logistics and supply chain, operations,

finance

• Customer service

• Data science and algorithm development

• Firmware engineering

• Graphic design

• Commercial product development

Leverage the best

of each world to

gain competitive

advantages and

scale internal

capabilities

development fast.

Source: Company website, press articles.

*Interview with Sonny Vu conducted by CNET in 2015.

Page 27: Policy ecosystem for strengthening innovation capacities

Uber’s struggles to scale in China, Russia and SEA illustrate that global

success of digital services still require local know-how

© Reddal Inc. This material is Reddal proprietary. 27

Lessons learnt from some of Uber internationalization journey

Feb 2013 – Uber launched in Singapore, starting its

expansion in South East Asia (SEA).

Jul 2014 – Uber officially launched in China. Also in Russia.

August 2016 – Uber China merged into Didi Chuxing. Uber

China would own 20% of the new entity. Didi to own $1bn

share in Uber global.

July 2017 – Uber merged its operations in Russia,

Azerbaijan, Belarus and Kazakhstan with Yandex. Uber

would own 36.6% of the new entity.

March 2018 – Uber sold its operations in SEA for 27.5%

stakes in Grab – a Singapore based competitor.

Uber expansion timeline in selected markets

Source: Press clippings.

Page 28: Policy ecosystem for strengthening innovation capacities

Grab focused on building ”segmented, localized and tailored

service” to foster customer experience and loyalty

© Reddal Inc. This material is Reddal proprietary. 28

Grab localization strategy to succeed in regional expansion

• Traffic congestion make motorbike a

more convenient and faster choice

• GrabBike was launched in 2014, two

years ahead of Uber Motor

• Cash payments are still prevalent in

many South East Asian cities

• Grab has traditionally accepted cash

payments, long before Uber began to

pilot it, first in India in 2015

• SEA is a fragmented region with

different languages; many still do not

speak English

• Grab launched GrabChat in 2016 with

template messages and auto translation

for quick communication between drivers

and riders

• Durian is a special and popular local

fruit in many parts of SEA

• Grab organized special campaigns/

redeem offer for special treats of high-

quality durian

How Grab cater to local needs and tastesSouth East Asia special characteristics

Source: Press clippings.

Page 29: Policy ecosystem for strengthening innovation capacities

Without a dedicated entry strategy, many young companies fell to the

pitfalls of relying on the “sales” approach only for short-term gain

© Reddal Inc. This material is Reddal proprietary. 29

Entry strategy approach versus “sales” approach to international markets

”Sales” approach Entry strategy approach (go-to-market system)

Time horizons Short-run. Long-run (say, 3 to 5 years).

Target markets No systematic selection.Selection based on analysis of markets/sales

potential.

Dominant objectives Immediate sales. Build permanet market position.

Resource commitment Only enough to get immediate sales. What is necessary to gain permanent market position.

Entry mode No systematic choice. Systematic choice of most appropriate mode.

New product development Exclusively for home market. For both home and foreign markets.

Product adoptionOnly mandator adaptions (to meet legal/technical

requirements) of domestic products.

Adaption of domestic products to foreign buyers’

preferences, incomes, and use conditions.

Channels No effort to control. Effort to control to drive market objectives/goals.

PriceDetermined by domestic full cost with some ad hoc

adjustments to specific sales situations.

Determined by demand, competition, objectives, and

other marketing policies, as well as cost.

PromotionMainly confined to personal selling or left to

middlemen.

Advertising, sales promotion, and personal selling mix

to achieve market objectives/goals.

Without a go-to-market system with entry strategy for a

product/target market, a company only has a “sales” approach.

Source: Franklin R. Root, Entry strategies for international markets (2008).

Page 30: Policy ecosystem for strengthening innovation capacities

Success as global company

• Consolidate global system that allows

flexibility in cost management and

customized marketing

• Risk of new entrants with lower cost

advantage persists

• To sustain position, firm-specific and

proprietary knowledge in narrow field

must be developed

Developing own design/brand

• Early strength in production skills acquired

in supplier position

• Upgrade into higher-value-added products

in the same industry

• Key challenges in weak brands, lack of

marketing experience and incumbent

litigations

SME supplier to conglomerate

• Condition: late entry and resource poor

• Learning and building technology via

external sources and in-house R&D

• Needs local conglomerates to supply to

SMEs in developing nations require a unique path creation

strategy, where internationalization is an integral part of success

© Reddal Inc. This material is Reddal proprietary. 30

Path creation strategy for SMEs: from OEM to OBM*

Sales

TimeEntry Gradual catch-up Path creating/ crisis Rapid catch-up Post catch-up

Path creation

begins

*OEM = original equipment manufacturer, OBM = original brand manufacturer; concepts can be also extended to services

Source: Lee, Economic catchup and technological leapfrogging

Page 31: Policy ecosystem for strengthening innovation capacities

Young technology companies need to build internal R&D capabilities and

leverage digital technologies and service platforms to drive growth

© Reddal Inc. This material is Reddal proprietary. 31

Tips on internationalization for technology SMEs

Avoid the OEM trap – being complacent

in playing the role of part manufacturers

in the global value chain.

Over-rely on low-cost advantages

without realizing other value-adding

advantages from local resources.

Invest in internal R&D to develop internationally

competitive technology and products, and

expansion abroad.

Overly ambitious expansion plan, risk

stretching themselves too thin over

mass expansion without a clear go-to-

market strategy/strategies.

Digital technologies make cross-border

collaboration more easily, which young

companies can leverage to build optimal teams.

Digital and service platforms make scaled

internationalization more feasible for young

companies with local resources – but local

know-how essential for success.

Page 32: Policy ecosystem for strengthening innovation capacities

Drivers of economic growth – the role of population, productivity and

export, as well as the global macro environment overall

Development path of South Korea and Vietnam, and the role of

national policy

Real life innovation and the opportunities for emerging Asian

countries

Overview of policy ecosystem – key elements along the company

development journey

Key messages

© Reddal Inc. This material is Reddal proprietary. 32

Page 33: Policy ecosystem for strengthening innovation capacities

Coase developed a basic theory of a firm, and this can partially

be extended to nations as well

© Reddal Inc. This material is Reddal proprietary. 33

Ronald Coase main theses on the nature of the firm

“As long as there is a cost of using the price-

mechanism, it is advantageous to organize within a

firm and reduce uncertainty by making a promise

of loyalty to a certain extent. Within a firm, an

unsustainably large number of contracts is

replaced by one.”

“A firm stops growing at some point due to

the law of diminishing returns to management: the cost

of organizing rises with additional transactions due to

inability to place resources effectively, and at some

point surpasses the costs of carrying out the transaction

in the open market. A firm therefore tends to be larger

•The less the cost of organizing is and the slower the

cost grows with expansion

•The less likely is the entrepreneur to make mistakes

and the smaller the probability of being inefficient

grows with accepting additional transactions

•The less the supply price of factors of production rises

as the firm grows larger”

Source: https://www.scribd.com/doc/156497850/Summary-Coase-1937-the-Nature-of-the-Firm.

Page 34: Policy ecosystem for strengthening innovation capacities

Earlier Kondratieff presented the notion of long-term waves in

global economy and Schumpeter ”creative destruction”

34

Kondratieff waves of growth and their main features

Source: Trott, Innovation Management and New Product Development, 5th ed., pp. 6-8, 54-55; see also Shin, The Global Financial Crisis and the Korean

Economy

1770s-80s 1830s-40s 1980s-90s1880s-90s 1930s-40s

Eco

no

mic

activity

Depression

Recession

Prosperity

Recovery

?

K1

Early

mechanisation

K2

Steam power and

railway

K3

Electrical and heavy

engineering

K4

Fordism

K5

Information and

communication

© Reddal Inc. This material is Reddal proprietary.

Page 35: Policy ecosystem for strengthening innovation capacities

These can now be connected to a theory of nations and their

success – and it lends itself perhaps also back to ventures

© Reddal Inc. This material is Reddal proprietary. 35

Basic concepts on structure of institutionsNarrow Broad

Distribution of power

Lack of

state

Political

centralization

State building

(China, N. Korea)

Democracies

(US, W. Europe)

Source: Daren Acemoglu, MIT, State building: A political economy perspective.

Economic institutions

Extractive Inclusive

Extractive

Inclusive

Political

institutions

Democracies

(US, W. Europe)

ChinaSoviet Russia

Somalia

Most extractive

institutions

(Latin America, Sub

Saharan Africa)

1

2Nations can

follow different

evolution paths

(1 – England, 2

– Turkey)

Page 36: Policy ecosystem for strengthening innovation capacities

The basic idea is that innovation is driven by freedom and creativity;

institutions can improve that by incentivizing everyone to participate

© Reddal Inc. This material is Reddal proprietary. 36

Rents and economic development

Economic institutions

Extractive Inclusive

Extractive

Inclusive

Political

institutions

USA UK

South Korea

ChinaNorth Korea

South Africa

Zimbabwe

Source: Daren Acemoglu, James A. Robinson, Rents and economic development: the perspective of Why Nations Fail.

Page 37: Policy ecosystem for strengthening innovation capacities

Idea

Inclusiveness is a key element in the early part of development, but the

overall policy ecosystem must also meet requirements down the line

© Reddal Inc. This material is Reddal proprietary. 37

Growth development path and role of environment

*MVP = Minimum viable product.

Source: Adapted from Eero Byckling, Vienti vetämään – näin luomme uusia menestyviä vientituotteita (2018).

Capturing market

changes

• Technology

evolution

• New services

• Changes in

demographics

• Changes in wealth

Creating unique ideas

• High quality education

• Inclusiveness

• Global talent

• High quality research

Professional business development

• Focused gov’t role

• Active business angel community

• International, regional and local

investors

• Ecosystem of professional services

Establishing a

foothold

• Deliveries to first

customers

• Customer feedback

Expanding the base

• Supply chain

• Sales channels

• Marketing in multiple

markets

• Access to top notch

talent

Scaling up to high

volume operations

• Deliveries to multiple

markets

• Expanding presence

• Attractive employer

in home country

Domain leadership

• Acknowledged brand

• Presence in multiple

markets

• Attractive employer

in multiple markets

Value adding owners

• Listed in stock

market (functioning

market)

• Part of larger

corporation

(ecosystems of good

corporate owners)

Industrial leadership

• Significant

contribution to home

country (attractive

regulative

environment and

stability)

Prototype or

concept (MVP*)Growth company Export company

Global/regional

corporation

Tasks

Role of

environ-

ment

FOR DISCUSSION

Page 38: Policy ecosystem for strengthening innovation capacities

• Growth is becoming increasingly difficult – the past does not provide clear recipes for the future, nations must forge their own paths

• Population growth is a clear driver for GDP growth, but needs to be combined with productivity growth – avoid the low labor cost trap that has both negative effect on productivity as well as potentially inequality

• Korea is a lesson in that state run industrial policy that favors only a small number of large corporations is not sustainable (compare to German industrial ecosystem, and the strong role of ”Mittelstand” companies)

• Vietnam may be a cautionary lesson in the excessive dependence on FDI, and failure to build the country’s own industrial ecosystem

• As a base rule, Asian companies can innovate if they leverage their inherent advantages in a creative way

• Inclusiveness is critical to success – it implies seeking to get the most of all members in the society (also immigrants in the country and diaspora abroad)

• However, in order to develop a growing economy, the nation’s policy ecosystem must address the needs of the entire company development path – piecemeal solutions do not work (see also Josh Learner, Bulevard of Broken Dreams)

We can learn from the past, and from others, but the future we

face brings fresh challenges – new holistic solutions are needed

© Reddal Inc. This material is Reddal proprietary. 38

Conclusion

Page 39: Policy ecosystem for strengthening innovation capacities

Working together for successful growth!

39© Reddal Inc. This material is Reddal proprietary.