Innovations needed to create market

Nazarul Islam | Published: 00:00, Nov 08,2019

 
 

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TALKING of miracles, prosperity and sustained economic growth, the names and countries keep flashing in our minds. Bangladesh is certainly not the country that would come to mind when you think about economic miracles. This nation’s per capita earning is just $1,750; and close to 15 million of the 166 million people in the country live on less than $1.90 a day. However, compared with the situation in Bangladesh only a decade ago, the country is very much on the upswing. Since 2009, Bangladesh has soared up in its growth, by more than 6 per cent a year, and its GDP per capita has almost tripled. In addition, the rate of extreme poverty in the country of this formerly nicknamed ‘bread basket’ has dwindled from roughly 20 per cent to just under 9 per cent. Bangladesh’s policy planners expect the annual growth to reach 10 per cent by 2021.

Plainly speaking, much of Bangladesh’s growth over the past decade has emerged from a nation which started from the rubble of the liberation war, slowly transforming itself into an apparel manufacturing hub. Today, this industry constitutes to be the largest employer in the country. The ready-made garment industry currently employs more than 4.5 million people. This small nation proudly stands next to China.

Bangladesh currently exports about $38 billion worth of textiles and garments a year. By 2021, the government’s goal is for that number to reach $50 billion.

To aid the industry further, improve its manufacturing prowess and simultaneously develop the country, the Bangladesh government has set an ambitious goal of developing 100 special economic zones around the country. SEZs are economic oasis-zones in a country where business and trade laws are different from those in other parts of the country, often offering manufacturers low (or no) taxes and fees on imports and exports. Progress is certainly being made on developing more SEZs; it has already built at least 11. It will, however, not necessarily translate into robust and sustainable economic growth because most SEZs fall under the category of efficiency innovations and these innovations do not create long-term growth.

From an economic development standpoint, it is helpful to categorise innovation into three types: sustaining, efficiency, and market-creating. These different types of innovation have vastly different impact on an economy in terms of robust economic development, sustainable job creation, and inclusive growth. We need to consider how they differ from one another.

Sustaining innovations targets demanding high-end customers with better performing products than what was previously available. These innovations are designed for existing consumers and typically do not expand the market for a particular product. For example, if Ford Motor Co decided to add new features to its Ford Explorer line, such as leather seats or adaptive cruise control and it sold it for more money, they were targeting people for whom existing Ford Explorers were affordable. These innovations were important and had kept a company and an economy vibrant but it did not significantly impact economic development and job creation.

In the historical perspective, efficiency innovations enable companies to do more with fewer resources. While these innovations free up capital and keep an economy competitive, these are notorious for eliminating jobs when they are not targeted at creating new markets. For example, when a company decides to move manufacturing from a region where wages are increasing —say China — to a region where they are still low — like Bangladesh — that is an obvious example of an efficiency innovation. In the case of Bangladesh, we can see how efficiency innovations in the garment industry have fuelled a lot of growth over the past decade, but that growth is beginning to slow down as the number of factories has reduced by 22 per cent in the past five years.

Efficiency innovations can create short-term growth, but they often do not lead to robust and vibrant development. Market-creating innovations are what do that.

Purely in economic terms, the market creating innovations have the ability to transform complex and expensive products into simple and more affordable products, making them accessible to a wider segment of the population. A perfect example of a market-creating innovation happens to be the Henry Ford’s ‘Model-T’ car. Henry Ford was able to make, distribute, market, sell, and service a car that was inexpensive enough for an American with a modest income to purchase. Ford reduced the price of a car from roughly $10,000 in the early 1900s to around $260 in 1925 ($4500 in 2019dollars). In doing so, he has been largely credited with the democratisation of the automobile.

And just because market-creating innovations target people who have historically been unable to afford a product — typically the majority in poorer societies — innovators must hire many more people to make, distribute, sell, and service their products. As such, from a job creation standpoint, they are net positive. But perhaps of more importance is their impact on economic and societal development. Before the democratisation of automobiles, for instance, the concept of long-distance travel, living in suburbs, going out to restaurants near or far, filling stations, and fuel taxes (which helped build many of the roads in the United States) were far-reaching. The impact of market-creating innovations is vast.

Now that we are equipped with the knowledge that there are different types of innovation, each having different impact on an economy, Bangladesh can continue with its economic ascendancy by investing in market-creating innovations. If the government and entrepreneurs within the country focus on making products and services more affordable for Bangladesh’s 166 million people, in areas such as health care, food production, manufacturing, insurance, and entertainment, these new markets which will lead to more sustainable jobs.

Efficiency innovations, such as those prevalent in garment manufacturing for the rest of the world, can only take the country so far. It is by investing in market-creating innovations that Bangladesh cannot only sustain its current miracle, but also propel its economy to greater heights.

Far far away across the horizons, of my adopted country, I keep looking for Bangladesh, the land where I was born and raised. My pride jumps manifold, to see lives being transformed today and its poverty being addressed. Let Bangladesh remain to be the cherished model for economic growth and prosperity, in the years ahead.

 

Nazarul Islam is a former educator based in Chicago.

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