Where is East Asia’s Silicon Valley?

If the governments of East Asia want their economies to thrive in the digital age, they may need to consider political liberalisation, Kris Hartley and Jun Jie Woo write.

While Asia’s economic rise in recent decades has largely been based on a manufacturing and export-led model of development, many cities in Asia are increasingly seeing the knowledge economy as a new pathway to global status.

Having internationalised their economies through their roles as trading hubs and headquarters of regional multinational corporations, Asian cities are increasingly home to entrepreneurs and start-ups with global ambitions. Nurturing this innovative capacity is crucial for Asian countries in sustaining their development trajectories and challenging the economic hegemony of Western cities.

However, to fulfill its innovative potential, Asia must reconcile a fundamental tension of modern development.

Government intervention in industrial infrastructure facilitated Asia’s first wave of economic modernisation. From Japan’s zaibatsu to South Korea’s chaebol, the role of the state in market enterprise was crucial for ensuring investment stability and ramping up production in the face of once weak private-sector capacity. Over time, this approach – referred to in academic circles as ‘developmentalism’ – led to comparative advantages for the Asian Tigers and became a model for the region’s developing countries.

The tension arises when a developmentalist policy approach that is more suited to manufacturing-based industrialisation is applied to the emerging knowledge economy.

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The market structure of the knowledge economy differs substantially from that of manufacturing. Many Asian governments once supported only a handful of industrial conglomerates, which, through state intervention and guidance, expanded and diversified to serve increasingly sophisticated consumer demand as per capita incomes rose. This was often known as “picking champions.” For example, Hyundai, which many Western consumers know as a car manufacturer, also has spin-off and former subsidiary enterprises in housing, financial services, and retail, among many others.

These hierarchical conglomerates, or national champions, were managed by politically connected executives, and through their domestic market power they were able to reinvest in capacity to serve global markets. The profile of Asian countries rose alongside that of their conglomerates.

The market structure of the knowledge economy, however, is fundamentally different, due in part to comparatively lower capital requirements.

A disruptive market player in manufacturing needs substantial up-front investment and many years to develop capacity. In the knowledge economy, on the other hand, one needs only a computer, creativity, and programming skills (at least in the technology industry). Some seed funding is needed for scale, and indeed the presence of venture capitalists is a competitive driver for clusters like Silicon Valley.

Further, transformative innovation in knowledge industries can come as much from individuals and small enterprises as from the research and development departments of major corporations. For these reasons, as we argue in a recent paper, the old developmental approach is inapplicable for fostering competitiveness in the knowledge economy.

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The need to resolve this tension has significant implications for economic development and industrial policy in Asia.

Decades of developmentalism have enshrined a top-down orientation suitable for helping firms mobilise capital, scale-up, and diversify product lines.

Such orientation does not suit the nimble texture of the knowledge economy.

Furthermore, conglomerates that are state-owned or politically-connected are increasingly finding themselves out-manoeuvred by smaller firms wielding disruptive technologies. Thus, global economic restructuring is exerting pressure not only on firms but on governance systems, prompting Asian countries to re-think policymaking and even state-society relations. Countries that adjust quickly can to turn the modern innovation wave into competitive opportunities, becoming the 21st century’s New Asian Tigers.

Some countries already seem to be aware of this opportunity. For example, Singapore’s ASTAR and SPRING research agencies are a nod towards the changing dynamics of global competitiveness in knowledge industries.

Nevertheless, such strategies may be putting the cart before the horse. A vibrant and competitive innovation economy is the outcome of natural market forces, rather than of top-down state interventions.

As such, the strategy to engineer an innovation ecosystem reeks of legacy developmentalist thinking. In Singapore, vestiges of such thinking are apparent in top-down efforts to kick-start innovation and plan industry clusters, whether through state agencies or state-owned technology firms such as Singapore Technologies.

In the interest of accelerating growth, this approach skips an important step: endogenous growth that emerges from the individual decisions of enterprises. The issue, then, lies not with the desire to generate industry-specific growth, but the strategy through which this desire is fulfilled.

The outcomes of artificially accelerated growth are arguably less sustainable than those of natural growth, because decisions about what to produce and where to locate should be driven more by market needs than by coercive policies. It is safe to assume that market players are (and should be) more attuned than governments to market needs and trends.

Top-down intervention in innovation industries also replicates long-entrenched power structures. In Singapore, technocratic elites and industry representatives heavily influence policymaking. It is fair to question whether this model is becoming outdated with the decentralisation of market structures characterising emerging knowledge industries.

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Reform in policymaking should not simply be a matter of surrendering sovereignty to market forces, as neoliberal prescriptions would advise. Instead, reform is needed in state-society relations through political liberalisation.

It is no coincidence that many Asian Tigers, in their developmentalist epochs, also had authoritarian or quasi-authoritarian political leadership. Such regimes may have worked for industrialisation but are incompatible with the demands of the knowledge economy; the anaemic innovation performance of the world’s one-party countries is evidence.

Even in the exemplary case of Silicon Valley, government has often played a role, if inadvertently, in the growth of innovation capacity and knowledge industries. In the United States, public investment in military research and development gave rise to many technologies that were later marketised. In this way, large American military contractors that enjoyed market power in the mid-20th century – for example, the Lockheed Corporation – are similar to Asia’s government-backed conglomerates.

Where did their paths diverge? Why did Silicon Valley emerge only in the United States? While small examples of technology-specific clusters have sprouted across Asia, such as Taiwan’s semiconductor industry, something ‘in the air’ made Silicon Valley an unparalleled hub of experimentation and innovation across numerous technologies.

Further research is needed to explore this puzzle. The answer may have to do with fundamental political values such as civil liberties and individual expression, as well as with deeper societal norms like an appetite for risk-taking and the ability to rebound from failure – something Asian countries need but are unable to engineer.

This piece is based on the authors’ paper in Asia & the Pacific Policy Studies, Urban innovation policy in the postdevelopmental era: Lessons from Singapore and Seoul. All papers in the journal are free to read and download.