What emerging economies can teach us about designing better innovation policies

Developing countries are interesting innovation policy schools. In places where the basic economic principles of limited resources versus unlimited needs are amplified, designing innovation policies becomes even more challenging.

You put together in a briefcase mass customization, 3D printing, advanced robotics, the internet of things, artificial intelligence and countless other fun developments – and you knock on several doors with your innovation pitch of "best investment today for the development of tomorrow". The challenge is that people demand better health, education, employment and security today. So the pitch really has to be impressive.

The fourth industrial revolution will be more challenging for emerging economies because risks can be potentially bigger than opportunities. The impact will vary according to the answers to these three questions:

1) When will these advanced manufacturing technologies be widely adopted?

2) What public policies will be necessary to deal with this new species of economic development?

3) How fast will domestic companies adapt to the uncertainties created by new technologies and business models?

Nobody knows the answers yet because we are at the beginning of an industrial transformation whose impacts are almost impossible to predict. Nevertheless, we can certainly say that we'll see faster results than in previous industrial revolutions.

Based on a situation dominated by uncertainty and complexity, it is mandatory that governments and businesses in developing countries identify as soon as possible the risks and opportunities for Industry 4.0. It is the first step to understand, plan and make decisions about how to deal with this new reality.

That is important because there are significant risks for emerging markets. Over the last decades, these countries have explored their competitive advantage on labour costs and natural resources availability. However, the industry of the future will demand fewer and more qualified workers on manufacturing systems, products will be more sustainable and it will be cost-effective to operate close to customers (reshoring). Governments and businesses from developing countries have to analyse where they could be competitive in a situation where previous advantages are fading away.

Another serious concern is jobs. Advanced manufacturing will require a different kind of worker in the future. As they learn to make their own decisions, robots look set to replace many mental activities, as well as physical. The worker of the future will need to be highly proficient at soft skills such as teamwork, creativity, critical thinking, as well as technical skills. It will be an enormous challenge for traditional education systems and long-term outcomes.

Industry 4.0 also presents potential opportunities for emerging economies. The first and obvious advantage is the size of the consumer market: it is an important motivation to foster local production, innovation and attract foreign direct investment to the country. One important aspect of this new revolution is reduced barriers to entry. Digital tools, low-cost and powerful sensors, 3D printing and other technologies have brought into being new businesses, business models and opportunities. It is an excellent opportunity to create customized products and services to local markets based on their own reality.

The world’s future growth will largely depend on the engines of emerging markets. The physical and digital infrastructure needs are immense, and so is the demand on more intelligent solutions for water, sanitation, education, housing; among others. Despite the current economic scenario, these economies are already rising up international rankings, such as Deloitte’s 2016 Global Manufacturing Competitiveness Index.

Complexity and speed are of essence once you understand the profound impacts that Industry 4.0 will have on global value chains, education, employment and many other critical economic and social aspects. With that in mind, in 2015 the Brazilian government brought together private sector, academia, research institutes and other parties to develop an advanced manufacturing policy. The main question was simple and complex: what should be an advanced manufacturing strategy for Brazil?

A large, inclusive and transparent process of public consultation was carried out from North to South of Brazil (a country which is 24 times the size of Germany). Since the beginning of 2016, hundreds of specialists from private sector, government and academia took part in structured workshops pointing out practical opportunities and challenges on the areas of technological convergence, regulation, human resources, value chains and infrastructure. A positive side effect of this process is the growing awareness about the topic in government and private sector.

Indeed several key questions remain open: which strategic choices will Brazil make in terms of Industry 4.0? How will the country position itself as value chains become more flexible but at the same time more fragmented? How will inter-operability and data security be ensured? What technologies should be prioritized based on our own capability? What is the ultimate goal: productivity increase, technology development or both? The most important aspect is that we are answering these questions together with the Brazilian society and not only on government cabinet offices.

The fact is that the world is a very different place today and new opportunities exist for emerging economies. KPMG’s Future State 2030 points out that in 1937 a company used to stay on average 75 years on S&P’s 500 Index. In 2011, it was 15 years. In 2025, this is expected to be five years. This is the core of the pitch.

If emerging economies invest fast enough and properly on innovation policies, work with networks of local and global partners, take advantage of large consumer markets, they will certainly have a good story to tell in the future.