The Great Technology Adoption Divide
Some paradoxes are truly striking. Consider, for example, two factors of production i.e. Labour and Capital. The classic production function is Q=ʄ (L, K). The Cobb-Douglas production function Q= ʄ (L, K) = ALa Kb. For a given amount of labor and capital, the ratio Q/L represents the output per unit of labor.
While most parts of the developing world is witnessing negative (Sweden, Denmark), Zero (Japan) and near — zero (USA) yields on capital, many developing nations including India have high interest rates and inflation resulting in real interest rates being zero.
The capital sitting on the sidelines (“dry powder”), in case of private equity, for example, is concentrated in the developed world in general and North America in particular. The Economist reports more than a trillion USD in dry powder. The search for near risk free returns drives capital (K) to US treasuries i.e. capital gravitates towards the optimum risk adjusted returns, which happens to be US government issued paper for a large part.
That is not to say that there are no opportunities elsewhere in the world. But, the volatility in financial markets tilts the balance towards exchange traded index funds and US backed debt. Thus, the overwhelming trend is that capital is either sitting still or gravitating towards near risk free returns.
Labor, on the other hand, is a different story. Labor flows to the least expensive country which happened to be China (manufacturing) and India (services, business process and knowledge process outsourcing). The trend is now skewed towards smaller countries i.e. the Philippines and Vietnam. Cebu, in the Philippines, is growing thanks, in large part, to this trend.
Thus, labor and capital are truly following a different trajectory. If a corporation has access to global markets, it is easier to raise debt overseas (although, in some cases, exchange differences can negate a large part of the interest rate differential).
Flow of labor has resulted in the hollowing out of the middle class in the developed world to the benefit of the developing world.
However, the technology paradox is more interesting. Next generation technology (the future), is quite literally, invented in the developed world but it is adopted at a much higher rate in the developing world. The reason is quite simple: a mass market that craves economical but practical applications. One could argue that this could be the case in the developed world as well (although the populations are truly not comparable). India has a billion people while the United States has approximately 350 million residents.
A Harvard Business School working paper on ‘The Intensive Margin of Technology Adoption’ written by Diego Comin and Marti Mestieri argues that the intensive margin of technology adoption (i.e. the number of units adopted, for a given size economy) accounts for more than 40% of variation in income per capita. As a whole, technology adoption seems to account for 70 percent of differences in cross country per capita income. This has very profound implications for poverty alleviation. I would argue, therefore, that the developing world has a greater urge to use technology to reduce marginal costs and make unique experiences surprisingly affordable.
On my trip home to India, I have witnessed a much faster rate of technological adoption than the United States. China, as quoted by many sources, has the highest adoption of Virtual Reality (VR) in the world. VR is used for a myriad of applications i.e. from brokers using the technology to show new apartments to clients to gaming arcades delivering a truly immersive experience.
India, too is no stranger to technology adoption. Entrepreneurs and businessmen find ingenious applications of technology and in many cases, reverse engineer the whole construct. While Uber and Ola battle it out in the super competitive cab hailing app business, VR is put to use in many different forms. The developing world is proving the importance of the following tenets:
a) Being a fast adopter, at times, is smarter than being an innovator. The fruits of decades of research and commercialization in the developed world are borne by the developing world at the price of buying the technology. In other words, the biggest consumers of technology reside in the developing world.
b) Reverse engineering and then improvising to meet local market requirements provides an opportunity for technology arbitrage. In that sense, the first mover in the developing world can have a significant lead over others in the market.
Tim Cook alluded to the concept of a virtual ‘You’ or your virtual avatar that will do everything from playing ping pong tennis with your parents in a different city to transacting business with a partner in a different country. Facebook is working on virtual social media, where your virtual avatar will react to discussions in a virtual world instead of a click on emojis to indicate your expressions used today. Companies such as cappasity are letting consumers shop in 3D. The future could be converging to Sci-Fi reality. Truly, life may end up imitating art.