chapter 2 the role of technology in creation of wealth

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MANAGEMENT

ofThe Key to Competitiveness

and WealthCreation

TECHNOLOGY

Tarek Khalil | Ravi Shankar


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The Role

ofTechnology inthe Creation of

Wealth

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GROWTH OF

TELECOMMUNICATION

TECHNOLOGY IN INDIA

Growth of IndianTelecom Sector

The major positive changes started coming up only afterthe announcement of National Telecommunication Policy1994 (NPT 1994), which was further reinforced by NewTelecom Policy 1999 (NPT 1999)

While tariff in India is one of the lowest in the world,subscriber base is growing tremendously in the recentyears

Source:COAI


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HISTORICAL PERSPECTIVE

Evolution by Age of Technology


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HISTORICAL PERSPECTIVE(Contd.)

Dow Jones Industrial Average(The Dow Jones Industrial Average has Broken SymbolicBarriers with Increasing Frequency. This Graph Shows the Ten Thousand-Point Milestone).


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THE CREATION OF WEALTH

Capital is best employed for the production of wealth; thateach nation should produce the goods in which it hasabsolute advantage Adam Smith

Schumpeter showed that industrial expansion is also theresult of economic forces and argued that innovation incompetitive capitalism is typically embodied in thefoundation of new firmsthe main lever

Attempts to define the different sources of economic growth

and quantify their relative contributions have been pursuedby many economists, including Abramovitz (1956), Solow(19561957), Dennison (1962, 1967, 1979, 1985), Kuznets(1971), Kendrick (1973), Jorgenson, et al., (1987), and Boskinand Lau (1992)


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THE CREATION OF WEALTH(Contd.)

Economic growth is determined by the rate of change in percapita real gross domestic product (inflation-adjusted GDP)

Boskin and Lau (1992) indicate that the three principal sources

of nations economic growth are enhanced capital, labor, andtechnical progress (or, equivalently, total factor productivity)

The growth rate of physical and human capital, combined withtechnical progress, accounts for a significant portion of theeconomic growth of nations

Robert Solow argued that technical progress (the change inproduction techniques) is built into machines and other capitalgoods and that this must be taken into account when makingempirical measurements of the role played by capital


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THE CREATION OF WEALTH(Contd.)

Boskin and Lau (1992) estimated the relative contributions ofthree sources of economic growthcapital, labour, andtechnical progressfor the United States, France, WestGermany, Japan, and the United Kingdom

The U.S. National Science and Technology Council, in itsreport Technology in the National Interest (1996)emphasized that technology is the engine of economic growth

The use of technology proved to enhance manufacturing inevery performance category


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THE LONG-WAVE CYCLE

Technology also triggers another mechanism for economic

growth that is yet to be fully appreciated, one whose effect has

not been quantitatively measured

In 1930, the Soviet economist Kondratieff observed thatfluctuations occurred in Western economies every 30 years

and attributed them to the long-wave effect

Mensch (1979) studied this phenomenon and suggested that

basic new technology began the economic expansion in eachlong wave

Graham and Senge (1980) concurred with the view that

inventions and innovations trigger economic long cycles


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THE LONG-WAVE CYCLE(Contd.)

Betz (1987) suggested the following sequence of events for the

long-wave process:

1.Discoveries in science create a phenomenal base for technologicalinnovation

2.Radical and basic technological innovation creates new products

3.These products create new markets and new industries

4.The new industries continue to innovate in products and processes,expanding markets

5.As the technology matures, many competitors enter internationally,eventually creating excess production capacity

6.Excess capacity decreases profitability and increases business failures andunemployment

7.Subsequent economic turmoil in financial markets may lead todepressions

8.New science and new technology may provide the basis for new

economic expansion


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Betz (1987) argued that the long-wave hypothesis merely describes

past connections among pervasive basic innovation, long-term

economic expansion, and excess capital formation in technology-

mature industries. His observations:

Cutting-edge technology is behind the long waves of economicactivity

High-technology products displace old technology when there is a

justification for performance over cost

Technology life cycles of industries affect long cycles in the national

economy

New technology comes from science, and science comes from new

discoveries in nature

A new technology, when created, will begin a new wave


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Isaacson (1997) stated:

The outputs of the old economy were simpler to measure:

steel, cars, and widgets are easily totted up. But the neweconomy defies compartmentalized measurement. Corporatesoftware purchases, for instance, are not counted aseconomic investment. What is the value of cellular phonesthat keep getting cheaper, or e-mail? By traditional

measures banking is contracting, yet there has beenexplosive growth in automated banking and credit cardtransactions; the same for the way health care is delivered


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THE EVOLUTION OF

PRODUCTION TECHNOLOGY

Evolution of Production Technology


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TECHNOLOGY AND NATIONAL

ECONOMY

Developed economies are identified with countries that

properly use technology for the creation of wealth

Less developed economies are identified with countries

lacking the technological know-how necessary to createwealth

Two examples in modern history are Japans and Germanys

recent successes in the world markets and their subsequent

economic prosperityIt is important here to note that proper management of

technology encompasses all levels of technology, from low-

tech to super-high technologies


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TECHNOLOGY AND NATIONAL

ECONOMY (Contd.) However, proper management of low- or medium-level technologies can

still create a certain competitive advantage and be effectively used for

wealth creation (Khalil, 1993)

The U.S. economy went astray in the 1970s and early 1980s when the focus

shifted from efficient production and global marketing for wealth creationto a rash of unjustifiable financial transactions and unworkable costing and

accounting schemes

One cannot expect to continue to improve economic conditions on the basis

of paper transactions on Wall Street and Dalal Street, or money exchanges in

banks, savings and loans associations, or board rooms 1991 saw the economy reforms coming to Indian economy. Late 2000 has

seen once again a severe global economic recession

To overcome the recession, we have to work for innovation and cost cutting


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chapter 2 the role of technology in creation of wealth

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