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The recent decades have witnessed the migration of highly sophisticated electronic-product manufacturing industries from developed economies to emerging ones in Asia. The US has borne the brunt of this migration, resulting in a decline in the high-technology manufacturing sector. Given the history of great innovation, one would expect that new industries would emerge in the US on the basis of new technologies. In fact this has happened, but the new industries have not replaced the manufacturing industries that migrated because they are based largely on applications of new information technology. Thus new service industries have been created of great value, leveraging information and communications technology equipment developed in the US but largely manufactured overseas.

To frame this discussion, the digital industrial revolution can be divided into two major  periods. The first great wave of electronic innovations began with the invention of the junction transistor in 1948, which made computers practical, followed by integrated circuits, semiconductor lasers, fiber optics and flat-panel displays that enabled the computing and communications capabilities that we have today. The US government played a key role in supporting much of the research that led to these innovations

But lots of capital was needed. Many billions of dollars of venture capital from the US seeded the emergence of new companies such as Intel and Cisco, and receptive public markets financed growth. These products reached commercial maturity as a result of massive innovations in manufacturing technologies and software that allowed new systems to be produced at ever declining cost.

Looking for growth, these electronic industries were targeted by emerging Asian economies. American industrialists welcomed this migration because new sources of lower-cost production became available. The migration of sophisticated manufacturing to new countries was made possible by the fact that these new industries benefited from production-equipment suppliers that sold turnkey plant equipment that could be operated by workers with modest training and the fact that industrial know-how was freely licensed in important sectors such as consumer electronics and semiconductors. For example, RCA licensed its color-television and semiconductor technology freely to companies around the world.

The second big wave of industrial innovation was the result of the Internet that emerged in the US as a global communications system in the late 1990s

The second big wave of industrial innovation was the result of the Internet that emerged in the US as a global communications system in the late 1990s. As a result of large venture-capital investments and US government research support of new software technology (artificial intelligence), new industries leveraged the formidable computing capabilities and communications developed in the first stage of the digital revolution.

Note that the US venture-capital industry has shifted substantially from investing in infrastructure companies to information-technology companies. The attraction was the rapid  revenue growth of such companies, relatively low capital needs compared with manufacturing businesses, and high valuations when becoming public. The numbers are instructive. In 2018, US venture capital firms invested $63 billion in 6,227 new software companies, compared with $15.3 billion in 1,150 software companies in 2000. For comparison, VCs invested only $0.9 billion in 108 communications and networking companies in 2018, compared with $12.3 billion in 339 new companies in 2000.

Combining powerful communications and computer processors with ever more sophisticated software has produced great new companies. The ability to manage and harness massive amounts of data for entertainment and commercial use is at the heart of many of these new companies and services that have emerged. Many have been funded with professional venture capital. As a result, some of the most valuable companies in the world were created – Apple, Google and Facebook being on the top of the list.

Apple did not just develop a better cellular hand-phone. The novel capability of the smartphone profoundly changed the way people work, collaborate and communicate, thus allowing other new services to emerge transforming industries. For example, a service such as Uber was not practical without the smartphone. It is noteworthy that the products are largely manufactured offshore.

Amazon is another example of creating a new industry by developing online shopping into a nearly universal consumer service by developing the appropriate technology from ordering to supply-chain management and delivery. Furthermore, by its development of the cloud computing concept, the company has moved the old concept of time-sharing computer facilities to a whole new level of service and revolutionized the way industry uses computers.

Facebook started off as a simple service for friends to stay in touch but emerged as a global provider of unique communications service and advertising platform that revolutionized the way businesses market their products. Google with its universal data search capability transformed the way information is shared globally and made much of the printed literature available to all.

In addition, many other companies have recently emerged, changing the way people organize their lives, communicate and travel – autonomous vehicles being an example of what is promised in the future.

Information technology is becoming a core value driver for practically all industries, be they manufacturing, software products, or services. This has serious implications because there is one certainty: Just like in the first wave of digital innovations, the new wave based on information technology started in the US, but as quickly as these new industries emerge, there are no borders to contain them. Intellectual property based on information technology travels fast. In fact, new companies overseas have replicated many of the capabilities initially developed in the US. Hence the importance of maintaining an economic environment capable of rapidly adapting to new market needs and meeting them better than competitors.

The race to grow economies is won by the smart, the innovative, the swift and the well-funded. To sustain dynamic and growing economies, countries need to promote entrepreneurship, risk capital and innovation. What this means is that industrial success in the digital age continues to be based on investment in innovation, the building and sustaining of innovative companies to move such innovations into the marketplace quickly.

The policy implications in national industrial planning are noteworthy. The right workforce to staff growing companies is critical. This means a well-educated and productive workforce able to adapt to industrial activities that require a high level of analytical thinking and disciplined workplace execution. This requires an appropriate technical educational from high school through university. But a four-year university program in engineering may not be everyone’s choice. Hence post-secondary vocational training programs in partnership with companies are needed to offer an opportunity for young people to be prepared for demanding (and well-paid) industrial jobs.

New companies need to reach critical mass of revenues quickly to establish a sustainable market position. Access to capital on economic terms is vital. Private equity funds and public market funds have provided capital for this purpose in the US and some other countries.

And, finally, research and development must be a national priority, with government funding of information-technology programs high on the list. Government support is needed because history has shown that such programs end up benefiting the economy as a whole.

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