“Normal” periods of technological innovation show a gradual and stable path of development for cities, industries and countries. However, during periods of radical technological breakthroughs, big opportunities exist for actors to “leapfrog” various stages of development using new technologies. Digital technologies and ICTs in particular foster this prospect, potentially leading to huge leaps in development for laggards at the expense of incumbents.
Observations
- The core idea behind leapfrogging is that actors have a linear model of growth and development ,can “leap” certain stages of development and thus often become leading nations instead of laggards. Generally, a few conditions have to be met: i) the development should be boosted by “radical innovation” so that lagging countries can leap leading actors; ii) lagging countries should have no “legacy infrastructure” that enables them to invest in “next-gen infrastructure” on which new innovations and business models can be leveraged; and iii) there must be an institutional framework that can deal with the process of “creative disruption” imposed on incumbent parties and sectors.
- The seminal paper of Fudenberg, Gilbert and Stiglitz (1983) expanded on the conditions of leapfrogging in the case of patent races in industrial organization. Their model shows that cumulative experience that leads to product improvement, information lags that introduce uncertainty about the technological and research capabilities of competitors and multi-stage games in markets create the possibility for following firms to “leapfrog” industry leaders.
- Brezis, Krugman and Tsiddon (1993) developed an endogenous growth model that examined how major technological change could lead to economic leadership shifts between countries. In contrast to incremental, “normal” technological change, whereby increasing returns to scale tend to accentuate leadership, a major technological breakthrough could radically upend the economic balance between countries (e.g. the invention of the steam engine in 19th century England, the development of semiconductors in 20th century United States). This is because leading countries (with higher wages) generally lack the incentive to develop and adopt the new technology, while low-wage lagging countries have an incentive to invest in the initially less productive technology and also lack the sunk costs of the incumbent leading nation. As the productivity and profitability of the new technology eventually pays off, the lagging country “leapfrogs” the leading nation to become a new economic leader based on the new techno-economic paradigm. Brezis and Krugman (1997) developed a similar model for metropolitan areas, in which leading cities can lose their leadership in times of radical technological innovations to upstart urban centers.
- Joel Mokyr distinguishes between incremental technological improvements and innovations that build on each other (i.e. “microinventions) and result in technical systems, in contrast to radical technological breakthroughs (i.e. “macroinventions”) that seem to come out of nowhere. The latter is also associated with Carlota Perez’ concept of “technological revolutions”, Smihula’s ideas of “long waves of technological innovations” and Christensen’s concept of “disruptive innovation”.
- The first five technological revolutions all emerged in the West during the Atlantic Era: the Industrial Revolution in 18th century England, the Age of Steam and Railways in the first half of the 19th century in England, the Age of Steel, Electricity and Heavy Engineering in the second half of the 19th century in Germany and the U.S., the Age of Oil, Automobile, and Mass Production in the first half of the 20th century in the U.S., and the Age of Information and Telecommunications in the second half of the 20th century in the U.S. These technological revolutions facilitated and sustained the position of the global hegemon of that time, showing the interrelationship between geopolitics and technological innovation. As we are moving towards a multipolar world order, and capital deployment and technological research are spreading across the world, the next technological revolution might emerge elsewhere or simultaneously across the world. It might begin in China, for example, which wants to leapfrog the U.S. and is technologically the most advanced nation.
Analysis
The idea of leapfrogging is that companies, cities and countries do not follow a linear model of development in which they go through specific phases of development and growth. For example, the general development model of countries is that they transform from a local and traditional society, with most employment and value-added in agriculture (i.e. the primary sector), into an economy driven by urban industrial production (i.e. the secondary sector), finally moving towards a high-end service sector (i.e. the tertiary sector). This approach is not limited to industrial organization of economic growth as such. For example, in demographics, the general model is that countries first have high fertility as well as high mortality rates and low life expectancy, resulting in stable population growth. As countries develop and spend more on healthcare, fertility rates remain high but mortality rates decline and life expectancies rise, leading to high population growth and the so-called “demographic dividend”. Eventually, as work and life move towards modern industrial production in urban centers, fertility rates also come down, hence population growth stabilizes and society eventually starts ageing.
Generally, we perceive that companies, cities, and countries move along certain stages of development, in which incremental technological improvements and innovations drive growth and development. However, sometimes these actors make huge leaps along their path of development, in which case certain stages of development are skipped. Examples in the domain of urban development and industrial organization are South Korea’s digital TV industry or Israel’s high-tech ecosystem. With respect to specific domains of development in countries, we see Kenya’s huge boost of financial inclusion by mobile payments, Rwanda’s near-universal healthcare coverage using smartphones as a service point, Tanzania’s decentral “off-the-grid” power generation, China’s rapid development of the digital “new economy” (e.g. China’s booming sharing economy and fintech industry) and India becoming a digital superpower with a competitive IT sector because of massive public investments in its digital infrastructure. In the consumer domain, we perceive that Indian consumers are leapfrogging into digital practices that surpass those in developed countries (e.g. using voice interfaces, mobile commerce) or Myanmar’s embracement of mobility solutions for those who do not own their own transportation vehicles.
The idea of leapfrogging is that companies, cities and countries do not follow a linear model of development in which they go through specific phases of development and growth
Why is this concept of “leapfrogging” so important in our times? We have written before about the things that make our information age so special. First, it is that information and communication technology (ICT) enables hitherto disparate sources of information to converge and spread, almost limitlessly, across time and space. As the computer algorithms, communication channels and software protocols that produce digital goods and services are not fundamentally different from the digital data they manipulate, digital products and services are never “finished goods” as offline products are (e.g. Tesla’s car requires continuous updates, Google’s search engine is continuously improving) but permanent “semi-finished goods”. Furthermore, as data becomes the primary input in this production process and knowledge increases exponentially (e.g. the “Knowledge Doubling Curve“ will show a doubling of all human knowledge every day from 2025) companies and regions that know how to generate value from all this knowledge and information will quickly be able to become the leading actors of our digital economies (i.e. “digital conglomerates” or digital hubs).
Lastly, as a new technological revolution is in the making, with artificial intelligence (AI) at its core and combined with other technologies, such as 5G, cheap and miniature sensors and quantum computers, this could result in a new techno-economic paradigm (i.e. the sensor-based economy) that is being developed in other developing countries (e.g. China). For these countries, “digital leapfrogging” is becoming a powerful force of development, showing many non-linear paths of modernization and internal development. For example, using data from the World Bank on fertility rates and the KOF index of Information Globalization, we find a significant and exponential relationship between these two variables. One explanation could be that lower search costs driven by accessible digital information could increase educational chances for women in developing countries as well as enable them to acquire information on contraception, empowering them to have children later in life. Another example is that the network readiness is significantly correlated to social progress: the fact that more and more parts of our daily lives are now organized in online networks that transcend space and time could create more opportunities for excluded individuals (e.g. those living in remote areas) to search for employment, gain social capital and move out of poverty traps (e.g. using P2P lending to boost financial inclusion, or metropolitan areas seeing themselves as platforms for digital ecosystems with network effects). As such, leapfrogging could radically upend the economic order and paths of development and modernization as we know it.
Implications
- Although leapfrogging provides huge potential to lagging actors, we have written before that we tend to overlook the resilience and strength of incumbent actors. For example, incumbent parties often have the capital for M&As or to “buy time” and catch up with the new entrants, they are typically well-known and trusted and have the political capital to lobby for regulations that raise barriers for new entrants.
- Leapfrogging could easily lead to a kind of “techno-optimism” that digital technology will provide a solution to our problems by bringing huge gains in efficiency and new opportunities that arise from the process of “creative disruption”. However, we have written before that as technology is always embedded in social and cultural systems, significant “softer conditions” should be met before actors can leapfrog into new business, production and consumption models.
- Furthermore, the concept of technological revolutions and technological breakthroughs fails to account for waves in economic growth and for the fact that technological innovations often emerge as the result of a cumulative process consisting of multiple technological developments. Likewise, the idea of radical technological breakthroughs or macroinventions that come out of nowhere seems to put too much emphasis on the “cult of the genius” that creates new paradigms and things ex nihilio instead of against the institutional and systematic background of technological innovations. See, for example, Thomas Hughes’ idea of “large technical systems” that stress the various stakeholders (e.g. investors, financiers, managers, researchers, politicians) that contribute to the development of large technical systems (e.g. the electricity network, the internet business).
