Chasing the Silicon Dragon
The role Southeast Asia's growing tech industry plays in development
For 40 years or more, Silicon Valley has been the darling innovation engine of the world. Many local and national governments have tried to cultivate a similar level of dynamism and innovation in such a concentrated area. Despite achieving some successes, none of these tech incubators came to rival the concentrated success that Silicon Valley did. Despite this, high-tech success stories have percolated across the world. The first areas to succeed were already economic powerhouses with the financial and educational networks to succeed in the emerging digital economy. However, today, web entrepreneurs are widely dispersed around the world. Southeast Asia, among many other regions, has benefited from a host of new locally founded tech companies, e-commerce brands, and digital services.
This emerging digital economy has caught the attention of governments eager to tout their economies as dynamic, business-friendly, and tech-forward. Many have put forward policies to both nurture local talent through incentives and the creation of local incubators, as well as incentives to attract foreign tech entrepreneurs to their borders. Investors, too, have tuned in to the trend. In the last decade, an explosion of investment dollars has flowed into the region's tech companies, as well as the formation of new VC firms looking to strike while the iron is hot.
True to the venture capital driven tech industry around the world, the startup scene in Southeast Asia has faced a downturn over the last couple of years. Macroeconomic headwinds have investors looking for other places to put their money and entrepreneurs looking for more conservative, profit-focused growth instead of the growth at any cost model that prevailed in the years of cheap money.
Finding the right mix for development
Like most economic trends generating a lot of buzz, the software industry’s shifting into high gear in Southeast Asia comes with a mix of genuine benefits and snake oil. A vibrant software industry helps societies increase the amount of information shared across the economy and breaks down silos. As digital expertise increases, companies seek to disrupt old ways of business. However, the software sector also offers a false promise for those seeking economic development.
The challenge for developing countries is that they are generally seeking to lift millions out of poverty while equipping a population raised on the farm with the technical skills and conventions required for industrial employment. In the seminal book How Asia Works, Joe Studwell explains how the most successful Asian economies gained their dominance by laddering up from light, low-tech manufacturing through heavy industry and eventually into the cutting-edge high-tech sector.1 One could envision a simplified journey from textile sweatshops to industrial assembly before moving on to market-dominating brands in automobiles, planes, and semiconductors. Developing countries can’t jump straight to the top of this pyramid no matter how much they’d like to because the skills and foreign capital aren’t available to make it viable.
Two factors are essential to consider when considering Southeast Asia's development trajectory. First, the majority of the economies in the region are already relatively well on their way up the development chain and, while still having a long way to go, now resemble other wealthier middle-income countries more than they do the most poverty-stricken societies in the world. This almost invariably means large chunks of the population have already moved beyond the most menial and predatory employment opportunities and on to more complex and lucrative roles. Secondly, it’s important to point out that the various enterprises that develop on the internet, from e-commerce to software as a service (SaaS), function very differently at both micro and macro levels. While still requiring sophisticated technical skills, the overhead for both the education and the development of a viable business is far lower than that of any factory.
This dynamic makes internet-based industries attractive opportunities for the numerous college-educated young adults. It also presents an attractive development path for governments in the region eager to demonstrate the dynamism and tech-forwardness of their economies.
The challenge, however, is that even in the most developed economies, the tech industry represents a relatively small share of the population. Even in countries like the United States, where the tech industry gets attention for its massive power and eye-watering salaries, it is still a far less significant employer than the diminished manufacturing sector.
Simply put, while the emerging tech sector in the region undoubtedly benefits developing economies, it does not, on its own, represent a viable road to successful development.
How web-based industries can help development
While not a full solution, developing market participation in web-based industries is still important for economies seeking to cultivate economic vibrancy. Expertise in software design and business models based on highly integrated work groups is often cultivated within the software industry before percolating out to other sectors of the economy. As manufacturing develops in many of Southeast Asia’s economies, these technical skill sets will become increasingly in demand.
In particular, as countries move up the value pyramid and increasingly pick off more complex opportunities previously captured by China, they will come under increasing pressure to increase the efficiency of their operations. It’s one thing to run a textile plant on older labor practices, however, in large assembly lines producing sophisticated products, inefficiencies and down time can cost companies serious money. This is where firms finding sophisticated uses for data provided by the thousands of censors and connected devices present in a modern smart factory find themselves at an advantage.
Growing an economy from an agrarian base into a modern, digitized, and industrialized economy is no small feat. It’s even more daunting when that economy is recovering from the remnants of war and the traumas of the colonial age, as many in Southeast Asia are. Succeeding from these roots requires intense trade-offs and often no small amount of force to push through the needed reforms.
That challenge is part of what makes it so exciting to see the creativity in adapting web-driven technologies to Southeast Asia's use cases and business environment. The software industry isn’t going to power the rise of a country. However, the presence of a healthy tech industry is indicative of a society rapidly expanding in its sophistication and internal integration and, correspondingly, its wealth. As in developed countries, it has done this by contributing to greater business efficiencies and new ways of organizing productive assets in society. The presence of this ecosystem will ultimately help position Southeast Asia to take advantage of the bets investors and their own governments make in placing increasingly sophisticated operations in Southeast Asia.
Joe Studwell, How Asia Works: Success and Failure In the World’s Most Dynamic Region, 2013.