Egyptian startups and businesses work on solving local challenges with an eye on international markets, whether to attract foreign investments or to outreach with their products or services. But do their innovations have the capacity to scale and reap the profit margins like the big market players one day? Does their future hold the position of contributing to the Egyptian GDP with a significant percentage? Will we be having another “Amazon” or another “Apple” that once has been an Egyptian startup or a small business?
What makes innovation – and investing in R&D that fosters it- a winning bet is highly linked to the type of economy it creates. But let’s first understand the economic growth stages, checkmark where do we stand, then we would comprehend the importance of working on innovations in science and technology that take us steps forward in the economic growth journey.
Efficiency Economy
Efficiency economy is when the country starts to add a processing or a manufacturing phase rather than raw material provision. The technologies used for manufacturing are still developed elsewhere. And to build up such economy, care is being given to vocational training, workers’ integrity, production lines and systems management to ensure quality of production at a scale and an optimized cost. The more “efficient” you are at this role, the more you land manufacturing deals, given certain designs, formulae, and specifications by those who created the technology (The Knowledge Economy Leaders).
If we continue to look at the same example of shaving machines as a product, now factories working on turning plastic polymers and metal alloys into usable machines through pouring them into pre-designed molds or sharpening the blades with predesigned slants are the efficiency economy contributors to that product.
The best financing options for the efficiency economy players are the private equity and banking sectors, they’re casually called “Efficiency Money”.
Knowledge Driven Economy
The knowledge economy, or knowledge-based economy, is an economic system in which the production of goods and services is based principally on knowledge-intensive activities that contribute to advancement in technical and scientific innovation.
Economy’s profits come from the commercialization of science and research. innovation based on research is commodified via patents and other forms of intellectual property. And GDP is skewed towards generating knowledge and technology that’s most likely will be manufactured elsewhere.
According to The World Bank, Knowledge economy is defined by four pillars
1. Institutional structures that provide incentives for entrepreneurship and the use of knowledge
2. Availability of skilled labor and a good education system
3. Access to information and communication technology (ICT) infrastructures
4. A vibrant innovation landscape that includes academia, the private sector, and civil society
Knowledge economy businesses are game changers, like how Tesla has surpassed Mercedes position by a whole new concept for cars. Those game changers come up with a know-how after extensive R&D, then they sell a unique product built with this know-how at a much higher price markup from what its raw materials actually cost, or they license such know-how to others to utilize by themselves.
Back to our example of shaving machines, those who worked on the Research and Development to come up with the exact shaving machine’s design and specifications then handed them to manufacturers are the ‘’Real” or “Knowledge Economy” masters who incur the highest markup and profits from selling such product!
For knowledge economy businesses, R&D does not stop at releasing a functional product, it explores how it will be commercialized and utilized whether as a B2B or B2C product. And by the time the technology has been ethically licensed, or even at the risk of being stolen or imitated, the R&D has already been working on the next evolution version of the product by integrating is with AI, IoT or even replacing the product altogether with a whole new concept that makes that old product obsolete.
The R&D cost, although high, is still legitimate for those businesses, once the innovation scales, it sells at very high profit markups that even manufacturing costs are not considered significant.
For knowledge economy businesses to exist for a country, many supporting policies need to be set in place, like those related to IP protection, medical products testing protocols, data privacy policies, and the likewise.
Financing organizations Knowledge Economy businesses need to break free from the expecting quick ROI metrics. Which calls for more “Patient Money, coming mostly from venture capitals and private equity which see and understands the value of investing in R&D (High risk High Returns).
The exact stage for a country’s economy is determined by how much percentage of the GDP is coming from products and services being developed at which stage.
Saudi Arabia has long hosted Aramco on its lands with concession deals for extracting its oil, playing in the factor economy arena long before Saudi Aramco was created, now owning the equipment and extraction know-how, moving over efficiency economy and towards knowledge economy. China has long played the world’s largest efficiency economy nation, but we see it starting to shift towards knowledge economy. And the Egyptian ecosystem calls for moving towards knowledge economy as well, by raising awareness among entrepreneurs to adopt the release of more science and deep tech innovations, for policy makers to speed up setting laws and policies that accelerates the innovation ecosystem, and for universities to start working on their research commercialization and collaboration with industry for products and services that solves real life problems!
Are you engaging in a science and technology research with the intention to transform it into a usable solution? Read our article about the Technology Readiness Levels to understand what next level you need to take your innovation to.
This article is an adapted part from Dr. Alaa-Eldin Adris, Professor of Management of Technology session during “The Booster Program” by Ecosys+ , hosted and organized by Nile University.