Economic transformation - factors to consider

Dr M A Shantha WIJESINGHE

While studying for my Ph.D at Jonkopine International Business School in Sweden, one Professor of Marketing discussed the secret behind market capturing and transformation of economies from market-driven to theory and product-driven forces. In his explanation he emphasized the concept of quality combined with purchasing power, affordability, and the market segment of the world economy in support of his arguments. Now I feel that it is important to examine the extent to which we are trying to apply these concepts in our present economic development process. Thus, the objective of this article is to emphasize the significance of such economic concepts in transforming our economy from market-driven forces to theory and product-driven forces, which are timely and essential to develop our country.

In any economy, theory, product and market driven forces are the forces leading its growth and development. In the process of development, various institutions in a country lead these forces in achieving their goals, relating to theory, product and market development. Theory-driven institutions are usually embryonic, involved in advanced theoretical research and considered as the first stage of economic development. They are at the advanced cutting edge of ideas, innovations, and inventions.

Thus, the key areas of the location of such theory based economic activities are the availability of venture capital, ease of start-up and transfer. Product-driven institutions are at the second stage of economic development and at this stage the products become viable and need to be closely monitored for quality and must be modified before sale.

Requirements for the location of such product based economic activities are the availability of technicians and skilled workers, accessibility to theory-driven research and development facilities and favourable business climate, such as low business and personal taxes.

Market driven facilities, which are considered as the third stage of economic development, emerge when the product becomes routinized, imitators enter the market, and price competition enters the selling process. At this stage cost and the availability of labour, cost of utilities, inducements and exemptions are the leading market forces in economic development. At this stage labour costs will exceed 50 per cent of all locationally variable costs.

Where we are?

As followed by many South and South-East Asian countries at the preliminary stage we also initiated the path of our economic development by emphasizing the market forces. Particularly after 1977 we opened our economy to foreign investors to develop the country through market forces but after more than three decades it is timely to look into whether such market forces have contributed to real economic development of the country. As explained above, market forces are important at the third stage of economic development but many developing countries, including Sri Lanka, where capital is scarce and labour is abundant, followed that approach as a solution for capital and technological transformation.

But, it is questionable whether we have been able to get the advantage from such market forces as attained by many other East and South East Asian countries and whether we are still supporting foreign investors for their cost minimizing efforts by emphasizing market-driven forces.

Anyhow, by following the world economic trends many South, East and South East Asian countries initially started their economic development by emphasizing market-driven forces particularly due to lack of venture capital for development. But some of them, such as, Singapore, Korea and Malaysia, gradually transformed their economies from market-driven process to theory and product driven forces particularly by transferring capital and technology through Foreign Direct Investment (FDI), as they identified their prerequisite for development.

In the Product Cycle of any economic activity, theory and product phases are the most important and when it reaches the market phase investors, particularly in the developed countries, attempt to shift their products to developing countries by studying market-driven strategies as cost minimizing efforts. At that level they particularly expect on-off workers and therefore we must be so many of their strategies by planning and implementing our strategies to transform our economy from market-driven to theory and product driven fores at the right time. Even after more than three decades of open economic policy, introduced in 1977, it is questionable whether the economy of Sri Lanka has significantly thought of such a shift.

Where shall we begin?

As quoted at the very beginning of this article it is timely to think of the applicability of the concept of quality combined with purchasing power, affordability and the market segment of the world economy in initiating this transformation.

The meaning of purchasing power is the number of goods and services that can be purchased by a consumer with a unit of currency and affordability is the purchase in accord with the resources. It is an individual's ability to purchase and both these concepts are interchangeably used. Quality is the measure of excellence or a state of being free from defects, deficiencies, and variations that satisfy specific customer or user requirements. It is non-inferiority or superiority of something. Market segment is a sub-set of a market made up of people.

Thus, it is essential to examine the extent to which these concepts can be used in transforming our economy from market-driven forces to theory and product-driven forces at the initial stage. Particularly the European and American markets are comparatively so much concerned about quality but we need to rethink whether product quality associated with high cost of production is suitable to the Asian market where purchasing power of the majority of consumers is less. Maintaining quality is essential but compared with its high cost, consumers in the Asian market cannot afford quality products due to their low income and less purchasing power.

But we should not forget here that the consumers in the Asian market contribute a significant portion of the world market even though they basically belong to poor segments of the market with less purchasing power. Therefore, at the initial stage of the transformation, we must particularly target this big market segment according to their affordability, as the cost of production of their goods and services is comparatively low and such economic activities can easily be initiated with the minimum level of capital. The same concept can be applied to domestic poverty market that represents significant segment of the local market as well.

Skilled human resources

Unlike in the early stages of the open economy phase, Sri Lanka has now plenty of skilled human resources and marketing personnel that we cannot be considered as just a labour abundant country with on-off workers. In addition, higher educational institutions and various professional bodies of the country also generate scientists and researchers who have the strength and capability for such transformation with innovative and inventive ideas which are essential in theory and product development stages. However, the start should be initiated and then it can gradually be transformed into theory and product-driven forces through research and development with high technical skilled labour after the capitalization is well established.

Therefore, at the initial stage of the Product Cycle, we should bother about quality to a greater extent. But we should not forget here that we are already far behind, as this strategy has already been used by some of the East and East Asian countries. Anyhow, before concluding this article one important point needs to be mentioned about quality. There is no argument that quality means something superior in state but we should never forget that it is comparative depending on many economic practices and concepts of quality into comparative advantages as practised by many Asians in transforming their economies from market to theory and product driven forces. Otherwise we will be supporting multinationals forever by opening avenues through market forces to minimize their cost but not develop our economy.

The writer is the Senior Lecturer of the Faculty of Humanities and Social Sciences, University of Sri Jayewardenepura