Disruptive technology always challenges entrenched interests, be they economic or political. It usually needs a benign regulatory environment, scale in the addressable consumer market and access to funding to drive standardisation and adoption.
Candidate disruptive technologies include automation, artificial intelligence, aeroponics, block chain, batteries, clean energy, drones, stem cells, 3-D printing and virtual reality.
The repercussions should these technologies gain traction are far from straightforward for emerging and frontier markets. Some bring economic benefits (such as greater documentation of the economy, greater inclusion of lower income segments in economic development), some challenge the security and defence mechanisms of governments (easier to mobilise protests and carry out terror) and some may cause the largest, developed economies to take less interest in emerging market supply chains (and less interest in protecting the security of those supply chains) if manufacturing migrates back to developed economies.
A positive driver of economic growth in emerging markets…
Some of these new technologies should accelerate growth by enabling a frog leap over existing economic bottlenecks. Mobile broadband, artificial intelligence and blockchain, for example, should dramatically accelerate mass financial inclusion, documentation of the economy and the achievement of scale across borders.
In Sub Sahara Africa, the telco-led mobile model has proven a useful tool for enabling financial inclusion, due to the lower operating costs and fees related to banking by mobile phone versus via traditional banking channels.
Those technologies, particularly in combination, were not available when today's more advanced emerging markets were at the same stage - in terms of GDP per capita - as some of today's poorer markets.
…but a negative impact on political and security risk too
But these technologies also threaten vested interests and some of the social control mechanisms, security and critical assets of the state. Media is no longer a tightly controlled marketplace of views in the world of social media. Rent-seeking in government bureaucracies (or reward for political allegiance via patronage or, simply, employment) is not so easy when new technologies are deployed that save on labour and make interactions with government departments more transparent. Protests (as well as terror and military attacks) can be mobilised (and, if necessary, funded) increasingly quickly and efficiently too.
Recent massive demonstrations and popular protests that are currently shaking the world from Algeria to Chile and Yemen demonstrate how civil societies can feel empowered by social media and mobile technologies.
And what if disruptive technologies shift manufacturing back to developed economies?
Successful emerging markets have benefited from the security cover and low tariff access provided to the supply and transport chain for their exports by the largest economies. In a world where manufacturing is driven more by automation, which relies less on low cost power rather than low cost labour (which may cause a shift of manufacturing back to developed markets), and 3D-printing, which does not use traditional raw materials, there is a risk that the macroeconomic growth model of many emerging and frontier markets is throttled. Furthermore, the security protection provided by the largest economies to emerging market exporters (both commodity and manufacturing exporters) may be withdrawn (if these supply chains shift back to developed economies because of technologies such as automation and 3D printing).
Good government and access to capital are still paramount
Many emerging and frontier governments sit atop populations that are very heterogenous and nation states that are relatively young and subject to continual external, geopolitical influence. In response, many of these governments have adopted an authoritarian style. Silicon Valley idealists may question whether disruptive technology can thrive under authoritarian governments? In our view, this misses the key drivers that are regulatory support (legalising the disruptive technology), critical scale in human capital (to develop or implement the technology), scale in addressable market (to drive down unit costs and drive standardisation) and access to capital (for the upfront investment to launch new business models and drive adoption). Concentrating on these factors, rather than how authoritarian a government is, explains the difference in, for example, China's success in the development of technology and technology-based businesses compared to the GCC.
Below we summarise some of our thoughts on the positive and negative impact of disruptive technologies on investment in emerging markets.
This article has been written by Hasnain Malik, Strategy & Head of Equity Research and Tracy Kivunyu, Senior Equity Research Analyst for Tellimer