Lecture 8: Innovation dynamics in the World Economy

World Economy and Innovation• The world economy has provided incentives for

innovation since ancient times – [transportation, navigation, maps, containers…].

• The world economy has provided markets for the introduction of new production processes, for the specialization of production activities and for the emergence of large corporations [MNC].

• Access to the world economy has created technology-driven opportunities for catching up.

• What is new?

A “new wave” of labour specialization

• Internet enabled

• High wage differential, low set up barriers

• No face-to-face customer servicing required

• Low “social networking” required

Location does Location does not matter not matter muchmuch……

Annual Salaries of software programmers in various countries

Computerworld, April 28, 2003

USAUSA

The Globalization of Innovation

• Advanced S&T spreading around the world, also in developing countries

•(e.g. India, ppp $2,900, China, $5,000 versus US $37,800).

• Increased mobility of scientists and inventors (geographic, institutional)

• Larger, more diverse teams of inventors and scientists

• More international cooperation

• Decentralization of “big science”: e.g. the Genome project.

So, shall we skip the country level?

• Location matters for employment.• Local activities generate spillovers flowing inwards:

those that involve creativity, cutting edge innovation, frontier science.

• Where do the gains flow to? Ultimately to those that own/control knowledge.

• Perhaps this is the most interesting and indeed a novel trend in the world economy: the co-evolution of two processes. First, the increasing integration of production activities and second, globalization of research and innovation.

R&D Propensities and manpower in major country groups (latest year available)

Countries and regions (a) Scientists/engineers in R&D Total R&D Sector of performance Source of Financing Source of financing (%) (% distribution) (% of GNP)

Per mill. Numbers (% of GNP) Productive Higher Productive Government Productive Productive population sector Education enterprises enterprises Sector

Industrialised market economies (b) 1,102 2,704,205 1.94 53.7 22.9 53.5 38.0 1.037 1.043

Developing economies (c) 514 1,034,333 0.39 13.7 22.2 10.5 55.0 0.041 0.054Sub-Saharan Africa (exc. S Africa) 83 3,193 0.28 0.0 38.7 0.6 60.9 0.002 0.000North Africa 423 29,675 0.40 N/A N/A N/A N/A N/A N/ALatin America & Carribean 339 107,508 0.45 18.2 23.4 9.0 78.0 0.041 0.082Asia (excluding Japan) 783 893,957 0.72 32.1 25.8 33.9 57.9 0.244 0.231

Mature Tigers (d) 2,121 189,212 1.50 50.1 36.6 51.2 45.8 0.768 0.751 New Tigers (e) 121 18,492 0.20 27.7 15.0 38.7 46.5 0.077 0.055 S Asia (f) 125 145,919 0.85 13.3 10.5 7.7 91.8 0.065 0.113 Middle East 296 50,528 0.47 9.7 45.9 11.0 51.0 0.051 0.045 China 350 422,700 0.50 31.9 13.7 N/A N/A N/A 0.160

European transition economies (g) 1,857 946,162 0.77 35.7 21.4 37.3 47.8 0.288 0.275

World (79-84 countries) 1,304 4,684,700 0.92 36.6 24.7 34.5 53.2 0.318 0.337

Source lall (1998): Calculated by the author form UNESCO Statistical Yearbook 1997. Regional propensities for R&D spending are simple averages.Notes: (a) Only including countries with data, and with over 1 million inhabitants in 1995.(b) USA, Canada, West-Europe, Japan, Australia and N Zealand. (c) Including Middle East oil states, Turkey, Israel, South Africa, and formerly socialist economies in Asia. (d) Hong Kong, Korea, Singapore, Taiwan Province. (e) Indonesia, Malaysia, Thailand, Philippines. (f) India, Pakistan, Bangladesh, Nepal(g) Including Russian Federation.

The knowledge divide: shares of world patents and income

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Share of Total Number ofPatents

Share of World Income

Rest of the WorldTop 10 Countries

Knowledge divide: the regional dimension - Patents granted at the USPTO by region [per million]

Concentration of R&D expenditures in the world economy

PATENTS by Latin American & Asian Countries

116.5615,871135Taiwan523.4312,06223South Korea41.6572517Singapore12.4617513Malaysia4.4548589India8.631,694176Hong Kong

191.335773ChinaEmerging Asian Economies

2.6418250Venezuela2.48431124Mexico1.184822Costa Rica0.504228Colombia4.006012Chile2.62492136Brazil0.98228115Argentina

Emerging Latin American EconomiesGrowth Rate1995-19991976-1980Country

Asymmetrical access to world markets - Technology Competitiveness [Fagerberg]

The world economy offers opportunities

• Enormous productive potential of new technologies in all economic activities

• Faster growth of technology-intensive activities with greater spillover benefits

• Access to and contacts with huge markets• International flows of information, knowledge,

machines, skills and enterprises• Ability of firms to manage integrated operations

across the globe

It also poses great challenges

• It shrinks economic distance and exposes all activities in all countries to competition with unprecedented intensity

• It needs massive transformation of existing productive, institutional and social structures, not just initially but constantly

• Rich or fast growing countries must struggle to keep ahead of others

• Poor countries must transform to catch up

General Interpretation I: Asymmetries in the World Economy

• Extreme concentration of innovation and technical change

• Greater macroeconomic vulnerability of developing countries

• Increasing capital mobility vs. limited international mobility of labour

General Interpretation II: Challenges for Developing Countries

• Potential benefits of trade and foreign investment depend on the availability of institutional and productive capacities to respond

• International trade and factor movements have increased but in a highly selective way

• Diverging economic growth trajectories in the integrated world economy

• Growth and development depends on an uncertain mixture of unbalanced global market forces and asymmetrical local productive capacity and experience. Thus, institutional variety in policy configuration is needed.

However, in the current policy debate R&D/Innovation policy has emerged as the

solution for everybody• In Europe: The Lisbon agenda: 3% R&D/GDP, the

“Knowledge economy”

• Race in emerging economies to develop innovation policies, set up Government support to R&D (e.g. eastern Europe, Asia, India, etc)

• Presumed success stories turned into “benchmarking models”: Israel, Finland, Taiwan, Bangalore….

• Bandwagon effect in riding the globalization R&D wave; rush to attract and set up Venture Capital funds all over.

• Is all this really relevant for development?

Catch-up Potential vs. Realization (Abramovitz)

• Catch-up potential is determined by backwardness of a country, measured through per capita income or (labor or total factor) productivity gap

• Its realization takes place through:– accumulation of human and physical capital– technological change– resource reallocation from low to high productivity

industries• … but is constrained by the social [and

technological] capability to catch up. • Thus, innovation policy challenges are

associated with levels of economic development.

Simple questions about Innovation Policy for Developing Countries

Global Global R&D, KR&D, K

TFPTFP

R&DR&D

∆∆∆∆∆∆∆∆KK

GrowthGrowth

•• Why not free ride?Why not free ride?•• Is the inflow really larger Is the inflow really larger than the outflow? than the outflow? •• What exactly do we What exactly do we mean by mean by ““absorptive absorptive capacity?capacity?””

•• Need not only formal Need not only formal R&D, but host of other R&D, but host of other factors to get factors to get usefuluseful ∆∆∆∆∆∆∆∆KK

•• What sort of innovations What sort of innovations impact TFP? impact TFP?

•• Are these the same in Are these the same in DCsDCs and in and in LDCsLDCs??

Is Is ““growthgrowth”” ��

““developmentdevelopment”” in in this context?this context?

Costs and benefits of R&D internationalization[the international business perspective]

Innovation to accommodate heterogeneous needs, local markets

• Typical examples for bottom of the pyramid innovations in LDCs:

• Health care: very different incidence of diseases; need for cheap prevention rather than high end technology, etc.

• In ICT: simpler software packages (not more features), less demanding on hardware, more backwards compatibility.

Why globalization of Science and Innovation?

Some of the reasons:

• Globalization in trade, finance, IP, WTO, etc. bound to impact also S&I.

• Increased complexity, cross-disciplinary nature of frontier S&I (e.g. Genome, nano), increased specialization of researchers.

• Advances in ICT, ease of communication and transportation, lowering of barriers.

Further facts about globalization of S&I

• Larger teams of researchers per unit of S&I output (papers, patents, etc.)

• More international and institutional cooperation and diversity

• More geographic dispersion of researchers

• Large fraction of foreign PhD students

• IPR and the division of labour of scientific research [read Forero-Pineda]

Why do we care?

•The ICT sector breeds from the S&I infrastructure of the country.

• Outsourcing pushes us up the “tech ladder,” but to be able to climb up, need advances in S&T.

Why firms care?• The above transformations have provoked fundamental changes in

innovation management. Corporate innovation management must address three tasks simultaneously:

– Develop innovative capabilities– Recruit and retain experienced knowledge workers– Develop and adjust innovation process management in a cost effective way

• Given the high risks involved in the development of new products for global markets, firms prefer to outsource the most risky parts of innovation to small high-tech companies, which operate at arms length but would be taken over, once successful.

• Large, R&D intensive firms, appear today less interested in increasing their R&D investment in OECD countries than in rationalizing them or even reducing the risks by collaboration.[a UK example: A UK firm, by shifting 10% of its R&D activity to the US in the 1990s, while keeping overall R&D at the same level would witness a 3% increase in productivity. An effect similar to doubling its R&D stock]

A final comment

• After going through 400+ recent papers on these issues, I am convinced that there is a clear need to develop new ways to measure innovation as it evolves in the world economy.

Readings…

• Furman, general trends• Storper, location of knowledge and

knowledge flows• Verspagen and Fagerberg, the gaps

approach• Forero-Pineda (IPR, available latter

today)• Additional Broadberry (different production

systems co-exist)