©Knowledge for Development, WBI Carl Dahlman Knowledge for Development Program March 16, 2004 Santiago, Chile Challenge of the Knowledge Economy: Towards

©Knowledge for Development, WBI©Knowledge for Development, WBI

Carl Dahlman Knowledge for Development Program

March 16, 2004Santiago, Chile

Challenge of the Knowledge Economy: Towards a Pragmatic Innovation Agenda

Structure of Presentation

1. The Knowledge Revolution and Implications for Latin American Competitiveness

2. Objective of seminar: Towards a pragmatic innovation agenda


1. The Knowledge Revolution

Ability to create, access and use knowledge is becoming fundamental determinant of global competitiveness

Seven key elements of “Knowledge Revolution”

Increased codification of knowledge and development of new technologies

Closer links with science base/increased rate of innovation/shorter product life cycles

Increased importance of education & up-skilling of labor force, and life-long learning

Investment in Intangibles (R&D,education, software) greater than Investments in Fixed Capital in OECD


The Knowledge Revolution -2

Greater value added now comes from investment in intangibles such as branding, marketing,distribution, information management

Innovation and productivity increase more important in competitiveness & GDP growth

Increased Globalization and Competition

•Trade/GDP from 38% in 1990 to 57% in 2001

•Value added by TNCs 27% of global GDP

Bottom Line: Constant Change and Competition Implies Need for Constant Restructuring and Upgrading


GDP/Capita Growth: Korea vs Argentina


Implications for Latin America With very few exceptions, Latin America’s growth performance has not been very strong over the past 20 years

It is risking falling further behind because it is not successfully tapping into growing global knowledge or exploiting its potential

Countries need to develop strategies to use existing and new knowledge to

Improve performance in traditional sectors Exploit opportunities for leapfrogging Develop competitive new sectors

Countries needs to Assess where they stand Develop concrete action plans


Shares of World GDP - Constant US$ (1960 - 2002)

0

5

10

15

20

25

30

35

40

1960 1965 1970 1975 1980 1985 1990 1995 2000

%

East Asia & Pacific

High income: OECD ex. US & Japan

Japan

United States

Sub-Saharan Africa

Middle East & North Africa(Light Blue)

Latin American & Caribbean

Europe & Central Asia South Asia(Grey)

High Income: Non-OECD(Black)

East Asia and LAC: Shares of World GDP (1980 - 2002)

0.5

1

1.5

2

2.5

3

3.5

4

1980 1985 1990 1995 2000 2002

%

EA NIEs

Brazi

China

Mexico

Upcoming EA NIEs

Other LAC

East Asia and LAC: Shares of World Merchandise Exports (1980 – 2002)

0

2

4

6

8

10

1980 1985 1990 1995 2000 2002

%

EA NIEs

Upcoming EA NIEs

China

Other LAC

Mexico

Brazil

Selected Countries: Real GDP 2002 (Bil of 1995 US$)

Argentina$250

Mexico$375

Chile $85

Brazil$810

Finland$169

Hong Kong$173

Singapore$113

South Korea$680

China$1207

0

1

2

3

4

5

6

7

8

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000Real GDP per capita 2002

Average RGDP per capita Growth 1965-2002 (%)

Selected Countries: Real GDP 2002


Selected Countries: GDP 2002 (Bil of International $)

China$5732

South Korea$784

Singapore$97

Hong Kong$178

Finland$134Brazil

$1312

Chile $149

Mexico $879

Argentina$401

0

2

4

6

8

10

12

0 5,000 10,000 15,000 20,000 25,000

GDP per capita 2002

Average GDP per capita Growth 1990-2002 (%)

Selected Countries: GDP 2002


Benchmarking Countries KAM: 76 structural/qualitative variables to benchmark

performance on 4 pillars Variables normalized from 0 (worst) to 10 (best) for

121 countries www.worldbank.org/kam Multiple modes offering wide range of graphic

representations and functionalities (1995 - Most Recent, comparison options)

Aggregate Knowledge Economy Index (KEI) – average of performance in 4 pillars: economic incentive and institutional regime, education, ICT and innovation

Weighted and unweighted version – Innovation Variables



LAC and the World: Knowledge Economy Index


2. Towards a Pragmatic Innovation Agenda

What do we mean by innovation?

The diffusion of a product, process, or practice which is new in a given context (not in absolute terms).

Technological innovations often go hand in hand with organizational ones

Innovation promotion often goes with enterprise upgrading

Therefore distinguish two broad types of innovationLocal improvements through adoption of existing foreign

technology

Development of technologies new to world


Innovation in Developing Countries

In developing countries the first type is the most relevant, the second is more rare, except for the most advanced developing countries

Developing countries will get a bigger economic impact from raising average local practice to best world practice than from creation of their own new knowledgeThey will also get a bigger impact from raising average local practice to best local practice, therefore the tremendous importance of domestic diffusion

Sources of Domestic Innovation

Imports of capital goods, components, products or servicesCopying or reverse engineering of foreign products and services Products and services brought to and produced in country by foreign investorsTechnological efforts of domestic or foreign firms, not all of which is based on formal R&D

Bias Towards Formal R&D Efforts

Policy makers in developing countries tend to focus on formal R&D and on publicly funded research effortsThey tend to focus on glamorous high technology sectorsThey tend to focus on industry, to a lesser extent on agriculture, and very little on services They also tend to focus on R&D inputs and outputs, not so much on entrepreneurship and management

ChallengesBut, as noted earlier, focus of policymakers are not the most important elements of the innovation system in developing countries

R&D not the main source of innovationHigh tech sectors are tiny part of developing economiesService sector is largest share of economic activitySuccessfully applying knowledge requires entrepreneurship, management, organizations,and also depends on economic and institutional regime

Need a better conceptual framework and policy tool kit that

differentiates across countriesProvides made to measure policy advice and specific project design

Differentiated StrategiesAcquiring Creating Disseminati

ng

Catch-Up Most critical:-lots of knowledge in pubic domain-also large stock to be purchased Therefore need good global scanning and acquisition ability

Less relevant or feasible, but still need R&D capability to acquire and adapt.Critical to focus limited R&D efforts on most relevant areas

Very important: -extension services-technical information-metrology, standards, testing and quality control-specialized suppliers-growth of most efficient firms

Countries Nearer Frontier or with Large Critical R&D Mass

Need to continue tapping global knowledge:-FDI/licensing-Strategic alliances -foreign R&D to tap knowledge

Refocus public efforts on commercially relevant researchGet private sector to make major effort to create new knowledge

Dissemination efforts continue to be critical But also need to take knowledge to production:-technology transfer-tech parks/spinoffs-cluster development

National Innovation SystemNeeds to include not just R&D institutions and universities, but most critically firms and other knowledge institutions(MSTQ, training, consulting)Needs to include attention to the broader economic incentive and institutional regime, education and skills, and ICT-hence our K4D framework

Challenges to Developing Countries

Finding advantageous ways to plug into and compete successfully in the global system

Getting into global value chainsMoving up these value chains

Taking advantage of global knowledge to improve welfare

Preventive healthAgriculture

Developing differentiated advantagesBuilding on local resourcesBuilding on culture and other intangiblesStrengthening non-traded services

Getting rid of innovation myths

About the innovation process: it is not a linear process from research to marketAbout the source of innovation: key role of clients’ needs, suppliers’ ideas, etcAbout high tech: it is its use which matters (not its production); needs a technical cultureAbout the innovator: it is not a single individual, but a group of people with complementary functionsAbout the role of government: it is important (including in form of direct support)


How innovation develops Not a linear process coming from research for going to the market, but a design centered project with ideas coming from multiple sources (clients, suppliers, etc); innovation does not derive from research, but it is the reverse (particularly in developing countries)Innovation is a project brought about by group of people (not a single individual): the inventor, the entrepreneur, the godfather, the gatekeeper (Roberts, MIT)An organic not a mechanistic view; innovation is like a flower that needs gardening


Watering (finance, supportto innovation projects)

Removing weeds (competition, deregulation)

Nurturing soil (research, education, information)

Government Role – Gardening Innovation


Initiating Innovation Policies: Key Actions

To ignite interest show cases abroad (study tours). To build self confidence, show local success stories; key role of media (radio/TV)Understanding issues and potentials by soft actions (cluster building)Competitive funding to stimulate local/regional interest and investmentBuilding national and cross national innovation champion networks; getting entrepreneurs and citizens campaigning for improvement of business/governance climates


Developing national programs and institutions: main issues

There are already many programs for many different purposes (SMEs, FDI, RD…) which have a crowding out effectAgencies: need to have multi function-ones, private sector-like management (Fundacion Chile); but usually state agencies are constrained by bureaucratic rules and tend to capture or defend territoriesCouncils (model is ST policy councils of Finland): they exist in numerous countries but they are not working; problem of motivation


National Priorities

Priorities: build on strengths focused on use of available resources, generate income for further investment in education, research and key technology infrastructure, etc

Climb up gradually the innovation system steps corresponding to development levels and related value chains


Towards a pragmatic innovation agenda

It is not about just a about high tech. Long-term agenda: Integration into global knowledge networks and value chains.

Medium-term priority: promotion of inter-firm and inter-organizational linkages

horizontal linkages: cluster agenda vertical: supplier and buyer development university-industry linkages

Short-term priority: Articulation of vibrant and vocal innovation community in the private sector


Learning Capabilities of firms Research and Technology Development Very rarely present, mostly large firms Design and Engineering Capabilities rarely present in SMEs Technician and Craft Skills and Capabilities Strong skills sometimes present, though key skills often absent or weak Basic Operating Skills and Capabilities In SMEs, often weak, with limited and irregular upgrading

R&D

TECNOLOGY UPGRADING

REVERSE ENGINEERING

TECHNOLOGY ACQUISITION

ASSIMILATION

TECHNOLOGY USE AND OPERATION

Towards a pragmatic innovation agenda


To respond to the challenges of knowledge revolution , Latin America needs a dynamic innovation and enterprise upgrading system: a network of organizations to enhance firms’ capabilities

Led by private demand and responsive to private sector needs; Characterized by strong academic-industry linkages; Inserted into international knowledge networks Providing support to technology entrepreneurs, both financial (early stage venture capital) and technical assistance; and Characterized by continuous evaluation and monitoring. Results of evaluation linked to financing of programs.

Responding to the challenges of the knowledge revolution


1. Focus on knowledge entrepreneurship (high-tech start-ups and spin-offs, venture capital): Israel

2. Focus on innovation strategy of a developing country that has already made transtion to being a global innovator:Korea

3. Focus on a network of private sector-led national technology transfer organizations: Chile (Fundación Chile), Mexico, Russia.

These three approaches are complementary and willbe considered in this seminar.

Approaches to reform and enhanced national innovation and enterprise upgrading systems


Annex



Knowledge Economy Index (most recent) breakdown


Knowledge Index (most recent) breakdown


KEI data – most recent

KI data - most recent


0

5

10GDP grow th (%)

Human Development Index

Tariff & nontarif f barriers

Rule of Law

Regulatory Quality

Researchers in R&D / million

Patent applications granted by theUSPTO / million

Scientif ic and technical journal articles /million

Adult literacy rate (% age 15 and above)

Secondary Enrollment

Tertiary Enrollment

Telephones per 1,000 (mainlines +mobile)

Computers per 1,000 persons

Internet users per 10,000 people

1995 Most Recent Data

Latin America

Latin America


0

5

10GDP grow th (%)



Rule of Law

Regulatory Quality






Tertiary Enrollment




1995 Most Recent DataArgentina

Argentina


0

5

10GDP grow th (%)



Rule of Law

Regulatory Quality






Tertiary Enrollment





Chile

Chile


0

5

10GDP grow th (%)



Rule of Law

Regulatory Quality






Tertiary Enrollment




1995 Most Recent DataMexico

Mexico


0

5

10GDP grow th (%)



Rule of Law

Regulatory Quality






Tertiary Enrollment




1995 Most Recent DataIsrael

Israel


0

5

10GDP grow th (%)



Rule of Law

Regulatory Quality






Tertiary Enrollment





Korea

Korea


0

5

10GDP grow th (%)



Rule of Law

Regulatory Quality






Tertiary Enrollment




1995 Most Recent DataRussia

Russia


LAC: Performance Variables


LAC: Economic Incentive Regime Variables


LAC: Governance Variables


LAC: Innovation Variables


LAC: Education Variables


LAC: ICT Variables


Chile: Performance Variables


Chile: Economic Regime Variables


Chile: Governance Variables


Chile: Innovation Variables


Chile: Education Variables


Chile: ICT Variables


Global R&D Effort in Comparative Perspective


R&D Expenditure, 1981-2000

Source:World Bank SIMA Database

R&D Expenditure as % of GDP

0

0.5

1

1.5

2

2.5

3

3.5

4

1981 1985 1990 1995 2000

Korea

US

Japan

Finland

Ireland

Taiwan

Argentina

Brazil

Chile

Mexico

R&D Expenditure, 1981-2000


Export Structure (1965-2000) China (1987-2000)

0

10

20

30

40

50

60

70

80

90

100

1987 1990 1995 2000

Food (% of merchandiseexports)

Manufactures (% ofmerchandise exports)

Ores and metals (% ofmerchandise exports)

Fuel (% of merchandiseexports)

Agricultural raw materials(% of merchandise exports)

Korea

0

10

20

30

40

50

60

70

80

90

100

1965 1975 1985 1995 2000






Singapore

0102030405060708090

100

1965 1975 1985 1995 2000






Hong Kong

010

2030

4050

6070

8090

100

1965 1975 1985 1995 2000






Argentina

0

10

20

30

40

50

60

70

80

90

100

1965 1975 1985 1995 2000

Brazil

0

10

20

30

40

50

60

70

80

90

100

1965 1975 1985 1995 2000

Chile

0

10

20

30

40

50

60

70

80

90

100

1965 1975 1985 1995 2000

Mexico

0

10

20

30

40

50

60

70

80

90

100

1965 1975 1985 1995 2000

Thank you!

[email protected]

Documents

©Knowledge for Development, WBI Carl Dahlman Knowledge for Development Program March 16, 2004 Santiago, Chile Challenge of the Knowledge Economy: Towards