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China and India:

Technological upgrading patterns and their implications for other developing countries

Tilman Altenburg,

German Development Institute, Bonn

OECD Development Centre Paris, 16 March 2006

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Key questions:

1. To what extent, at what velocity, and in which sectors can we expect China and India to catch up with global technological leaders?

2. How do they manage to catch up? What are the policy lessons?

3. What are the economic consequences for other developing countries?

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1To what extent, at what velocity, and

in which sectors can we expect China and India to catch up with global

technological leaders?

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Software industry: India Software industry: India

20 years of spectacular growth. 12 billion US$ exports, 20 years of spectacular growth. 12 billion US$ exports, 345,000 employment. 345,000 employment.

80% exports. 80% exports.

Several Indian firms emerging as global players.Several Indian firms emerging as global players.

However:However: Specialisation on lower-end services, BPO- Specialisation on lower-end services, BPO-ITES, still low market share in system integration, ITES, still low market share in system integration, embedded software, product design etc. embedded software, product design etc.

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Space industry: India Space industry: India

Successful development of three sub-systems: satellites, rockets, Successful development of three sub-systems: satellites, rockets, ground systems. Robotic moon mission planned.ground systems. Robotic moon mission planned.

Only developing country to develop own remote-sensing satellites. Only developing country to develop own remote-sensing satellites. Rockets capable of placing 2 ton satellites in orbit.Rockets capable of placing 2 ton satellites in orbit.

Increasing local content of core technologies.Increasing local content of core technologies.

Systems integration capability (dealing with huge simultaneous & Systems integration capability (dealing with huge simultaneous & complementary technological developments), several hundred complementary technological developments), several hundred research projects with over 100 universities, research centres and research projects with over 100 universities, research centres and increasing private sector participationincreasing private sector participation

Partly commercial success: leading provider of civilian satellites, Partly commercial success: leading provider of civilian satellites, many countries use Indian rockets. many countries use Indian rockets.

However:However: Still dependent on subsidies, global consolidation may Still dependent on subsidies, global consolidation may threaten minor competitors (as in aircraft industry) threaten minor competitors (as in aircraft industry)

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Automotive industry: China Automotive industry: China

Chinese joint venture partners start producing own cars Chinese joint venture partners start producing own cars

First exports of national brandsFirst exports of national brands

Increasing number of own patentsIncreasing number of own patents

Acquisition of auto and autoparts companiesAcquisition of auto and autoparts companies

Major manufacturers set up R&D centres in China, partly Major manufacturers set up R&D centres in China, partly adaptive R&D, partly due to government pressureadaptive R&D, partly due to government pressure

However:However: Still basically foreign licenses, little innovation Still basically foreign licenses, little innovation

Still 10 years time-lag, reduced from Still 10 years time-lag, reduced from 30 years

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Personal computer industry: Personal computer industry:

China China

World’s leading producer of PCs.World’s leading producer of PCs.

Emergence of strong local brandsEmergence of strong local brands

Acquisiton of IBM’s PC productionAcquisiton of IBM’s PC production

However: most critical components imported / licensedHowever: most critical components imported / licensed

Still low degree of appropriation of technological Still low degree of appropriation of technological capabilitiescapabilities

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Are China & India catching Are China & India catching

up? up?

Still distant from technological frontierStill distant from technological frontier

Technological gap rapidly decreasing. Difficult to assess Technological gap rapidly decreasing. Difficult to assess how long it will take to close the remaining gap. Very how long it will take to close the remaining gap. Very different perceptions!different perceptions!

Need for better proxies for technological mastery/ Need for better proxies for technological mastery/ upgradingupgrading

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Are China & India catching Are China & India catching

up? up?

Hypothesis: Substantial further progress likely because of Hypothesis: Substantial further progress likely because of

- Global economic shift towards Asia. China and India Global economic shift towards Asia. China and India emerging as world’s leading markets emerging as world’s leading markets

- Pan-Asian production system benefits China (advantages Pan-Asian production system benefits China (advantages in manufacturing combined with capital and know-how from in manufacturing combined with capital and know-how from Taiwan, Singapore, Japan, Korea)Taiwan, Singapore, Japan, Korea)

- Strong bargaining power (trading technology for markets). - Strong bargaining power (trading technology for markets). Major manufacturers set up R&D centres in China and IndiaMajor manufacturers set up R&D centres in China and India

- Strong investment in human capital- Strong investment in human capital

- Global network of qualified expatriates Global network of qualified expatriates

- High savings & foreign exchange reserves => investment in High savings & foreign exchange reserves => investment in R&D + acquiring technology firms + hiring return migrantsR&D + acquiring technology firms + hiring return migrants

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2How do they manage to catch up?

What are the policy lessons?

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India’s space industry: India’s space industry:

Ambitious space programme started in 1962, Ambitious space programme started in 1962, national pet project. Science-driven, strong government supportnational pet project. Science-driven, strong government support

Building on international cooperation with NASA, SU, France, ESA. Building on international cooperation with NASA, SU, France, ESA.

Strong focal institution (ISRO): 11,000 scientistsStrong focal institution (ISRO): 11,000 scientists

Private sector came in lately. ISRO helped to develop technology Private sector came in lately. ISRO helped to develop technology firmsfirms

India’s software industry:India’s software industry:Early focus on human capital building, excellent universities and Early focus on human capital building, excellent universities and technical collegestechnical colleges

Until 1984 no specific promotion policy for IT, even disincentivesUntil 1984 no specific promotion policy for IT, even disincentives

Oversupply of IT engineers => emigration and “body shopping” => Oversupply of IT engineers => emigration and “body shopping” => strong diaspora as facilitators for India’s market access, return strong diaspora as facilitators for India’s market access, return migration.migration.

Not result of visionary industrial policy, dynamic development Not result of visionary industrial policy, dynamic development surprised Indiasurprised India

Luck: Window of opportunity when oversupply of engineers met new Luck: Window of opportunity when oversupply of engineers met new technological standard that made outsourcing possible. technological standard that made outsourcing possible.

Very heterogeneous policy trajectories

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China`s automotive industryChina`s automotive industry

Competence building through various phases of Competence building through various phases of industrial policy: industrial policy:

• Centralized planning, SOE => from 1978 ISI => from 1994 Centralized planning, SOE => from 1978 ISI => from 1994 increasing use of bargaining powerincreasing use of bargaining power

• after 2001 WTO, liberalisation, carrot and stick approach. Still after 2001 WTO, liberalisation, carrot and stick approach. Still discretionary government influence. discretionary government influence.

Trading technology for markets.Trading technology for markets.

Acquisition of foreign auto parts and car makers to get access to Acquisition of foreign auto parts and car makers to get access to technology, brand names, marketstechnology, brand names, markets

China’s PC industryChina’s PC industryStarted as an extension of Taiwanese computer industryStarted as an extension of Taiwanese computer industry

Export assembly baseExport assembly base

Increasing backward integration from comparative advantage in Increasing backward integration from comparative advantage in low-cost assembly, acquisition of foreign technology companieslow-cost assembly, acquisition of foreign technology companies

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Policy lessons? Policy lessons?

1 Still feasible to catch up with technological leaders

2 Very different trajectories may lead to technolo-gical upgrading

3 In the long run, trajectories converge towards similar patterns of mature National Innovation Systems

4 Strategic vision, political leadership & coherent sector policies often crucial, but not always

5 High emphasis on skills development and increasingly on R&D

6 Neither China nor India offer “conducive investment climate” in the traditional sense. Do they perform well because of or despite this?

7 Especially China negotiates incentives, puts pressure on foreign investors.

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3What are the economic consequences

for other developing countries?

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1 Technological progress makes Chinese and Indian growth sustainable => growth prospects of world economy.

2 Sustained growth increases demand for raw materials and improves terms of trade for net commodity exporters

3 Especially strong pull-effects for Asian neighbours

4 More competitive pressure in knowledge-intensive production => rising entry barriers for other DCs

5 New South-South technology alliances likely to emerge (IBSA, China-Brazil space technology)

6 Rising labour costs: will China and India move out of very low-cost manufacturing?

7 Provision of technologies more appropriate to DC needs ?

8 Greater role in global governance structures. Aid for raw materials