Tapping into Global Technology

Adam Eddy SzirmaiUNU-MERIT

http://www.merit.unu.edu

A.Szirmai, The Dynamics of Socio-Economic Development. An Introduction, Cambridge University Press, 2005: Chapter 3, Theories and Experiences, Chapter 4:

Technology and Development, http://www.dynamicsofdevelopment.com

J.Fagerberg and M.M. Godhinho, Innovation and Catching Up, in J. Fagerberg (ed.), Oxford Handbook of Innovation, 2004

M. Abramovitz, Thinking About Growth, in M. Abramovitz, Thinking about Growth and Other Essays in

Economic Growth and Welfare, Cambridge University Press, 1989, p. 3-79.

Sources for this presentation

Introduction and Outline

1. Introduction2. Differences in Economic Performance: The Role of

Technology 3. The Global Technology Race4. Productivity and Technology5. Proximate, Intermediate and Ultimate Sources of Growth6. What is special about investing in knowledge and

technology? Innovation and Diffusion: spillovers and capabilities

7. Production and Diffusion of Knowledge and Technology in the International Economic Order

8. Mechanisms of International Technology Transfer9. Social Capabilities, Technological Capabilities and Systems

of Innovation

GDP per capita (1990 PPP$) in Asia and Africa,(South Korea, Malaysia, Thailand, Jordan, Pakistan,Ghana, Tanzania), 1950-2006

Sources: 1950-1990, Maddison (2007); 1990-2006: GGDC, 2007

0

4,000

8,000

12,000

16,000

20,000

1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

South Korea Ghana TanzaniaMalaysia thailand Pakistanjordan

South Korea

Ghana

Malaysia

Thailand

Tanzania

Pakistan

Jordan

GDP per capita (1990 PPP$) in Asia and Latin AmericaArgentina, Brazil, China, India, Mexico, 1950-2005

0

2.000

4.000

6.000

8.000

10.000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

China India Argentina Brazil Mexico

India

China

Brazil

Argentina

Mexico

Sources: 1950-1990, Maddison (2007); 1990-2006: GGDC, 2007

0

4,000

8,000

12,000

16,000

20,000

1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006South Korea Tanzania Pakistan jordan Turkey

Syria Iran Iraq Saudi Arabia China

South Korea

Tanzania

Pakistan

Jordan

Syria

TurkeyIran

Iraq

Saudi Arabia

China

GDP per Capita, Middle Eastern Countries

Key concepts

• the concept of a productivity and technology race, • Central proposition: No Asian miracle. No Chinese miracle. Rapid catch

up is a normal process if the conditions are right• Potential advantages of technological backwardness: rapid catch up

through technology diffusion and absorption, without bearing the risks of technology development.

• Changes in technology can create new opportunities for developing countries: lead countries locked in obsolete technology; skipping technology generations, e.g. environment, e.g. digital switching in communications; opportunities for outsourcing

• Catch up is closely related to successfully tapping into and absorbing global technology from technological leaders.

• Multinational Enterprises are key players in international technology and knowledge flows. Their contributions to the building of domestic technological capabilities depend on many complementary factors such as absorptive capacities, skills and government policies.

• An important role of technology and innovation policy in developing countries is fostering the absorptive capacities of individuals, firms, sectors and national economies.

Technology Race

• Labour productivity as catch-all measure of technological performance

• Shifts in global leadership and patterns of catch up• Increase in global inequality, but increasing fluidity

of country positions in the international income hierarchy.

International Economic Orders

- Flows of goods and services (including capital goods, primary products, semi-fabricated products)

- Financial flows: profits, investment, loans, transfers, grants, taxes Flows of people: voluntary migration of labour, slave trade, contract labour, guest

workers- Flows of knowledge (Diffusion of science, knowledge, information and technology,

culture, symbols)

and

- Intensity of relations between economic units (before 19th century no world economy)

- Institutional characteristics of relationships (political control, colonialism, mercantilism, free trade, protectionism)

- Dependency relationships between rich and poor countries- Patterns of Growth and Stagnation in the World Economy- Size of Income gaps between regions

Characteristics of the Post-War Economic Order

• Rapid growth of the volume of international trade.• Breaking the mould of the colonial pattern of international

trade: the emergence of industrial exports from developing countries.

• A modest share of developing countries in international trade.• Financial flows from the developed countries to developing

countries• Liberalisation of international trade.• Liberalisation of capital flows; increase in the volume of

capital flows.• The emergence of global production chains and the increased

importance of intra-firm trade.• Acceleration of growth of per capita national income in both

rich and poor countries in the period 1950-1973, followed by divergent growth trends.

Growth Rate of World Exports

1720-1820 0.9 1820-1870 4.2 1870-1913 3.4 1913-1950 0.9 1950-1973 7.9 1973-1985 3.6 1985-1996 6.6 1996-2000 7.0 2000-2007 9.7 1973-2007 6.2

Growth of GDP per Capita, 1870-2000 1870-

1913 1900-1913

1913-1950

1950-1973

1973-2000

2000-2004

Asian countries

0.3 0.6 -0.2 2.6 4.0 5.0

Latin American countries

1.8 1.6 1.4 2.7 1.0 0.6

African countries

0.3 1.0 2.0 0.1 4.6

Average developing countries

0.5 0.8 0.4 2.7 3.0 3.7

Average OECD countries

1.6 1.7 1.2 3.6 2.1 1.6

Source: Szirmai, 2005, http://www.dynamicsofdevelopment.com

Share of Developing Countries in World Manufacturing Value Added 1960-2004 (%)a

Year Africa West Asia

South and East

China

Latin America

Developing Countries b

Asia excl.

China Excluding China (constant 1990$) c 1960 d 0.8 0.7 1.8 4.9 7.9 1970 d 0.8 1.3 2.4 6.0 10.5 1980 0.9 1.7 3.7 6.9 13.2 1990 0.9 2.0 6.2 5.5 14.6 1997 1.0 1.8 8.6 5.6 17.0 2000 1.0 2.2 9.4 5.5 18.0 2004 1.1 2.4 10.8 5.3 19.6 Including China (constant 1990$) 1980 0.9 1.7 3.6 1.4 6.8 14.4 1990 0.9 1.9 6.0 2.6 5.4 16.8 1997 0.9 1.7 8.1 5.9 5.3 21.9 2000 0.9 2.1 8.8 6.6 5.2 23.6 2004 1.0 2.2 10.0 8.5 4.9 26.6 Including China (current $) 1993 0.8 1.7 7.0 4.3 5.8 19.6 1996 0.8 1.6 8.3 5.1 6.2 22.0 2000 0.8 1.4 15.2 6.6 5.4 22.8 2002 0.8 1.5 17.1 8.1 4.4 23.8 Source: Szirmai: www.dynamicsofdevelopment.com

Gross Value of Foreign Capital in Developing Countries, 1870-1998 ($ bln)

1870 1914 1950 1973 1998 2003 Total in current prices

4.1 19.2 11.9 172.0 3590.2

Total in 1990 prices 40.1 235.4 63.2 495.2 3030.7

Stock as percentage of Developing Country GDP

8.6 32.4 4.4 10.9 21.7 31.4

Maddison, 2001, 2003 from Portelli, 2006.

Changes in Technological Leadership

• Islamic World 750-1100• China till fourteenth century• Italian city states in fourteenth century: Venice, Florence,

interaction with the Islamic science and technology• Portugal and Spain: fifteenth and sixteenth century• The Dutch republic seventeenth century• Great Britain: 18th century and 19th century

Importance of industrial revolution• USA- 1890-present• Future: China?, Japan?, India?

• Industry as engine of growth!! What about services?

Catch Up since late 19th Century

• Japan since 1868• German and Russia since 1870• After 1950: Taiwan, Korea, Singapore, Hong

Kong,Western Europe versus USA till 1973; Brazil and Mexico till 1980

• Brazil and Mexico till 1979 followed by lost decade• More recently Malaysia, Thailand, Indonesia, Turkey

(since 2001), India and China.• In Europe periphery: Ireland, Spain, Poland

Falling Behind

• Argentina since 1950• Brazil and Mexico after 1980• Ottoman empire till 1919• Former soviet republics, including Russian

Federation (recently recovery of Russia due to oil exports).

• Most of sub-Saharan Africa (except South Africa), but recent upturn.

Paradox of increasing global inequality, but very rapid catch up in some countries

• Increasing global inequality of per capita incomes• 1820: ratio richest to poorest country 2 to 1• In 2006, the richest 29 countries are 14.2 times as rich

as the 48 poorest countries (in PPP dollars)

• But, if a country starts to catch up: explosive growth is the normal pattern. Double digit growth in Japan, Korea, Taiwan, Singapore, presently China and Vietnam.

Table : Post-War Catch Up Episodes

Country Period Growth of GDP Growth of GDP/capita

China 1978-2006 8,1 6,9

West Germany 1950-1973 6,0 5,0

India 1994-2006 6,7 5,1

Indonesia 1967-1997 6,8 4,8

Ireland 1995-2006 6,2 6,2

Japan 1946-1973 9,3 8,0

Korea 1952-1997 8,2 6,3

Malaysia 1968-1997 7,5 5,1

Russia 1998-2005 7,2 7,2

Singapore 1960-1973 10,0 7,6

Taiwan 1962-1973 11,4 8,7

Thailand 1973-1996 7,6 5,8

Vietnam 1992-2005 7,6 6,1

World 1950-1973 4,9 2,9

World 1973-1997 3,1 1,4

World 1997-2003 3,5 2,3

Sources: Maddison (2007), Groningen Growth and Development Centre, (2007)

Value Added per Worker (USA = 100)

0

10

20

30

40

50

60

70

80

90

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Year

Val

ue

Ad

ded

per

Wo

rker

(U

SA

= 1

00)

Australia China India Indonesia Japan Korea

Taiwan Tanzania zambia Brazil

KoreaTaiw an

India

Australia

Japan

Indonesia

China

TanzaniaZambia

Brazil

Value Added (USA =100)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Taiwan China India Tanzania Zambia Indonesia

Taiw an

China

Indonesia

India

ZambiaTanzania

Productivity and Technology

1. Labour Productivity, National Income per Head and WelfareGDP/P = GDP/H * H/L * L/PProductivity and competitivenessProductive Capacity as a core concept in development

2. Rough Indicator of Technological Performance2.1 Capital accumulation2.2 Increase scale of production (Verdoorn’s law)2.3 Education and human capital2.4 Efficiency, including efficiency in the organisation

of production2.5 Disembodied Technological Knowledge:

knowledge about product and process technology3. Central goal of technology and innovation policy: increasing

technological and economic dynamism

Proximate and ultimate sources of growth Ultimate Sources of Growth Demographic Trends Institutions Geographic Conditions Historical Developments External Shocks Culture and Attitudes Class Structure groups International power relationships Long-run developments in science and

technology Distance to technological Frontier Intermediate Sources of Growth Economic, Technological and Social

Policies Trends in demand (domestic, international)

Proximate Sources of Growth where: O = National Income K = Capital L = Labour R = National Resources e = Efficiency

- economies of scale - efficient allocation of factors of production

o within sectors (e.g. capital labour ratios) o between sectors (structural change) o Specialisation between countries (comparative advantage)

- capacity utilisation/organisational efficiency - disembodied technological change

a net factor income from abroad p colonial plunder, voluntary transfers, development aid

p + a + e]*R)L, [(K, f= O

Proximate Factors in Growth and Productivity

1. Discovery of riches and natural resourcesDiscovery of natural resources - gas, coal, oil, gold etc - can promote growth. However, such growth will not be sustainable unless the revenues from windfall discoveries are transformed into more durable sources of growth

2. Labour supply and effort

3. TheftAppropriating resources from other societies and using these to accumulate capital. If resources are appropriated, but not reinvested they will have the same non-sustainable effects as windfall discoveries

4. Saving and accumulating capital

5. Education and the accumulation of human capital

Proximate Factors II

6. Efficiencyeffects of specialisation and international trade,economies of scale,structural change better utilisation of capacity (technical efficiency)Choice of techniques (economic efficiency)

7. Organisational Efficiencyefficient organisationmonitoring and motivationthe physical organisation of the production process (logistics)

8. Disembodied Technological changeDeveloping or acquiring new knowledge about how to produce valued goods and services and applying such knowledge in production. Such knowledge can be new to the firm, new to the country or new to the world.

Disembodied Technological Change

What do we mean by disembodied technological change?a.   changes in a stock of knowledge available to the firm, the sector or the

country;b.   improvements in the knowledge absorbed by employees and managers in

school and on the job (Maddison, 1987, p. 662);c.   learning by doing and learning by using of employees and managers on the

job;d.  disembodied technological change as improvements in technological

capabilities of firms and social capabilities of countries e.   the positive external effects of knowledge spillovers within an economy or

between economies;f.    the productivity improvements due to the complementarities of human

skills and human capital and increases and improvements in the capital stock.

Investing in Knowledge and Technological Change

• Investment in knowledge different from investment in human and physical capital: non-rival and non-excludable. Knowledge diffuses and spills over. Technologically backward economies can profit from advantages of backwardness.

• Advanced economies profit more from investment in knowledge than backward economies. More local spillovers, increasing returns to scale for capital and knowledge. Investment in knowledge leads to shifting the frontiers of knowledge and economic divergence

• Production of knowledge primarily takes place in the technologically leading countries. This contributes to divergence

• International technology diffusion and spillovers can result in convergence and catch up if developing countries can tap into global knowledge flows.

• Changes in technological paradigms create new opportunties for catch up.• Profiting from international technology diffusion and technology spillovers

depends on technological capabilities, social capabilities, technological congruence and appropriateness and absorptive capacities.

• If catch up takes place, it is very rapid and dynamic

US Patent Activity, 1870-2006

Year patent patentsapplications granted foreign developing developing

patents country countriespatents excl. S.Korea

1870 19171 121571900 39673 246561950 67264 430391973 103695 741391990 99220 46.6 1.1 0.31995 113955 43.4 2.8 0.52000 176083 44.9 4.8 0.72005 157741 47.6 7.7 1.12006 196436 47.9 8.8 1.3

share of patents granted (%)

Tapping into Global Technology Flows

• Catch Up in Modern Globalised International Order closely linked with Technology Diffusion and Technology Acquisition

• Every single example of successful catch up since 1868 based on tapping into global technology flows.

• The Myth of 'Indigenous Technology'• Successful Technology Acquisition is Innovation. Technology

acquisition is more than copying. It involves adaptation and effort.

• Absorptive Capacity is the key factor distinguishing between success and failure in Development.

• South South Flows as a complement to tapping into global flows, not an alternative.

Mechanisms of Technology Acquisition and Transfer

• Acquisition of technology licences.• Technology transfer as part of a package of FDI or joint ventures• Reverse engineering. Acquisition of technology through imports of new

products which are copied through reverse engineering• Competing on export markets.Competing on international export markets

and having to meet international quality standards has important learning effects

• Original equipment manufacturing: producing for foreign firms, according to specifications supplied by these firms

• International technological and scientific collaboration• Acquisition of technological know-how through the hiring of expatriate

experts• Sending own personnel abroad for training and schooling. This was the

path followed by Japan in the beginning of the twentieth century• Investing in the most advanced economies

FDI and Multinational Enterprises• Increasing importance of FDI as a mechanism of technology transfer.• Emergence of Global Value Chains Coordinated by Multinational

Enterprises• Inherent tension between the corporation's desire to integrate its activities

on a global basis and the host country's desire to integrate an affiliate into its national economy (Dunning)

• The more developed the absorptive capacities of the host country, the more it will profit from foreign investment

• The more stable the investment climate the more the host country will profit from foreign investment

• The role of short term speculative investment is a potential threat to the national innovation system.

• Increasing internationalisation of R&D, but still primarily within the TRIAD (USA, EU, Japan).

• Policy: create complementary capabilities and skills, absorptive capacities, maximise learning from FDI.

• New phenomenon: FDI from major developing countries, such as Brazil, India, China and Middle Eastern Economics. New machanism of knowledge flow.

Congruence and Capabilities

• Technology Gaps: the larger the gap the greater the catch up potential

• Technological Congruence of best practice with natural resources, factor supplies and other characteristics such as the size and homogeneity of markets. Too large gaps, diminishing congruence

• Social capability refers to the use a country can make of advanced technology and its capacity to acquire it in the first place (Abramovitz).

Absorptive Capacities: Social Capabilities

• Technical competence of a country's people• Levels of general education• The share of population with training in technical

subjects.• Management experience with large scale production• Experience in service sector• Quality of Financial system• Quality of Infrastructure

Absorptive Capacities of domestic firms: Technological Capabilities

• Production capabilities• Investment Capabilities• Adaptation Capabilities• Innovation Capabilities

• Capability building by firms and sectors• Industrial and technology policies which create

incentives and opportunities for learning

Absorptive Capacities: Systems of Innovation

• National and sectoral systems of innovation part of social capabilities• The relationships and networks between actors: Government, Knowledge

Institutions, Firms. Interactions between user and producer sectors. Public and private sector.

• Role of home market• Property rights• Non-price relations including power, trust and loyalty. Interactive learning instead

of transactions.• Innovation systems determine how effectively international knowledge is absorbed,

domestic knowledge is generated and how knowledge spills over and diffuses through the domestic economy.

• A narrow focus on the role of science and science-based activities is not what is most needed. We need a concept that covers all aspects of competence building in socio-economic activities. From science and technology policy towards innovation policy.

• Every country needs to develop systems of innovation which are tailored to local characteristics and possibilities of tapping into global knowledge flows.