the foundations of the knowledge economy: global evidence carl dahlman georgetown university ukraine...
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1.What is the Knowledge Economy? It is an economy that increasingly bases its economic activity on value enhancing knowledge rather than limited natural resources Knowledge has always been important It is becoming more important now because there has been an acceleration in the creation and dissemination of knowledgeTRANSCRIPT
The Foundations of the Knowledge Economy:
Global Evidence
Carl DahlmanGeorgetown University
Ukraine Knowledge Economy Training Initiative
January 22, 2008
Structure of Presentation
1. What is the Knowledge Economy and Why is it Relevant
2. Foundations of the Knowledge Economy3. Benchmarking Countries in the Knowledge
Economy4. Recent Transformation of Key Developed and
Developing Countries5. What is at Stake?6. Key Strategic Areas for Ukraine7. What is to be Done?
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1. What is the Knowledge Economy? It is an economy that increasingly
bases its economic activity on value enhancing knowledge rather than limited natural resources
Knowledge has always been important
It is becoming more important now because there has been an acceleration in the creation and dissemination of knowledge
Why is it Relevant?
There are many possibilities to leverage growth by making effective use of knowledge that already exists as well as by generating new knowledge
Most new knowledge creation is being led by developed countries
There is risk that developing countries will be falling behind
But to make effective use of knowledge as well as to create relevant knowledge it is necessary to develop appropriate policies, institutions, and capabilities
2. Foundations of the Knowledge Economy
Technological Trends Increasing Importance of Knowledge Growing Technology Intensity of Trade Increasing Globalization and Competition Changing Education Paradigm Major Global Restructuring Changing Nature of Competitiveness
Technological Trends There has been speed up in the generation and
dissemination of knowledge The ICT revolution is becoming an increasingly
important element of the current techno economic structure
It is spawning changes in management and organization of production and distribution
Production and Trade are becoming more knowledge intensive
Innovation and high level human capital are becoming critical elements of competitiveness
The knowledge and innovation markets are global and have big implications for successful participation in the global economy
Investments in Knowledge* now as high % of GDP as Investments in Machinery
and Equipment in Advanced Countries (2002)
012345678
Investmentsin
Knowledge
Investmentsin
Machinery&
Equipment
USSwedenFinlandOECD
*Investments in Knowledge = R&D, Software, and Higher Education; Source OECD 2005
©Knowledge for Development, WBI
Knowledge Intensive Services* Greater % of Gross GDP than Technology Intensive Manufactures in Advanced
Countries (2002)
0
5
10
15
20
25
High andMedium
TechnologyManufactures
KnowledgeIntensiveServices
USEUJapan
*Knowledge Intensive Market Services exclude government and include following services: posts and telecommunications, finance & insurance, business services: Source OECD 2005
©Knowledge for Development, WBI
Changing Structure of World Merchandise Export 1985 vs. 2004: Primary vs. Manuf.
by Tech. Intensity
Products 1985 2004 AnnualGrowth
Rate
1985 %
2004 %
All Products 1,689 7,350 7.6 100.0 100.0
Primary products 391 1,018 4.9 23.2 14.7
Manufactured products
1,244 6,063 8.2 76.8 85.3
Resource based 327 1,148 6.5 19.4 15.6
Low technology 239 1,962 7.9 14.2 15.0
Medium technology 480 2,169 7.8 28.5 29.5
High technology 196 1,643 11.2 11.6 22.4
An Increasingly Globalized and Competitive World Economy
Increasing Globalization Rapid reduction of transportation and communications
costs. Increasing global information (political, cultural, socio
economic) Strong trends towards regional integration (NAFTA, EU,
ASEAN+3) Increasing Competition
Significant trade liberalization is creating larger global market and increased competition
Share of exports and imports to GDP has increased from 40% in 1990 to 58% in 2005
MNCs are becoming the most important agent in global economic activity
MNCs account for more than 50% of global R&D They are responsible for about 2/3 of trade, and organize
and control global supply and distribution systems Value added directly controlled by MNCs is 27% of
global GDP in 2002, and that is an underestimate ©cjd
Changing Education & Training Paradigm
Traditional ModelInformation basedRote learningTeacher directedJust in case Formal education onlyDirective based Learn at a given ageTerminal education
Knowledge Economy ModelKnowledge creation/applicationAnalysis and synthesisCollaborative learningJust in timeVariety of learning modes Initiative basedIncentives, motivation to learnLifelong learning
©Knowledge for Development, WBI
Changes in Job Task-Skill Demands
USA: 1960–98
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
1969 1974 1979 1984 1989 1994 1998Perc
entil
e C
hang
e
Expert Thinking
ComplexCommunication
Routine Manual
Routine Cognitive
Non-Routine Manual
Source: Autor, Levy, and Murnane (2003) “The Skill Content of Recent Technological Change: An Empirical Exploration,” Quarterly Journal of Economics. © K4D program
Major Global Restructuring Three major components
Unbundling of production of goods to emerging countries facilitated by reduction of transportation costs
Unbundling of tasks to emerging countries facilitated by ICT revolution
Roughly doubling of global labor force participating in export markets with entry of China, India, and former Soviet republics
Implications Returns to labor in developed countries are decreasing
because of doubling of global labor force with entrance of newly emerging countries
Returns to capital are increasing because of expansion of labor force and ability to operate globally
Job security is decreasing Increasing tension between objectives of MNCs and
national interests
Changing Nature of Competitiveness
Competitiveness traditionally based on Capital and labor costs Costs of inputs and infrastructure services General business environment and ease of doing
business (including macro stability, taxes, x rate, etc) Superiority in technology or management
But it is increasingly being based on Ability to redeploy resources to take advantage of those
changing opportunities Quality, skills and flexibility of labor force (and
management) Ability to constantly keep up with rapidly changing
technological and organizational advances Ability to make effective use of information technologies
to reduce transactions costs and improve capacity to respond quickly to changing opportunities and threats
©cjd
Changing Nature of Competitiveness (cont)
Greater value added now comes from knowledge and information
As a result there is increased attention across countries on Improving their overall business environment
and the flexibility and speed of their economies to respond to rapidly changing circumstances
Improving education and skills systems Improving their innovation systems Improving their information infrastructure
©cjd
3. The Four Pillars of the Knowledge Economy
Education
InnovationInformation
Infrastructure
Interconnected
Interdependent
Economic and Institutional
Regime
EIR provides incentives for the efficient creation, dissemination, and use of existing knowledge
An educated and skilled
population that can use
knowledge effectively
Innovationconsisting of
organizationsthat can tap
into the stockof global
knowledge,assimilate
and adapt it andcreate local knowledge
To facilitate the effective communication, dissemination, and processing of information. ©cjd
Benchmarking Countries in the Knowledge Economy: The Knowledge Assessment Methodology
KAM: 83 structural/qualitative variables to benchmark performance on 4 pillars
Variables normalized from 0 (worst) to 10 (best) for 140 countries and 9 regions
www.worldbank.org/kam Basic scorecard for 14 variables for two points in time,
1995 and most recent Knowledge economy index (KEI) which includes 3
variables for each of the four pillars: Economic and institutional regime: tariff and non-tariff barriers,
rule of law, regulatory quality Education: literacy, secondary and tertiary enrollment rates Innovation: researchers in R&D, scientific and technical scientific
publications, and patents in the US ICTs: fixed and mobile phone lines per 1000 people, computer per
1000, internet users per 10,000 ©cjd
Basic Scorecard
Knowledge Economy Index
Economic and Institutional Regime Sub-Index
Education Sub-Index
Information & Communication Technologies Sub-Index
Innovation Sub-Index (Unweighted)
Innovation in Context of Developing Countries Innovation should not be considered
narrowly just as R&D to move the global frontier
It should be understood as new to the country, new to the sector, even new to the firm
Developing countries, like Ukraine, will get a much higher return from effectively tapping into global knowledge through trade, foreign direct investment, technology licensing, foreign education, etc than just from own R&D
Broad Innovation Scorecard
4. Recent Transformation of Key Developed and Developing Economies
Developed Triad: US, Europe, Japan Exemplary European Examples:
Finland and Ireland The Four East Asian Newly
Industrialized economies Developing Country Giants: China
and India
United States: technological leader building on large market, flexible institutions, and entrepreneurship
The US is the dominant Knowledge Economy in the World Is the largest single country market Spends the most on education (especially higher education and
continuous training) Spends the most on research and development Largest home to multinationals Reaps tremendous gains from scale economies and first mover
advantage The US show tremendous ability to restructure
Thanks to great flexibility of capital and labor markets Tremendous ability for technical, institutional and organizational
innovation Strong entrepreneurial and risk taking culture
But other countries/regions are catching up EU is now larger economic market Other countries are catching up in tertiary education and R&D Even US multinationals are now becoming more global than American
companies Is beginning to suffer from over reach in Iraq fiasco and lose hearts
and minds of many parts of world
European Community: building large internal market to compete with US
Part of the rational for creation of EU was to create large market to get economies of scale to compete with US
First was progressive trade integration Then common currency area now covering most EU countries Now working on integration in services and in regulatory
mechanisms, but has proved more difficult-note failure of EU constitution in 2006
Also expanded from EU 15 to EU 25 countries in 2004 EU launched ambitious Lisbon Plan in 2001 to make EU the
“most knowledge intensive” region in the world by 2010 Included creation of European Research Area and many framework
programs to promote joint R&D across countries and increase innovation efforts
Also included European Education Area with many programs to integrate education and training programs across countries
In spite of many advances plan is falling short of goals Productivity increases and use of information technology in Europe
have not kept up with advances in US Few countries that were not already meeting R&D goals are
significantly expanding spending to plan levels
Japan: producer oriented economy leveraging re-engineering and manufacturing capability
Japan was leading world in competitiveness in 1970s and 1980s
Initially absorbed foreign knowledge Then developed superior production system with just in time, multi-skilling,
multi-tasking and flexible specialization, and life-long employment This was an autonomously led development, with little foreign direct investment. Rapidly expanded share in global economy, with rapid advances in auto and
electronics industry Japan had major financial crisis in 1991 and unlike Finland
(financial crisis in 1991) and Korea (financial 1997) still has not fully recovered growth momentum
Failed to tackle necessary structural reforms in finance , education, and distribution systems
Failure from excessive focus on growth of market share w/o sufficient emphasis on profitability and sustainability
Was not sufficiently innovative in basic science Nevertheless Japan still very technologically strong country
Second largest R&D spender Strong technological innovator-growing leadership in autos, capital goods,
energy efficiency Home to many successful multinationals
Exemplary European Examples
Finland (from natural resource to knowledge based country)
Major financial and exchange crisis in 1990/91 with collapse of Soviet Union
Crisis lead to creation of national vision based on investment in telecommunication technologies
Government lead increase in R&D investment & ICT engineers
Private sector followed and deepened ICT and forestry clusters
Became one of most globally competitive economies Ireland (from poorest of Europe to one of richest
based on FDI, software and ICT Was poor agricultural economy until 1970s Developed national vision with respect to entry into EC Invested heavily in higher education and attracted
European oriented FDI Also developed knowledge based service sector as well as
tourism
East Asian NIES: Different entry points and leveraging strategies
Korea and Taiwan (more technologically autonomous a la Japan)
Korea: resource poor economy becomes global competitor by investing in education and skills and technologically strong domestic conglomerates
Taiwan: plugs into global production networks and moves up global value chains, with help of Chinese Diaspora
Hong Kong and Singapore (FDI dependent) Hong Kong: leverages its human resources as free
trade entrepot service economy for trade with China and node of global production system in East Asia
Singapore: leverages its human resources by strategically attracting FDI with value increasing activities by investing in human resources and trade infrastructure
China: Becoming the World’s Manufacturing Hub Speed, scale and scope of China’s entry into global system
unprecedented in history Second largest economy in ppp terms since 1994 when passed Japan Third largest merchandise exporter since 2005 when passed Japan Will pass US in merchandise exports by end 2007
Initially based high investment rate and tapping into global knowledge through
Trade FDI Technology licensing Early start in basic and secondary education
But moving rapidly up technology ladder through massive investments
Tertiary education (now largest # of tertiary students in world) R&D (now second largest in PPP terms-surpassed Japan end 2006) Physical infrastructure
Strong global competitor advantage not just low cost labor but also
Skills, knowledge, logistics Being plugged into global production system through FDI and Diaspora
India: Becoming the World’s Off shoring Service Center
India increased rate of growth From 2-3% Hindu rate of growth of 1950-1980s To 6% in 1990s To 8% last three years
Post 2000 increase due to Great success in post Y2K ICT service exports Having made early investments in elite English speaking
engineering schools Growth of business and financial services
India is becoming a knowledge intensive service economy with services, pharmaceuticals, and auto parts as main drivers
Has offset constraints of poor infrastructure and bureaucratic constraints on physical trade through possibilities opened up by ICT enabled services
5 .What is at Stake for Ukraine?
Given present trends, where will Ukraine be 10, 20, 30 years from now?
Will it have increased the income and welfare of its inhabitants, and its role in the world?
Will there be many world class knowledge driven companies who can open new opportunities
Or will Ukrainian companies be left behind and become marginalized?
Weakness in all the fundamental elements of growth and competitiveness
Relatively weak government and institutions Low savings and investment Weak human capital particularly new skills and life long learning Weak ICT infrastructure and use Weak innovation in terms to tapping global knowledge
6. Key Strategic Areas for Ukraine Ukraine needs to develop more explicit
strategies to improve competitiveness and to benefit more from participation in global economy
These strategies need to pay more attention to:
Economies of scale in regional markets Quality of institutions and market Education and high level skills Innovation, not just R&D, but tapping global knowledge Effective use of information and communication technologies Trade logistics
©cjd
7. What is to be done? The objective of this training seminar is to
Provide an overview of some of the key global trends of the knowledge economy
Give an initial assessment of where Ukraine stands in this new very competitive, demanding and dynamic international environment
Give some examples of strategies of different countries are using to deal with the challenges
Stimulate thinking about some of the key strategic issues Ukraine needs to focus on to improve its competitiveness in this context
Successful strategies depend on leadership and on good coordination between private sector, civil society and government
That requires developing a common vision, and strong implementation and monitoring capability
EndCarl J. Dahlman
Luce Professor of International Affairs and Information Technology
Georgetown UniversityEmail: [email protected]
Telephone: 202 687 8045
©cjd
Ukraine’s Knowledge Economy Index Compared to other Regions
Ukraine: Current vs 1995
Ukraine and Russia