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
not matter
much…

Annual Salaries of software
programmers in various countries
USA
Computerworld, April 28, 2003

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
1,102 2,704,205 1.94 53.7 22.9 53.5 38.0 1.037 1.043
Industrialised market economies (b)
514 1,034,333 0.39 13.7 22.2 10.5 55.0 0.041 0.054
Developing economies (c)
83 3,193 0.28 0.0 38.7 0.6 60.9 0.002 0.000
Sub-Saharan Africa (exc. S Africa)
423 29,675 0.40 N/A N/A N/A N/A N/A N/A
North Africa
339 107,508 0.45 18.2 23.4 9.0 78.0 0.041 0.082
Latin America & Carribean
783 893,957 0.72 32.1 25.8 33.9 57.9 0.244 0.231
Asia (excluding Japan)
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
1,857 946,162 0.77 35.7 21.4 37.3 47.8 0.288 0.275
European transition economies (g)
1,304 4,684,700 0.92 36.6 24.7 34.5 53.2 0.318 0.337
World (79-84 countries)
Source lall (1998): Calculated by the author form UNESCO Statistical Yearb ook 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
100%
90%
80%
70%
60%
Rest of the World
50%
Top 10 Countries
40%
30%
20%
10%
0%
Share of Total Number of Share of World Income
Patents

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
Country 1976-1980 1995-1999 Growth Rate
Emerging Latin American Economies
Argentina 115 228 0.98
Brazil 136 492 2.62
Chile 12 60 4.00
Colombia 28 42 0.50
Costa Rica 22 48 1.18
Mexico 124 431 2.48
Venezuela 50 182 2.64
Emerging Asian Economies
China 3 577 191.33
Hong Kong 176 1,694 8.63
India 89 485 4.45
Malaysia 13 175 12.46
Singapore 17 725 41.65
South Korea 23 12,062 523.43
Taiwan 135 15,871 116.56

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
• Need not only formal
R&D R&D, but host of other
Global factors to get useful ∆K
R&D, K
∆K
• Why not free ride?
• What sort of innovations
• Is the inflow really larger impact TFP?
than the outflow?
• Are these the same in
• What exactly do we TFP DCs and in LDCs?
mean by “absorptive
capacity?”
Growth
Is “growth”
“development” in
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)