Lecture 8 - Innovation dynamics in the World Economy


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Lecture 8 - Innovation dynamics in the World Economy

  1. 1. Lecture 8: Innovation dynamics in the World Economy
  2. 2. 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?
  3. 3. 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…
  4. 4. Annual Salaries of software programmers in various countries USA Computerworld, April 28, 2003
  5. 5. 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.
  6. 6. 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.
  7. 7. 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.
  8. 8. 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
  9. 9. Knowledge divide: the regional dimension - Patents granted at the USPTO by region [per million]
  10. 10. Concentration of R&D expenditures in the world economy
  11. 11. 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
  12. 12. Asymmetrical access to world markets - Technology Competitiveness [Fagerberg]
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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.
  17. 17. 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?
  18. 18. 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.
  19. 19. 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?
  20. 20. Costs and benefits of R&D internationalization [the international business perspective]
  21. 21. 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.
  22. 22. 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.
  23. 23. 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]
  24. 24. 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.
  25. 25. 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]
  26. 26. 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.
  27. 27. 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)