Technology, Globalization, And International Competitiveness

Knowledge, technology, and growth in long-term perspective...

Developing countries must develop more technological capability and greater flexibility to succeed in the more demanding and asymmetric global environment. It is likely that the pressures of globalisation and greater international competition generate strong protectionist retrenchment in both developed and developing countries. These should be resisted. The world as a whole will be better off if developed countries focus on increasing their flexibility to adjust to changing comparative advantage resulting from rapid technical change, and developing countries focus on increasing their education, infrastructure, and technological capability. There remain however large asymmetries in the global system and greater efforts need to be made to provide some global balancing and transfer mechanisms.

One of the best ways to see the role of knowledge in development, which is both sobering and enlightening, is to take a long historical perspective on both the growth of population and the increase in average per capita income. For the first 1,400 years of the past two millennia, the global population grew very slowly. Although there were privileged elites with much higher income during this period, average per capita incomes hovered around $400 (in 1990 international US dollars). This figure is sobering in that it is roughly the same as that for today’s poorest countries. Yet something remarkable began to happen around 1500. Both the global population and per capita income began to increase simultaneously.

This shift was due to the convergence of many factors, in particular: better hygiene; the development of ingenious ways to harness wind and water power to augment human and animal energy; and advances in agricultural techniques such as irrigation, improved seeds, and multiple cropping. What is even more remarkable, when viewed from a long-term perspective, is how suddenly, even seemingly exponentially, both population and per capita incomes began to rise from the 1800s onward. This tremendous growth was in large part led by the development of the steam engine, whereby mankind was first able to harness fossil fuel energy for productive tasks. This augmentation of power enabled the industrial revolution with the corresponding proliferation of productive activity and expansion in the range of products and services brought to market.

As a compounding factor, further improvements in agriculture released a stream of labour into the recently arisen and relatively more productive industrial sectors. Simultaneous with these demographic changes and enhanced production technology, railroads and steamships supported scale economies and provided new opportunities for specialization and exchange. In the early nineteenth century, this broad social and economic transformation set the course toward the advanced standard of living which is today the hallmark of developed countries. These first basic transformations were followed by successive radical inventions and corresponding institutional restructurings. Consider, for example, the advent of electricity. More or less suddenly, power could be distributed in discrete units including into the home for powering numerous labour saving devices. This technological change gradually released women into the workforce and increased output.

Other examples include the following: gas and then electric lighting increased the length of the working day; the development of the gasoline engine untethered power from grids and led to more flexible transportation; the telegraph, and then the telephone reduced distance by making it possible to communicate and coordinate activities across space, enlarging markets and furthering opportunities for specialization and exchange. Eventually, the development of the semiconductor spawned the current information technology revolution which ought to be viewed as one more epochal innovation wave that transforms the organization of economic and social activity. As such, development strategy today must be based upon the evolving productive and developmental logic of information technology and knowledge economics.

Regrettably, the benefits of all these many historical advances have not been equally spread. From the 1700s onward, per capita incomes diverged across countries and regions. The benefits of increased per capita income concentrated first in England which spawned the industrial revolution, then spread to Western Europe, and soon thereafter to the United States (US). By the end of the 1800s, the US began to overtake Europe in many areas of industrial production.

It is natural to ask: what accounts for the dazzling performance of the US? To a great extent, US growth was supported by a large internal market that allowed broader exploitation of transportation and communications advances starting with the railroad. Embracing these technologies brought large cost reductions from extensive economies of scale and scope. The US was also a land rich in natural resources including navigable rivers, arable land, timber, and minerals.

Yet, more important than these contributing factors, the foundation of American economic growth was a fabric of institutions and an economic incentive regime which supported entrepreneurship, experimentation, and risk-taking. A core expression of this orientation, the US may be said to have invented the process of invention itself— when Thomas Alva Edison created the first industrial research and development (R&D) laboratory. After Edison, the industrial R&D lab was quickly imitated by many large US companies. By 1900 there were more industrial research laboratories in the US than in Europe.

Citing R&D as the core element in US economic growth may lead some to think that the solution to unequal economic growth is to create more research capability in the developing world. While this orientation may help, the innovation needs of developing countries are both simpler and more complex: simpler because to a large extent developing countries can attain increases in productivity by making effective use of existing knowledge; more complex, because the key requirements of technology-driven development are not just new knowledge. In addition, development requires education, packages of technical skills, and a whole series of institutions, networks and capabilities which enable the effective use of existing knowledge and must be part of, or even precede, any serious effort to create new knowledge. Because addressing these constraints is critical for developing countries, the following sections offer greater detail on different aspects of innovation in order to lay the groundwork for explaining the strategies of different countries over time.

Innovation in the context of developing countries...

Innovation in the context of developing countries is not so much a matter of pushing back the frontier of global knowledge, but more the challenge of facilitating the first use of new technology in the domestic context. Innovations should be considered broadly as improved products, processes, and business or organizational models. Development strategists ought to think not only of R&D and the creation of knowledge, but also attend to the details of its acquisition, adaptation, dissemination, and use in diversified local settings. It is useful to review what is involved in each of these five activities as this taxonomy will help structure the analysis of the most appropriate policies, institutions and capabilities necessary to increase innovation in the broad sense suggested here.

The creation of knowledge is the process of inventive activity. It is usually the result of explicit research and development effort normally carried out by scientists and engineers. The key institutions involved in the creation of knowledge are public R&D laboratories, universities, and private R&D centres. However, not all creation of knowledge is the result of formal R&D effort. Sometimes inventions come from the experience of production, or through informal trial and error; sometimes they come from serendipitous insight. Notably, the multiple origination of knowledge raises a measurement problem because not all R&D activity results in an invention, and not all inventions come from formal R&D activity. Nonetheless, various proxies are available to track knowledge, R&D effort, and their interconnections. Accordingly, the most standard proxies will be applied as needed in the following discussion. For countries behind the technological frontier, acquisition of existing knowledge may be expected to yield higher increases in productivity than would flow from a similar scale investment in R&D or other efforts to push back the technological frontier.

There are many means of technology transfer for private goods. Direct foreign investment, licensing, technical assistance, importation of technology as embodied in capital goods, components or products, copying and reverse engineering, and foreign study are the key channels. Also, more generally, easy communication allows access to technical information in printed or electronic form, especially including what can be accessed through the internet. Proprietary technology is usually sold or transferred on a contractual basis. But even proprietary technology may leak out depending on the strength of the Intellectual Property Rights (IPR) regime and its enforcement, and the reverse engineering capacity of users. However, despite significant proprietary constraints, much of the most useful technology is in the public domain or is owned by governments who could potentially put it in the public domain. As such, the key challenges for development strategy are less about the creation and acquisition process and more often related to the challenges of delivering technology and knowledge to those who need it.

Technologies often must undergo adaptation to be applicable in specific local conditions. This need is particularly clear in agriculture, where new technologies such as hybrid seeds are very sensitive to specific local conditions. To meet local needs, further research and experimentation is often required to adapt general agriculture solutions to specific temperature, soil, and water conditions as well as local pests. To a lesser extent, even industrial technologies have to be adapted to local conditions: access to raw materials, sources of power, labour traditions, various standards, and climate are just some of the local idiosyncrasies that leave their mark on industry. And yet, often the skills necessary to adapt technologies to local conditions are not too dissimilar from those necessary to create new technology. Similar to knowledge creation, adaptation also requires research and experimentation.

In the private sector, the dissemination of knowledge happens when enterprises expand, sell, or transfer their knowledge, or when other firms or organizations imitate or replicate the knowledge others have created. The efficient dissemination of knowledge requires appropriate mechanisms to educate potential users in the benefits of the related technology, often a process inclusive of broad educational advance, not just the provision of technical information. Much dissemination also occurs through the sale of new machinery or other inputs that embody a new technology. There are also specialized institutions, such as agricultural research and extension systems, productivity organizations, and consulting firms that specialize in helping disseminate technologies. These efforts usually involve explicit training, demonstration projects, or technical assistance on how to use the technology.

To use new technologies usually requires literacy as well as specialized training. Also, beyond education, using new technology often requires access to complementary inputs and supporting industries, and access to finance for new equipment, inputs or purchase of the technology license. When it involves starting a new business, it is important to have a supportive regulatory environment, namely one without excessive red tape, but which at the same time has a strong rule of law, respects private property, and facilitates the enforcement of contracts. At the broadest level, knowledge use also requires macroeconomic stability and good governance. In short, it requires a well developed economic and institutional regime.

Countries have followed different strategies in how they created, acquired, adapted, disseminated or used knowledge for their development. Most countries that are behind the global technological frontier can take advantage of acquiring knowledge that already exists elsewhere in the world and adapting it for use in their local settings. This is most often done through trade and through formal technology transfer agreements. Foreign technology owners are not always willing to license their cutting edge technology. 34 Industrial Development for the 21st Century.

Some countries explicitly try to attract foreign investors to bring their advanced foreign technology to their countries, while others do not. In addition, not all countries that have put in place foreign investment promotion policies have met with success. Countries have sometimes preferred to develop their own technology, rather than to rely (primarily) on foreign technology. We will attempt to draw some conclusions on what works under what circumstances before considering some of the new elements of global competition which are affecting what may be feasible in the new, more demanding context.

Global overview of changing competitiveness...

Before focusing on the strategies of the developing countries that have had the highest rates of growth in the last 50 years, it is useful to have a somewhat broader perspective of the relative performance of different regions. The shares of global GDP accounted for by the two largest single economies as well as the European Union (EU), plus the developing world divided into the six regions used by the World Bank. This is done using two different sets of data. Nominal exchange rates are used. The share of the US in global value added declined during the seventies and eighties as Japan increased its share. The Japanese economy experienced very fast growth in the first half of the twentieth century based on copying and reverse engineering of technology developed in the West. This rapid growth was truncated during the World War II and its direct aftermath, but resumed soon thereafter, again, based on copying and reverse engineering of foreign technology. By the second half of the twentieth century, Japan innovated many elements of what came to be known as the Japanese production system, eventually becoming the fastest growing economy in the world. Japan has, however, not managed to recover fully from recession in the early 1990s.

The US, on the other hand, had faster growth in the second half of the nineties than the rest of the world and recovered most of its lost global GDP share by 2000. The rapid growth of the US in the last five years of the twentieth century, at an average annual rate of 5 per cent, was remarkable. Until then, it had been thought that countries at the frontier could not grow so fast. Its rapid growth was attributed to investments in information technology and organizational change which began to be made in the late 1980s and early 1990s when the country was trying to keep ahead of Japan. It is noteworthy that the EU also lost global GDP share, whether measured by the original EU 15 countries, or the expanded EU-25. In the developing world, the only region that continuously increased its share of global GDP was East Asia. All other regions lost global GDP share or at best barely maintained it. The remarkable growth of the East Asian developing countries can be appreciated better when GDP is converted using PPP exchange rates.

To Be Continue...