Role of government in promoting Role of government in promoting technology development technology development

Sanjaya Lall Sanjaya Lall Oxford UniversityOxford University

sanjaya.lall@economics.ox.sanjaya.lall@economics.ox.ac.ukac.uk

Why do developing countries need Why do developing countries need government policy for technology government policy for technology development ? development ? Usual case for technology policy in economics Usual case for technology policy in economics

is to remedy market failures due to is to remedy market failures due to externalities (under-investment in R&D), public externalities (under-investment in R&D), public goods (basic research, standards), information goods (basic research, standards), information and scale problems (SME support)and scale problems (SME support)

This requires generic ‘market friendly’ policiesThis requires generic ‘market friendly’ policiesThis is useful but inadequate for developing This is useful but inadequate for developing

countries: countries: selective policiesselective policies are also required are also required to overcome problems of multiple growth pathsto overcome problems of multiple growth paths

Choosing feasible path requires ‘vision’Choosing feasible path requires ‘vision’Implementing it needs government capabilities Implementing it needs government capabilities

Technology market failures in Technology market failures in developing countries is due to developing countries is due to ‘tacitness’ of knowledge ‘tacitness’ of knowledge Latecomers cannot import & use existing Latecomers cannot import & use existing

technology efficiently by simply opening up to technology efficiently by simply opening up to technology inflowstechnology inflows

Tacit nature of technology means local learning Tacit nature of technology means local learning is essential, and this is not trivial processis essential, and this is not trivial process

Learning faces market failures at 3 levels: Learning faces market failures at 3 levels: In-firm mastery: cost, uncertainty, duration, lack of In-firm mastery: cost, uncertainty, duration, lack of

information and unpredictability (infant industry)information and unpredictability (infant industry) Inter-firm interaction and externalities: coordination Inter-firm interaction and externalities: coordination

and collective actionand collective action Deficient factor markets and institutions: coordination Deficient factor markets and institutions: coordination

and development of basic endowments and development of basic endowments

Learning is cumulative and Learning is cumulative and path-dependentpath-dependentEach country has a unique learning path, with Each country has a unique learning path, with

complex economic and social interactions, complex economic and social interactions, feedback and disturbances feedback and disturbances

Technology literature uses ‘national innovation Technology literature uses ‘national innovation system’, NIS, to capture individual structural system’, NIS, to capture individual structural (systemic) features of each country (systemic) features of each country

‘‘NIS’ is mainly applied to industrial countries, but NIS’ is mainly applied to industrial countries, but it applies equally to developing countries it applies equally to developing countries

National system are difficult but not impossible to National system are difficult but not impossible to change: need country specific & constantly change: need country specific & constantly evolving policies evolving policies

Features of ‘ideal’ technology Features of ‘ideal’ technology policypolicyUse globalization effectively: Use globalization effectively:

Access new technologies promptlyAccess new technologies promptly Attract other mobile resources Attract other mobile resources Enter integrated production systemsEnter integrated production systems Link local value chains to global chainsLink local value chains to global chains Upgrade technologies and functions in value chainsUpgrade technologies and functions in value chains

Build local capabilities to exploit globalizationBuild local capabilities to exploit globalization Attract high value mobile resources Attract high value mobile resources Build domestic skills & technological capabilities to Build domestic skills & technological capabilities to

handle dynamic activities and technologies handle dynamic activities and technologies Develop strong local clusters capable of competing in Develop strong local clusters capable of competing in

global value chains global value chains

This may mean more ‘openness’ but not

necessarily non-selective (neoliberal) policies on

trade, FDI, skillsR&D or finance

There are important choices on mode There are important choices on mode of accessing foreign technology over of accessing foreign technology over time... time... Heavy dependence on internalised modes (FDI) Heavy dependence on internalised modes (FDI)

provides rapid and efficient access to operating provides rapid and efficient access to operating know-how, skills and global marketsknow-how, skills and global markets

But it may not lead to upgrading of functions But it may not lead to upgrading of functions beyond those based on beyond those based on existingexisting skills skills

And it may not lead to the rapid development of And it may not lead to the rapid development of innovativeinnovative capabilities capabilities

To build innovative capabilities, it is necessary toTo build innovative capabilities, it is necessary to Either restrict FDI and promote local firms and R&D Either restrict FDI and promote local firms and R&D Or to induce MNCs to deepen technological activity, by Or to induce MNCs to deepen technological activity, by

incentives, skill development and R&D capabilities incentives, skill development and R&D capabilities

Why are the policies of Asian Why are the policies of Asian Tigers of interest?Tigers of interest?At the start of the current era of economic At the start of the current era of economic

development (post II World War) East Asia was development (post II World War) East Asia was much poorer than Latin America, with a less much poorer than Latin America, with a less developed industrial sectordeveloped industrial sector

Many Asian countries were also resource richMany Asian countries were also resource richMost also embarked on import-substituting Most also embarked on import-substituting

industrialization policiesindustrialization policiesThey had better macro management but more They had better macro management but more

political strife, wars, ethnic problems and so onpolitical strife, wars, ethnic problems and so onBut they were far more successful in sustaining But they were far more successful in sustaining

high growth than Latin America high growth than Latin America

Take regional MVA in developing Take regional MVA in developing world world

0%

10%

20%

30%

40%

50%

60%E

Asia

1

E As

ia 2

S As

ia

LAC

SSA

1

SSA

2

MEN

A

19851998

Technology strategies in the Technology strategies in the East Asian TigersEast Asian TigersThere There waswas nono ‘Asian model’: given export ‘Asian model’: given export

orientation, each had own strategic vision orientation, each had own strategic vision Each ‘vision’ entailed different mixes of Each ‘vision’ entailed different mixes of

selective and functional (tactical) interventionsselective and functional (tactical) interventionsDifferences in strategy were in fact more Differences in strategy were in fact more

important than differences in tacticsimportant than differences in tacticsThese led to striking differences in industrial These led to striking differences in industrial

and technological structuresand technological structuresLeaders are ‘mature’ Tigers. New Tigers are in Leaders are ‘mature’ Tigers. New Tigers are in

a very different ball-park, with low innovative a very different ball-park, with low innovative capabilities and uncertain strategycapabilities and uncertain strategy

Three technological strategies Three technological strategies in export-oriented Tigers in export-oriented Tigers AutonomousAutonomous: based on domestic firms, with : based on domestic firms, with

high local content, minimal reliance on FDI, high local content, minimal reliance on FDI, heavy emphasis on skill building and R&D. heavy emphasis on skill building and R&D. Pervasive use of industrial policyPervasive use of industrial policy

Directed FDIDirected FDI: reliance on MNCs, but with : reliance on MNCs, but with stress on moving into high value activities, stress on moving into high value activities, with significant use of selective policywith significant use of selective policy

FDI dependent but passiveFDI dependent but passive: success largely : success largely due to welcoming policies, stable macro due to welcoming policies, stable macro environment, low wages, disciplined & semi-environment, low wages, disciplined & semi-skilled labour and good luck/location skilled labour and good luck/location

Share of MNCs in exports Share of MNCs in exports

0 10 20 30 40 50 60 70 80

Singapore

Malaysia

Philippines

Indonesia

China

Taiwan

Korea

India

Enterprise financed R&D, recent (% Enterprise financed R&D, recent (% GDP)GDP)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Kore

a

Taiw

an

Sing

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Mal

aysi

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Chin

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Indi

a

Thai

land

Philip

pine

s

Indo

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a

Swed

en

Japa

n

USA

Ger

man

y

UK

High technology exports and R&D High technology exports and R&D

0

10

20

30

40

50

60

70

Japa

n

US

A

Ger

man

y

S K

orea

Finl

and

UK

Taiw

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Chi

na

Irela

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Sin

gapo

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Mex

ico

Mal

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a

Thai

land

Phi

lippi

nes

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

HT%total exportsR&D/HT Exports

Skill creation: tertiary enrolments in Skill creation: tertiary enrolments in technical subjects as % populationtechnical subjects as % population

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

Chin

a

Thai

land

Mal

aysi

a

Indo

nesi

a

Philip

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Sing

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Taiw

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Kore

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19851997

Strategic differences: cluster analysis of 1995 RCAs in high-tech exports, with R&D and FDI

-0.5

0

0.5

1

1.5

2

2.5

-2 0 2 4 6 8 10 12 14 16 18

FDI

R&D

Bubble size indicates aver age value of RCA in H igh-T ech Exports,

1995

O EC D RCA : 0 .86

C hina H ong Kong M alaysia M exico

P hilippines Singapore T hailand

RCA : 1 .63

Korea Taiwan

RCA : 1 .47

O ther Developing C ountr ies

RCA : 0 .12

Now let us consider country Now let us consider country strategies for industrial strategies for industrial technology development... technology development...

Korean strategy: Interventionist, Korean strategy: Interventionist, nationalistic, strategic and high-nationalistic, strategic and high-tech tech Industrial policy dominant - strong, clear Industrial policy dominant - strong, clear

leadership commitment to competitiveness leadership commitment to competitiveness Import protection: high, prolonged but selectiveImport protection: high, prolonged but selectiveOffset by strongly export-orientation, with ‘push’ Offset by strongly export-orientation, with ‘push’

not ‘pull’: detailed targeting and pressures not ‘pull’: detailed targeting and pressures ChaebolChaebol spearheaded export, technology drive spearheaded export, technology drive Inward FDI tightly restricted -- until financial crisis. Inward FDI tightly restricted -- until financial crisis.

Outward FDI promotedOutward FDI promotedHeavy investments in human capital Heavy investments in human capital Directed and subsidised credit. Directed and subsidised credit. Support for SME R&D: 2,278 units by 1997Support for SME R&D: 2,278 units by 1997

Korea: financing R&D Korea: financing R&D SubsidiesSubsidies: :

Designated R&D Program funded 50% of R&D for large, Designated R&D Program funded 50% of R&D for large, 80% for SMEs, in ‘important new technologies’. $2 billion 80% for SMEs, in ‘important new technologies’. $2 billion invested 1982-93, 58% from government invested 1982-93, 58% from government

National Research Projects provided up to 67% of costs for National Research Projects provided up to 67% of costs for selected R&D. 1987-93: $1.1b. total, 41% subsidyselected R&D. 1987-93: $1.1b. total, 41% subsidy

Highly Advanced National Project started 1992 for very hi-Highly Advanced National Project started 1992 for very hi-tech R&D: 11 projects, $350 m. subsidytech R&D: 11 projects, $350 m. subsidy

LoansLoans: : Three funds with low interest rates, $1.2b. lent till 1994Three funds with low interest rates, $1.2b. lent till 1994 VC industry, 58 companies, $3.5 b. disbursed 1990-94VC industry, 58 companies, $3.5 b. disbursed 1990-94 Banks with special technology ‘windows’. KDB provided Banks with special technology ‘windows’. KDB provided

$3.4 b. during ’90-94 $3.4 b. during ’90-94 Guarantees for technology loans to SMEs: $8b. 1990-94Guarantees for technology loans to SMEs: $8b. 1990-94

Taiwan: Building high-tech SMEs Taiwan: Building high-tech SMEs Selective protection, subsidised and directed Selective protection, subsidised and directed

credit. credit. Strategic technology targetingStrategic technology targetingHuman resources: education and training Human resources: education and training Technology promoted by Technology promoted by

FDI targeting and local content/diffusionFDI targeting and local content/diffusion Superlative extension services: subsidised training, Superlative extension services: subsidised training,

finance, technology and marketingfinance, technology and marketing Strong public R&D, incentives for contract R&D, Strong public R&D, incentives for contract R&D,

venture capital, public R&D spin-offs venture capital, public R&D spin-offs Government ‘orchestration’ of technology: import, Government ‘orchestration’ of technology: import,

adaptation, diffusion and innovationadaptation, diffusion and innovation Science parks and technology clustersScience parks and technology clusters

‘‘Linking, leveraging and learning’ in Taiwan: Linking, leveraging and learning’ in Taiwan: Innovation consortia as leveraging tool Innovation consortia as leveraging tool

IBM unveiled its new PowerPC microprocessor, a product made by IBM, Motorola and IBM unveiled its new PowerPC microprocessor, a product made by IBM, Motorola and Apple, in New York in June 1995. It was followed one day later by the unveiling in Apple, in New York in June 1995. It was followed one day later by the unveiling in Taipei of PowerPC based products by a group of 30 firms from Taiwan. Taipei of PowerPC based products by a group of 30 firms from Taiwan.

The Taiwanese firms had not done this on their own. They were part of an innovation The Taiwanese firms had not done this on their own. They were part of an innovation alliance, the alliance, the Taiwan New PC ConsortiumTaiwan New PC Consortium formed by a government research formed by a government research institution, the Computing and Communications Laboratory (CCL), set up in 1993 institution, the Computing and Communications Laboratory (CCL), set up in 1993 to bring together firms from all parts of the IT industry in Taiwan. Its purpose was to bring together firms from all parts of the IT industry in Taiwan. Its purpose was to transfer, master and diffuse the new PowerPC technology over the whole range to transfer, master and diffuse the new PowerPC technology over the whole range of products from PCs and peripherals to software and multimedia applications as of products from PCs and peripherals to software and multimedia applications as well as to semiconductor manufacturers. The firms involved were relatively small well as to semiconductor manufacturers. The firms involved were relatively small by international standards, and CCL brought them together and negotiated on by international standards, and CCL brought them together and negotiated on their behalf with IBM and Motorola. their behalf with IBM and Motorola.

John MathewsJohn Mathews

Examples of R&D alliances in Taiwan, 1983-1997 Alliance Year(s) Companies Budget NT$ m A. Electronics and information technology 1. PC 100 (IBM PC XT-compatible) 1983-1984 5(9) 40 2. PC 400 (IBM PC AT-compatible) 1984-1985 3 24 3. Workstation (Sun SPARC-compatible) 1989-1991 2(3) 150 4 Notebook PC 1990-1991 46 100 5. Graphics terminal 1991-1993 34(9) 25 6. Palmtop PC 1991-1992 16 50 7. Pentium server 1991-1993 2 50 8 Taiwan NewPC (PowerPC) 1993-1997 40 250 B. Consumer electronics and communications 1 Ethernet switch 1993-1996 5(8) 75 2. Digital loop carrier 1992-1994 3(4) 60 3. LCD consortium 1995-1997 4 230 4. HDTV 1994-1996 11 250 5 Interactive TV 1995-1997 21 200 6. V5 Network access standard 1996- 12 150 7. High speed loop access system 1996- 14 120 C. Mechanical engineering/materials 1 1.2 L engine 1992-1997 4(3) 1,400 2. Electric scooter 1991-1996 10 500 3. 250cc motorcycle engine 1996- 2 600 D. Software/services 1. Java-based Internet products 1996- 24 250 2 Electronic commerce 1996- 61 300

Singapore: ‘Using’ MNCs Singapore: ‘Using’ MNCs Dynamic comparative advantage by designDynamic comparative advantage by design

From labour to capital intensive, then to technology From labour to capital intensive, then to technology intensive and finally to innovation itselfintensive and finally to innovation itself

Growth of local ‘technopreneurs’ based on innovationGrowth of local ‘technopreneurs’ based on innovation Latest industrial strategy is biotech and bio-medicine Latest industrial strategy is biotech and bio-medicine

HowHow did Singapore ‘use’ MNCs? did Singapore ‘use’ MNCs? TargetingTargeting by efficient, honest and competent agency by efficient, honest and competent agency

(EDB) with (EDB) with powerpower to coordinate & implement changes to coordinate & implement changes Public sector played catalytic role, leading private sector Public sector played catalytic role, leading private sector

and MNCs, recently in R&D by setting up laboratories and MNCs, recently in R&D by setting up laboratories Superb Superb infrastructureinfrastructure, financed by highest savings rate , financed by highest savings rate MNCs participated directly in policy making processMNCs participated directly in policy making process Upgrading education & Upgrading education & industrialindustrial skillsskills (‘best workforce (‘best workforce

in world’) and in world’) and importing importing high level manpowerhigh level manpower

Singapore’s skill system ... Singapore’s skill system ... School leavers given pre-employment industrial School leavers given pre-employment industrial

training of high quality training of high quality Tertiary system tightly regulated and guided, but with Tertiary system tightly regulated and guided, but with

ample financing and closely linked to industry ample financing and closely linked to industry Ample, varied industrial training courses, some run by Ample, varied industrial training courses, some run by

MNCs, some jointly with foreign governments MNCs, some jointly with foreign governments Skill Development Fund funds full cost of training by Skill Development Fund funds full cost of training by

SMEsSMEs Large firms are penalised for low-skill employment and Large firms are penalised for low-skill employment and

lack of training, and subsidised for providing training lack of training, and subsidised for providing training Funding for foreign trainersFunding for foreign trainers Liberal entry for skilled expatriatesLiberal entry for skilled expatriates

Hong Kong: Nearly Hong Kong: Nearly Laissez Laissez FaireFaire Interventions for SME upgrading and export Interventions for SME upgrading and export

marketing; land subsidies for manufacturing marketing; land subsidies for manufacturing Unique initial advantages: Unique initial advantages: HongsHongs, entrepôt, entrepôt

experience, financial and physical infrastructure, experience, financial and physical infrastructure, influx of skills from Mainland China influx of skills from Mainland China

High initial export growth, but High initial export growth, but lack of deepeninglack of deepening forced industry to relocate forced industry to relocate

Manufacturing and export growth now negative: Manufacturing and export growth now negative: only Asian Tiger to go into industrial declineonly Asian Tiger to go into industrial decline

Some late attempts at technology promotionSome late attempts at technology promotionGrowth based on servicing China -- but Shanghai Growth based on servicing China -- but Shanghai

taking over important functionstaking over important functions Few lessons for other countries in technology policyFew lessons for other countries in technology policy

New Tigers: Malaysia, Thailand, New Tigers: Malaysia, Thailand, Indonesia and the Philippines Indonesia and the Philippines Weak skills and technology, but Philippines is Weak skills and technology, but Philippines is

best in skills and Malaysia in R&D best in skills and Malaysia in R&D Domestic entrepreneurship (led by Chinese) is Domestic entrepreneurship (led by Chinese) is

weakest in Malaysia and strongest in Thailand weakest in Malaysia and strongest in Thailand Active industrial policy in domestic oriented Active industrial policy in domestic oriented

sectors, but not advanced capabilitiessectors, but not advanced capabilitiesHigh-tech strategies in Malaysia and High-tech strategies in Malaysia and

Indonesia not successful Indonesia not successful Facing severe competitive threat from China Facing severe competitive threat from China Moving to FDI targeting, but lack authority of Moving to FDI targeting, but lack authority of

IPA to design and implement strategyIPA to design and implement strategy

ConclusionsConclusionsTechnology policy has taken very different Technology policy has taken very different

forms in Asian Tigers forms in Asian Tigers Korea and Taiwan have strong domestic Korea and Taiwan have strong domestic

innovative bases, with skills & institutions innovative bases, with skills & institutions to cope with technical change and new to cope with technical change and new competitive challenges (though China will competitive challenges (though China will be major threat as it upgrades)be major threat as it upgrades)

Singapore is building technology base, but Singapore is building technology base, but remains vulnerable to external forcesremains vulnerable to external forces

New Tigers have to match domestic skills New Tigers have to match domestic skills and technological capabilities to high and technological capabilities to high technology export structures. If they technology export structures. If they cannot they will be extremely vulnerable cannot they will be extremely vulnerable to new competition, especially from China to new competition, especially from China

Policies are converging: Autonomous ones Policies are converging: Autonomous ones are now more open and market oriented. are now more open and market oriented. Passive FDI strategies are becoming more Passive FDI strategies are becoming more targeted. And all countries are trying to targeted. And all countries are trying to build local capabilities, enterprises and build local capabilities, enterprises and innovation systems. innovation systems.

But history matters -- there will not be But history matters -- there will not be rapid convergencerapid convergence