Role of government in promoting technology development

1
Role of government in promoting technology
development

• Sanjaya Lall
• Oxford University
• sanjaya.lall_at_economics.ox.ac.uk

2
Why do developing countries need government
policy for technology development ?

• Usual case for technology policy in economics is
  to remedy market failures due to externalities
  (under-investment in RD), public goods (basic
  research, standards), information and scale
  problems (SME support)
• This requires generic market friendly policies
• This is useful but inadequate for developing
  countries selective policies are also required
  to overcome problems of multiple growth paths
• Choosing feasible path requires vision
• Implementing it needs government capabilities

3
Technology market failures in developing
countries is due to tacitness of knowledge

• Latecomers cannot import use existing
  technology efficiently by simply opening up to
  technology inflows
• Tacit nature of technology means local learning
  is essential, and this is not trivial process
• Learning faces market failures at 3 levels
• In-firm mastery cost, uncertainty, duration,
  lack of information and unpredictability (infant
  industry)
• Inter-firm interaction and externalities
  coordination and collective action
• Deficient factor markets and institutions
  coordination and development of basic endowments

4
Learning is cumulative and path-dependent

• Each country has a unique learning path, with
  complex economic and social interactions,
  feedback and disturbances
• Technology literature uses national innovation
  system, NIS, to capture individual structural
  (systemic) features of each country
• NIS is mainly applied to industrial countries,
  but it applies equally to developing countries
• National system are difficult but not impossible
  to change need country specific constantly
  evolving policies

5
Features of ideal technology policy
This may mean more openness but
not necessarily non-selective (neoliberal)
policies on trade, FDI, skills RD or finance

• Use globalization effectively
• Access new technologies promptly
• Attract other mobile resources
• Enter integrated production systems
• Link local value chains to global chains
• Upgrade technologies and functions in value
  chains
• Build local capabilities to exploit globalization
• Attract high value mobile resources
• Build domestic skills technological
  capabilities to handle dynamic activities and
  technologies
• Develop strong local clusters capable of
  competing in global value chains

6
There are important choices on mode of accessing
foreign technology over time...

• Heavy dependence on internalised modes (FDI)
  provides rapid and efficient access to operating
  know-how, skills and global markets
• But it may not lead to upgrading of functions
  beyond those based on existing skills
• And it may not lead to the rapid development of
  innovative capabilities
• To build innovative capabilities, it is necessary
  to
• Either restrict FDI and promote local firms and
  RD
• Or to induce MNCs to deepen technological
  activity, by incentives, skill development and
  RD capabilities

7
Why are the policies of Asian Tigers of interest?

• At the start of the current era of economic
  development (post II World War) East Asia was
  much poorer than Latin America, with a less
  developed industrial sector
• Many Asian countries were also resource rich
• Most also embarked on import-substituting
  industrialization policies
• They had better macro management but more
  political strife, wars, ethnic problems and so on
• But they were far more successful in sustaining
  high growth than Latin America

8
Take regional MVA in developing world
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Technology strategies in the East Asian Tigers

• There was no Asian model given export
  orientation, each had own strategic vision
• Each vision entailed different mixes of
  selective and functional (tactical) interventions
• Differences in strategy were in fact more
  important than differences in tactics
• These led to striking differences in industrial
  and technological structures
• Leaders are mature Tigers. New Tigers are in a
  very different ball-park, with low innovative
  capabilities and uncertain strategy

10
Three technological strategies in export-oriented
Tigers

• Autonomous based on domestic firms, with high
  local content, minimal reliance on FDI, heavy
  emphasis on skill building and RD. Pervasive use
  of industrial policy
• Directed FDI reliance on MNCs, but with stress
  on moving into high value activities, with
  significant use of selective policy
• FDI dependent but passive success largely due to
  welcoming policies, stable macro environment, low
  wages, disciplined semi-skilled labour and good
  luck/location

11
Share of MNCs in exports
India
Korea
Taiwan
China
Indonesia
Philippines
Malaysia
Singapore
0
10
20
30
40
50
60
70
80
12
Enterprise financed RD, recent ( GDP)
13
High technology exports and RD
14
Skill creation tertiary enrolments in technical
subjects as population
15
Strategic differences cluster analysis of 1995
RCAs in high-tech exports, with RD and FDI
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Now let us consider country strategies for
industrial technology development...
17
Korean strategy Interventionist, nationalistic,
strategic and high-tech

• Industrial policy dominant - strong, clear
  leadership commitment to competitiveness
• Import protection high, prolonged but selective
• Offset by strongly export-orientation, with
  push not pull detailed targeting and
  pressures
• Chaebol spearheaded export, technology drive
• Inward FDI tightly restricted -- until financial
  crisis. Outward FDI promoted
• Heavy investments in human capital
• Directed and subsidised credit.
• Support for SME RD 2,278 units by 1997

18
Korea financing RD

• Subsidies
• Designated RD Program funded 50 of RD for
  large, 80 for SMEs, in important new
  technologies. 2 billion invested 1982-93, 58
  from government
• National Research Projects provided up to 67 of
  costs for selected RD. 1987-93 1.1b. total,
  41 subsidy
• Highly Advanced National Project started 1992
  for very hi-tech RD 11 projects, 350 m.
  subsidy
• Loans
• Three funds with low interest rates, 1.2b. lent
  till 1994
• VC industry, 58 companies, 3.5 b. disbursed
  1990-94
• Banks with special technology windows. KDB
  provided 3.4 b. during 90-94
• Guarantees for technology loans to SMEs 8b.
  1990-94

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Taiwan Building high-tech SMEs

• Selective protection, subsidised and directed
  credit.
• Strategic technology targeting
• Human resources education and training
• Technology promoted by
• FDI targeting and local content/diffusion
• Superlative extension services subsidised
  training, finance, technology and marketing
• Strong public RD, incentives for contract RD,
  venture capital, public RD spin-offs
• Government orchestration of technology
  import, adaptation, diffusion and innovation
• Science parks and technology clusters

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• Linking, leveraging and learning in Taiwan
• Innovation consortia as leveraging tool
• 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 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 alliance,
  the Taiwan New PC Consortium formed by a
  government research 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
  transfer, master and diffuse the new PowerPC
  technology over the whole range of products from
  PCs and peripherals to software and multimedia
  applications as well as to semiconductor
  manufacturers. The firms involved were relatively
  small by international standards, and CCL brought
  them together and negotiated on their behalf with
  IBM and Motorola.
• John Mathews

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(No Transcript)
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Singapore Using MNCs

• Dynamic comparative advantage by design
• From labour to capital intensive, then to
  technology intensive and finally to innovation
  itself
• Growth of local technopreneurs based on
  innovation
• Latest industrial strategy is biotech and
  bio-medicine
• How did Singapore use MNCs?
• Targeting by efficient, honest and competent
  agency (EDB) with power to coordinate implement
  changes
• Public sector played catalytic role, leading
  private sector and MNCs, recently in RD by
  setting up laboratories
• Superb infrastructure, financed by highest
  savings rate
• MNCs participated directly in policy making
  process
• Upgrading education industrial skills (best
  workforce in world) and importing high level
  manpower

23
Singapores skill system ...

• School leavers given pre-employment industrial
  training of high quality
• Tertiary system tightly regulated and guided, but
  with ample financing and closely linked to
  industry
• Ample, varied industrial training courses, some
  run by MNCs, some jointly with foreign
  governments
• Skill Development Fund funds full cost of
  training by SMEs
• Large firms are penalised for low-skill
  employment and lack of training, and subsidised
  for providing training
• Funding for foreign trainers
• Liberal entry for skilled expatriates

24
Hong Kong Nearly Laissez Faire

• Interventions for SME upgrading and export
  marketing land subsidies for manufacturing
• Unique initial advantages Hongs, entrepôt
  experience, financial and physical
  infrastructure, influx of skills from Mainland
  China
• High initial export growth, but lack of deepening
  forced industry to relocate
• Manufacturing and export growth now negative
  only Asian Tiger to go into industrial decline
• Some late attempts at technology promotion
• Growth based on servicing China -- but Shanghai
  taking over important functions
• Few lessons for other countries in technology
  policy

25
New Tigers Malaysia, Thailand, Indonesia and the
Philippines

• Weak skills and technology, but Philippines is
  best in skills and Malaysia in RD
• Domestic entrepreneurship (led by Chinese) is
  weakest in Malaysia and strongest in Thailand
• Active industrial policy in domestic oriented
  sectors, but not advanced capabilities
• High-tech strategies in Malaysia and Indonesia
  not successful
• Facing severe competitive threat from China
• Moving to FDI targeting, but lack authority of
  IPA to design and implement strategy

26
Conclusions

• Technology policy has taken very different forms
  in Asian Tigers
• Korea and Taiwan have strong domestic innovative
  bases, with skills institutions to cope with
  technical change and new competitive challenges
  (though China will be major threat as it
  upgrades)
• Singapore is building technology base, but
  remains vulnerable to external forces

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• New Tigers have to match domestic skills and
  technological capabilities to high technology
  export structures. If they cannot they will be
  extremely vulnerable to new competition,
  especially from China
• Policies are converging Autonomous ones are now
  more open and market oriented. Passive FDI
  strategies are becoming more targeted. And all
  countries are trying to build local capabilities,
  enterprises and innovation systems.
• But history matters -- there will not be rapid
  convergence