The Technological Divide

1
The Technological Divide

• Luc Soete
• UNU-MERIT,
• University of Maastricht
• The Netherlands

SID lecture series on Economic Growth and the
Common Good, Amsterdam March 16th, 2009
2
Outline

• The technological divide How to reach
  inclusive growth, an economic growth which is
  also benefiting vulnerable groups and which
  prevents undesirable side effects?
• Knowledge on the move from ST to innovation
• Past the emergence of tight science
• Present ICT and the change in nature of
  technological progress
• Future Global research, local innovation
• (Development) Research on the move
• Past Research with borders. The national
  research policy focus technological
  competitiveness and national dreams of leadership
• Present recherche sans frontière
• Future A new emerging innovation development
  paradigm?
• Challenges of the financial crisis

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1. The technological divide

• What remains striking is how the two largest
  countries in the world China and India, saw
  their populations share of world population and
  their share of world GDP fall over the period
  1820 till 1973. In 1973, the imbalance between
  the worlds concentration of GDP and the worlds
  concentration of population was probably the
  highest the industrialized world had ever
  witnessed.
• This extreme geographical inequality in world GDP
  has to some extent formed the basis of the
  unilateral focus of both social scientists and
  policy makers on domestic competitiveness and in
  particular on technological competitiveness as
  essential feature for a countrys future economic
  growth.
• As Ulrich Beck put it The consequences of
  globalization for sociology have been spelt out
  most clearly in the English-speaking countries,
  but above all Britain, where it has been
  forcefully argued that conventional social and
  political science remains caught up in a
  national-territorial concept of society. Critics
  of methodological nationalism have attacked its
  explicit or implicit premise that the national
  state is the container of social processes and
  that the national framework is still the one best
  suited to measure and analyse major social,
  economic and political changes. The social
  sciences are thus found guilty of embedded
  statism and thought is given to a reorganization
  of the interdisciplinary field.

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Table 1 China India, Brazil and South Africa in
the World Economy
Year CHINA INDIA BRAZIL SOUTH AFRICA
Percentage share of world population Percentage share of world population Percentage share of world population Percentage share of world population Percentage share of world population
1820 36.6 19.9 0.4 0.1
1870 28.1 17.0 0.8 0.2
1913 24.4 14.2 1.3 0.3
1950 21.7 14.8 2.1 0.5
1973 22.5 14.8 2.6 0.6
2001 20.7 16.5 2.9 0.7
Percentage share of world income Percentage share of world income Percentage share of world income Percentage share of world income Percentage share of world income
1820 32.9 16.0 0.4 0.1
1870 17.1 12.1 0.6 0.2
1913 8.8 7.5 0.7 0.4
1950 4.5 4.2 1.7 0.6
1973 4.6 3.1 2.5 0.6
2001 12.3 5.4 2.7 0.5
Source Maddison(2003)
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RD-expenditures
http//www.sasi.group.shef.ac.uk/worldmapper/
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Technological revenues
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2. ST research on the move a) the past

• Strong focus on industrial RD a relatively
  recent phenomenon.
• Long before, experimental development work on new
  or improved products and processes was carried
  out in ordinary workshops. Technical progress was
  rapid but the techniques were such that
  experience and mechanical ingenuity enabled many
  improvements to be made as a result of direct
  observation and small-scale experiment. Most of
  the patents in this period were taken out by
  "mechanics" or "engineers", who did their own
  "development" work alongside production or
  privately. This type of inventive work still
  continues to-day and it is essential to remember
  that is hard to capture it in official RD
  statistics.
• What became distinctive about modern, industrial
  RD was its scale, its scientific content and the
  extent of its professional specialisation. Joel
  Mokyr calls tight ST
• Older arts and crafts technologies continued to
  exist side by side with the new "technology". But
  the way in which more scientific techniques would
  be used in producing, distributing and
  transporting goods led to a gradual shift in the
  ordering of industries alongside their
  technology intensity. Thus, typical for most
  developed and emerging industrial societies of
  the 20th Century, there were now high-technology
  intensive industries, having as major sectoral
  characteristic the heavy, own, sector-internal
  RD investments and more low-technology
  intensive, more craft techniques based
  industries, with very little own RD efforts.

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Industrial technology policy

• In many policy debates, industrial dynamism
  became associated with the dominance in a
  countrys industrial structure of the presence of
  those high-technology intensive sectors.
• In Europe it led to an obsession with national
  technological competitiveness. European
  integration a history of success and failure of
  industrial policy with as central driver the
  elusive pursuit for scale economies
• European problem one of scale (going back to M.
  Abramowitz in the 50s, see also Jan Fagerberg)
  from the origin of the European Community for
  Steel and Coal to sun-rise industries
  Microelectronics
• Focus on sun-rise industries starting with
  Davignon for political but also economic reasons
• The European, so-called Barcelona 3 RD/GDP
  target e.g., arose primarily from concerns that
  Europes industrial RD appeared to lag far
  behind that of the other technologically leading
  countries such as the US and Japan.
• The assumption was that more RD carried out in
  Europe would be a crucial factor behind Europes
  attempt at becoming the most competitive region
  in the world. Obvious that RD as an investment
  cost target is somewhat of an odd policy target.
  More important is the question what the results
  are

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b) the present new characteristics of
innovation

• Shift in the nature of knowledge accumulation
  from industrial, tight to more undetermined
  outcomes, trial and error science and technology
• Traditional industrial RD based on
• Clearly agreed-upon criteria of progress, and
  ability to evaluate ex post
• Ability to hold in place (Nelson), to
  replicate, to imitate
• A strong cumulative process learn from natural
  and deliberate experiments
• Still the case in many manufacturing sectors from
  automobiles, to consumer electronics, chemicals
  but even here tightness is becoming more
  difficult with the increase in complexity

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ICT and the change in nature of technological
progress

• New technological change appears more based
  upon
• Flexibility, hence difficulty in establishing
  replication
• Trial and error elements in research with only
  ex post observed improvements
• Problems of continuously changing external
  environments over time, across sectors, in
  space difficulty to evaluate
• E.g. In many IT-intensive sectors (education,
  health, mobility, safety, business) efficiency
  improvements remain complex stories only to be
  told ex post
• Particular role of users in the RD process
  itself and much larger role for entrepreneurial,
  creative destruction based innovation
• Codified parts of knowledge easy, but difficult
  to appropriate the efficiency improvements leak
  quickly away, tacit parts much more difficult,
  imitation never complete

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From industrial to innovation policy

• Distinction between novelty and routine reflected
  in essential features of RD definition and its
  policy support
• Professional RD with professional SE manpower
  versus routine production with routine high/low
  skilled manpower
• Dominance in-house RD over outsourcing,
  licensing, open innovation
• STS activities such as design, engineering, etc.
  outside of RD
• Systemic interactions between various knowledge
  creation and users components
• At innovation side blurring distinction between
  innovators and users
• Innovation sometimes outside of RD system,
  associated with entrepreneurs
• Innovation as novelty with respect to firms
  market, countrys market, world market?
• Role of knowledge management, organisational
  innovation, social innovation
• University-industry interactions, public-private
  research collaboration

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c) The future global research, local innovation

• Relevance of innovation (policies) at different
  levels of development. Three broad categories of
  innovation policy challenges (Aghion and Howitt,
  2005)
• For high income countries, such as Japan or the
  EU, the policy challenge is one of the
  sustainability of Schumpeterian dynamism
• For emerging economies (BRIC), the challenge
  appears the design of backing winners
  innovation policies based on new comparative cost
  advantages
• For least developing countries, the policy
  challenge focuses on the disarticulated nature of
  the local knowledge systems
• Growing scope for mutual learning from each
  others local experiences
• Relevance of community of practice in many
  areas.
• Differences in local university-industry-public
  research interactions.
• Sectoral traditions in e.g. extension schemes as
  way to diffuse new knowledge
• Link with local entrepreneurship and local
  context conditions

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Global sharing of knowledge as source of
innovation

• The global dimensions of collaborative
  innovation can go hand in hand with a huge
  concentration of RD efforts in the US, Japan,
  the UK and other EU countries with China and
  India rapidly catching up
• But such physical concentration will need
  increasingly to address global welfare problems
  and demands
• In this sense the most important long term
  enabling factor of OECD countries
  over-concentration of RD will be in enhancing
  A2K
• Not just access to the required knowledge but
  also to the tools to replicate and improve upon
  knowledge
• Access not as passive consumption but as right
  and ability of participation as a factor
  enlarging the resource base of potential
  innovators
• Crucial role of various communities of practice
  (innovators, local users, implementers, etc.)
• Role of (local) public sector in setting the
  fences of the commons in nature but also in
  innovation, in creative commons

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First conclusions

• Knowledge sharing shifts the attention away from
  the purely technological aspects of research to
  the broader organisational, economic and social
  aspects which are today in many cases a more
  important factor behind innovation.
• This is reflected to some extent in the much
  greater popularity of the term innovation today
  than RD
• Innovation is at the same time as relevant to
  poor countries as it is to rich countries. This
  holds a priori for countries with large, young
  populations where the potential for innovation,
  once users/consumers are identified as source of
  innovation, can easily be enhanced.
• In doing so, innovation is becoming less driven
  by RD and at the product end by the continuous
  search for quality improvements, typical of the
  old mode of technological progress, identified
  with the high income groups in society, but by
  broader user needs across society.
• At the same time, such innovation demands might
  feed back to RD departments in new ways, further
  globalising the impact of research.

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3. Research on the movea) Past Research within
borders

• The EU as case in point of research within
  borders.the case could be made that as in the
  case of trade diversion, a side effect of
  economic integration on research activities
  within the EU has been intra-European knowledge
  diversion
• Gradual move from national to European borders
  the ERA ( in French lespace européen de
  recherche) most easily comparable with a research
  single market.
• Lisbon fitted within this view it should be
  primarily considered as a correction on the EU
  institutional set-up.
• Competition policy not providing necessarily
  growth and innovation dynamics, on the contrary
  it created a lot of legal uncertainty with
  respect to MS national research policies
• Monetary/fiscal policy with growth and stability
  pact under the Maastricht Treaty not providing
  any fiscal prioritisation with respect to
  knowledge investments.
• Culmination of 50 years of European cocooning

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b) Recherche sans frontière

• Research is becoming increasingly globally driven
  in most applied research in the developed world,
  yet many of the most challenging research
  questions are often taking place within
  development contexts.
• Broadening of the scope of research activities to
  include more systematically users groups, and in
  particular various communities of practice. With
  respect to applied research including design, the
  possibilities of such collaborative innovation
  processes involve stronger collaboration,
  interactions, and partnerships with research
  communities in developing countries.
• Growing role in international research
  partnerships of NGOs, as initiators of research
  for development projects, as organisations with a
  wealth of user knowledge, local community
  expertise and not-for-profit interest which gives
  a voice to needs at the bottom of the income
  pyramid where markets are invisible.
• It is expensive to be poor it is expensive to
  service the poor

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c) An emerging innovation development paradigm

• Traditionally consumer product innovation has
  been driven by professional use demand directed
  towards the tip of the income pyramid the long
  tail of product quality, professional use
  improvements.
• In a global setting, this has offered growth
  expansion opportunities to firms thanks to rising
  income inequality in developed and emerging
  economies.
• In the long term though this is likely to be an
  unsustainable process high income market
  penetration offers too little innovation monopoly
  rents
• Need to strengthen the international
  implementation of IPR
• But with major problems of transfer pricing,
  parallel imports will remain in crucial areas for
  welfare (health, education, nutrition)
• Search on the part of the business community in
  the absence of Keynesian global redistribution
  policies for long tails elsewhere (remember
  Fords T-model)
• At middle income levels, youngsters, elderly,
  etc.
• Low income, bottom of the pyramid (BoP)
  innovations (Prahalad), local grassroots
  innovation (Anil Gupta).

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Global research challenges insights from the
South

• Developing markets appear to raise some of the
  most motivating research/innovation challenges
• Autonomy, unwired to high quality infrastructure
  (energy, water, roads, terrestrial
  communication)
• Low education hence necessity of simplicity in
  use
• Less maintenance/repair facilities, so an
  intrinsic need for long term sustainability
• Extreme income inequalities with strong needs in
  urban slums and poor rural villages, but little
  current purchasing power and high living risks,
  hence low willingness to invest or borrow money
  in the long term.
• All these features appear also and increasingly
  of particular value to consumers in developed
  countries
• Autonomy of high quality infrastructure as
  freedom of movement
• Shift in the democratization of innovation from
  the needs of sophisticated, bèta users to the
  needs of (digital) illiterates
• Need for zero maintenance and ecological
  sustainable cradle to cradle
• Relevance of new financial products such as
  micro-credit and micro-insurance in poor urban
  areas

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Innovation for development

• Role of local communities as professionalized
  non-governmental grass roots organizations
  becomes crucial. New strategic alliances emerging
  between NGOs and multinational firms in the
  development of BoP laboratories embedded in such
  environments, not part of traditional high tech
  RD centres.
• Innovation process is now likely to be reversed,
  starting with the design phase which will be
  confronted most directly with the attempt to find
  functional solutions to the BoP users framework
  conditions.
• This involves not just the need to bring the
  product on the market at a substantially lower
  price than existing goods, as Prahalad noticed,
  but also adaptation to poor local infrastructure
  facilities e.g. with respect to energy delivery
  systems, water access, transport infrastructure
  or digital access.
• Feedback from BoP users and from design
  developers upstream towards applied, even
  fundamental research is interesting new example
  of reverse transfer of technology (from South to
  North), re-invigorating and motivating the
  research community in the highly developed world
  in search of relevance.

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Pro-poor innovation challenges

• Private BoP innovation initiatives (BOP learning
  labs)
• Top down (Prahalad) from large Western foreign
  companies difficult to implement, insufficient
  top management support, CSR burden
• Bottom up emerging from grassroots innovation
  (Gupta) in alliance with firms from emerging
  economies Indigenous innovation difficulties in
  up-scaling and reaping scale economies
• Need for close link with development of
  purchasing power (micro-finance and
  micro-insurance) addresses in general above
  poverty line households.
• Focus at the moment on BoP innovations in health
  and nutrition area, a sector where applied
  medical research is dominated by access to new
  technologically sophisticated equipment (e.g.
  combined PET - positron emission tomography
  ct-scanners), and less by down to earth research
  questions about, and the list is non-exhaustive
  anti-biotic resistance, infectious diseases or
  resistant tuberculosis.
• An example toilet in India (Financial INclusion
  In Health and Sanitation FINISH project)

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Toilets in India

• The all India coverage of sanitation, according
  to the National Family Health Survey 3 is 44.6
  in 2005-06. Initial indications of an evaluation
  by the Government of India and UNICEF show that
  significant numbers of people, especially in
  below and just above poverty line households (lt
  3 a day) are not using their latrines.
• A number of studies correlate diarrhoeal disease
  and morbidity rates to water, sanitation and
  hygiene components. Open grounds in India receive
  an estimated 100,000 tons of human faeces
  everyday. Only one in three Indians has access to
  any form of a functioning toilet. Less than half
  of the 738,150 government primary schools are
  equipped with toilet facilities and out of 5000
  towns in India, only parts of 232 towns are
  connected to a central sewage system.
• Sanitation is more than providing toilets the
  associated excreta treatment and/or reuse system
  are the areas where sanitation makes the real
  impact. But neither really contributes to main
  motivators for people to buy a toilet, i.e.
  convenience and privacy.
• The market for toilets for the poor is very
  sluggish as it is considered to correspond to a
  merit good that must be provided by the
  government or charitable NGOs, as there is a
  strong preference in the bottom of the income
  pyramid group to use the scarce revenue for other
  essential goods or entertainment goods that
  provide temporary relief. (Ramani, 2008)

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Research objectives of FINISH

• Integrating sanitation (water, sanitation and
  hygiene) into the main activities of
  micro-finance institutions, including enhanced
  livelihood opportunities arising from sanitation
  interventions (soap manufacturing, composting,
  fertiliser usage, construction activities etc).
• Increase scope of financial services offered to
  rural and peri-urban poor through linking
  micro-insurance (life and health) with
  microcredit expanded to include sanitation. This
  is part of the financial inclusiveness of
  micro-finance service as offered to the rural
  poor.
• Could there be spin off of the demand for health
  insurance in rural areas that could be leveraged
  for enhancing demand for sanitation and water?.
  The underlying assumption is that health
  insurance does have a demand which is based on
  studies indicating that health costs are one the
  largest unplanned perils that low income
  households encounter.
• By having the MFI distribute micro-insurance as
  well as sanitation loans their grass root
  relationships can be maximised. The project will
  demonstrate to the community the relationship
  between lowered health costs and sanitation
  creating awareness for the latter and stimulating
  a demand for it which the MFI community can then
  satisfy through innovative funding mechanisms.

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4. The financial crisis

• A double squeeze a financial crisis having
  affected the real economy with a mutual
  reinforcing double squeeze on the economy.
• With practically all large international
  operating banks technically bankrupt, an economic
  recession which can not be addressed using
  traditional financial tools, banks no longer
  being in a position to carry out that function.
• The large financial banks have become dead
  bodies black holes in our economy, absorbing
  public money but no longer emitting any economic
  dynamism.
• As a result a declining financial sector in most
  (small) countries with domestic repatriation of
  financial services, a reduction in their
  profitability and a rapid reduction in employment
  despite heavy state involvement.
• From positive to negatively self-reinforcing
  externality effects (Stiglitz et al.)

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Mutually reinforcing effects
0,16

• Banks try to restore solvency

• Over the past 8 years, leverage has reached
  unprecedented levels

• Sell assets to restore capital ratio

• Asset
• Price Rise

• Financial
• Innovation

• Commercial paper markets collapse

• Further asset write-downs

• Cheap Credit

• Lowers asset prices

• US Subprime
• crisis
• Lehman Failure

• Commercial paper collapses (counter-party risk)

• Adverse selection fu rther depresses market

• Economic contraction

• Companies who can turn to bank credit
• lines

• Economy contracts

• Banks further tighten lending standards

• Markets are trying to adjust to the changed
  conditions, but it is unclear what the end-state
  will be and how long it will take to get there

• Increase in non-performing loans

Source Morgan Stanley Federal Reserve BEA
The Economist McKinsey analysis
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The crisis and need for knowledge investments

• Surprising how current financial/economic crisis
  is being discussed purely in national terms...
• Five Dutch economists proposals in NRC on
  economic recovery purely national
• Nothing on global imbalances to which the Dutch
  economy contributes
• Nothing on environmental unsustainbaility nature
  of current growth path.
• Global access to knowledge central in current
  crisis.
• HIgher growth in emerging and developing
  countries dependent on technology transfer and
  access to knowledge
• Global access to markets raises return to
  knowledge investments in The Netherlands
• Global and local environmentally sustainable
  growth is crucially dependent on fast diifusion
  of technologies and eco-innovation.
• Challenge to technology and innovation policy
  from national obsession with technological
  competitiveness to a new global view.

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The global knowledge challenge
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Crisis scenarios

• Regeneration of old globalization patterns
• Recession 3-4 quarters, then strong growth
• New, effective regulatory regime
• Recovery is broad-based
• Credit markets recover, safe leverage ratios,
  cost of capital to historic norms
• Global trade recovers rapidly

• Battered, but resilient
• Recession 2-5 years, then strong growth
• New, effective regulatory regime
• Recovery led by regions (eg. US, China)
• Credit Markets recover, safe leverage ratios,
  cost of capital to historic norms
• Slow recovery of global trade

Early Recovery
Capital Markets Crisis

• Stalled Gobalization
• Recession 1-2 years
• Recovery is based on national markets and
  national industrial policies.
• Financial and credit markets renationalize and
  downsize.
• Recovery growth quickly runs into foreign energy
  dependence so that global trade recovers only
  slowly

• Disruption
• Recession gt 10 years (Japan-style)
• Major disruptions bringing about new national
  regulatory policy experiments
• Credit markets rely on government input, cost of
  capital and energy high
• Global trade drops, knowledge as well highly
  skilled labour mobility increase

Continued Slowdown
Severe
Moderate
Economic Global Recession
Source McKinsey Global Institute
29
Global developments

• No change
• At first rapid recovery
• Limits to unsustainable growth (oil price, raw
  materials, agriculture increases) expressed in
  re-occurrence of crises in new areas (water,
  health, environmentally induced migration, )
• Rising inequality and exclusive growth, resulting
  in unsustainable social exclusion, increased
  security costs

• Balanced growth
• Redirection of global financial flows in a more
  balanced way
• Growth in US and UK savings, reduction in
  reserves in China and S-E Asia new role for IMF
  
• Stronger representation of emerging countries in
  international financial organizations
• Growing international trade conflicts

Early Recovery
Capital Markets Crisis

• Financial nationalism
• Focus on protecting national savings, going for
  national and international trust investments
  (local banks and global community banks)
• Regional disparities with growing labour
  migration pressures
• Financial global imbalances limit national
  growth opportunities

• Knowledge globalization
• Dramatic slowdown in trade of goods, with severe
  structural unemployment new specialization
  patterns emerging
• New priority on global implementation of
  environmental technologies
• High skill labour and knowledge mobility

Continued Slowdown
Severe
Moderate
Economic Global Recession
Source McKinsey Global Institute
30
Conclusions

• Knowledge sharing shifts the attention away from
  the purely technological aspects of research to
  the broader organisational, economic and social
  aspects which are today in many cases a more
  important factor behind innovation. This is
  reflected to some extent in the much greater
  popularity of the term innovation today than RD
• Innovation is at the same time as relevant to
  poor countries as it is to rich countries. This
  holds a priori for countries with large, young
  populations where the potential for innovation,
  once users/consumers are identified as source of
  innovation, can easily be enhanced.
• In a growing number of areas the
  over-concentration of research expenditures in
  the Northern world leads to a too slow spreading
  of knowledge
• In case of Energy saving technologies policy
  issue is fast proiferation of knowledge
• Need for multi-disciplinary research programmes
  on appropriate innovation Local food
  production, local energy efficiency, water
  management, transport, logistics, urban mobility,
  migration, etc.
• Need for adjustment of our financial system to
  focus more on local knowledge impact.