Creative destruction and an out-of-crisis roadmap Mario Cimoli

Creative destruction and an out-of-crisis

roadmap

Mario Cimoli

Out-of-the-crisis roadmap at the light of post-crisis scenarios: 8

points1. The self-enforcing role of the productive

structure

2. Technological learning, stickiness and re-adaptation

3. Crisis and catching-up: capability building and the dazzle of commodities

4. Latin America facing the crisis: stylized facts

5. New productive configuration

6. New technological paradigms

7. The role of the State

8. Towards a path of sustainable growth

1. The self-enforcing role of the productive structure

The crisis entails more than a systemic impact on aggregate macro variables

The impact of the crisis on the real economy is not neutral with respect to the characteristics of the microeconomic structure and the behaviour of the firms

The way world economy may affect economic growth in a specific country could be considered as “filtered” by the degree of structural change occurred into the domestic economy

1. The self-enforcing role of the productive structure

• The production structure defines how the economy reacts to the crisis: economies that are more specialized in high tech sectors will have higher income elasticity with respect to global growth

This higher elasticity implies that these economies will: - respond more dynamically to global growth in normal times - suffer more during episodes of global economic

contraction - recover more easily in the post-crisis stabilization

phase

The crisis leads to a re-composition of this same microeconomic structure, which in turn shapes the response of the economy

Growth Elasticity with respect to the World Growth

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0 10 20 30 40 50 60 70 80

Structure Index (%)(Value added of industrial technologial sectors over total industrial valued added)

Gro

wth

ela

stic

ity

wit

h re

spec

t to

wor

ld g

row

th

Brazil 2007

Brazil 1970

Korea 1970

Korea 2007

Argentina 1970

Argentina 2007

Source: Division of Production, Productivity and Management, ECLAC


In crisis scenarios firms and sectors readapt their capabilities, learning processes and production and investment strategies.

The production structure undergoes processes of restructuring, which may imply the destruction of certain productive, technological and human capabilities


Most of the difficulties firms have to face in restructuring arise from the features of the technological capabilities, which are affected by the intrinsic nature of technological learning

Technological Learning Require real time

Accumulation Stickiness Path-dependency Complementary Irreversibility

Stickiness in technological capabilities implies that all these processes of re-adaptation and change are costly and require resources and time


However: going through a process of re-adaptation of the microeconomic structure is a mandatory path for firms in order to face the new conditions and survive in the post-crisis scenario. This is possible if the firms are endowed with an adequate amount of technological capabilities

Consequently: firms close to the technological frontier are endowed with better technological capabilities and are more able to design a sound response and reaction to the crisis

firms in catching up economies are more vulnerable to the potential disruptive effects of a financial crisis, because the destructions of capabilities would have a higher systemic impact at an early stage of development

3. Crisis and catching-up: capability building and the dazzle

of commodities

a) Fragility of the capability building process

Catching-up economies are in the process of creating endogenous technological and production capabilities

With the occurrence of the crisis, this process slowed down and got eventually interrupted, resulting in a weakening or breakdown of real capabilities

This affects deeply the microeconomic structure and its consequences on productivity and growth may be persistent and more costly in the long run

Falling behind in terms of technological capabilities makes the process of catching-up increasingly difficult, as market shares are reduced and investment compromised

Stickiness in production and technological capabilities implies that these effects are less easily reversible in the real economy than in financial markets, in particular for catching up economies


of commodities

b) The dazzle of commodities: holding back structural change

Let’s consider a shock such as a temporary rise commodity prices

A shock of this type favours sectors which are less technology-intensive and whose stimulus to human capital formation is weak, with a consequent loss of technological capabilities and inhibits the creation of new ones

The economic structure resulting from the adaptation process will have in the aggregate less capabilities and fewer sectors

A loss of sectors and capabilities will reduce systemic learning and increasing returns and economic levels, compromising international competitiveness. Both effects combine and reinforce each other, giving rise to vicious circles which hamper economic growth in the long run


of commodities

c) The dazzle of commodities: volatility and uncertainty

Crucial to understand the microeconomic consequences of volatility and instability in prices and how they interact with long run growth in production and productivity

If shocks are recurrent, the firm might need either to constantly readapt its processes and product mix or to adjust at a slower pace, waiting for the emerging structure of relative process to become more transparent

The evolution of firm’s productivity with successive price or uncertainty shocks will appear as if productivity was stagnant, while it indeed had been fluctuating

A general slowdown in aggregate productivity is the most likely outcome of the productivity slowdown induced by price volatility in the medium-long run

t

Re-adaptation of technological capabilities and productivity slowdown

CRISIS: loss in capabilities

Productivity slowdown and loss of technology-intensive sectors

LONG RUN:LOWER ECONOMIC GROWTH

Source: Cimoli and Porcile, 2008

Crisis and catching-up economies:

the threat of the “Red Queen

Effect”

If immediate actions are not considered, once this “economic storm” would have passed the country will be running at a slower pace than the rest of the world, being unable to “keep in the same place”


a) The “bonanza” quinquennium: 2003-08

The expansion of the external sector The increased weight of manufacturing sectors

b) A “cold shower”: 2008-09 - the “bonanza” is over

The flip side of rising commodity prices Chronically underdeveloped technological capabilities

Trade unbalances Industrial production within the Global Value Chain

Structural change and productivity


What kind of structural change have Latin American countries experienced in the last decades (1990-

2007)?

In the US, the high-tech sectors represented almost 60% of total manufacturing value added in 2007. These sectors are capable to produce abundant knowledge spillovers, which contribute to foster productivity in the whole industrial sector, dragging upwards the industrial productivity growth

In LA, the industrial structure was – and still is - biased towards natural resources and traditional industrial sectors. The evident lack of structural change is at the root of the immobility and slowdown of productivity

The productivity gap between Latin America and US has been constantly increasing for more than two decades, even during the time span of recent economic growth

Between 1990 and 2007: LA fell behind the technological frontier both in terms of technological specialization and productivity growth

Structural change and productivity: Argentina

Argentina 1990

Argentina 2007

USA 1990

USA 2006

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

100,0

10000,0 30000,0 50000,0 70000,0 90000,0 110000,0 130000,0 150000,0 170000,0 190000,0 210000,0

Nota: red square = labor-intensive sectors green circle = natural resources blue triangle = high-tech

Labour productivity (constant USD 1995)

% value added of different sectors over total manufacturing value added

Structural change and productivity: Brazil

USA 2006

BRAZIL1990

BRAZIL 2006 USA 1990

0

10

20

30

40

50

60

70

80

90

100

0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000




Structural change and productivity: Chile

USA 1990

USA 2006

CHILE 1990

CHILE 2006

0

10

20

30

40

50

60

70

80

90

100

5000 25000 45000 65000 85000 105000 125000 145000 165000 185000 205000




Structural change and productivity: Colombia

0

10

20

30

40

50

60

70

80

90

100

0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000

USA 1990

USA 2006

COLOMBIA 1990

COLOMBIA 2007




Structural change and productivity: Mexico

USA 1990

USA 2006

MEXICO 1990

MEXICO 2006

0

10

20

30

40

50

60

70

80

90

100

0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000




50

60

70

80

90

100

110

Ind

ice

de

Pro

du

ctiv

idad

Rel

ativ

a

0

20000

40000

60000

80000

100000

120000

140000

160000

Pro

du

ctiv

idad

EE

UU

AL (promedio simple) USA

Productivity LA

Productivity USACRISIS

CRISIS

Persistency and increase of the technology gap

Source: Cimoli and Porcile (2008), Cimoli, Hernadez and Stumpo (2008)


A challenging after-crisis competitive context for Latin American firms:

contraction of international demand, collapse of export levels, increased world competition

rising difficulties in managing trade-of-balance deficits

weak domestic markets (unable to act as “spare wheel”)

production overcapacity and difficult relocation of human capital (rising unemployment)


Firms and the credit crunch:

• Financial restrictions will blow on the fire of the crisis and it will exacerbate the issue of scarce development of capabilities

• Foreign investors are likely to cut and divert investments in new plans

• National investors who are indebted will struggle to re-pay the debts or to find new credit


Firms and investment decisions:

• Firms have to reorganize production and reorient their capabilities to respond to changing conditions of demand and international competition. This means:- review investment plans - cut unnecessary expenditure- increase efficiency

- close production lines and plants, reduce employment

• Sectors in which technology mastery and specific technical knowledge are the core competences: firms foresee the way-out of crisis through technological leadership and thus they are likely to realize/increase their planned investments in R&D

• In primary commodity specialized economies: more difficult for firms where technological capabilities and other strategic assets are weaker - lock-in scenario, new projects may be cancelled and industries might migrate


Foreign Direct Investments:

• FDI pattern reflect the comparative advantage of the region in primary commodity sectors

• In 2008 Latin America received the largest amount of FDI (128.000 million USD) ever received, mainly concentrated in natural resources (up to 30% of FDI inflow in 2008) and services.

• However, at the end of 2008 Mexico and some countries of Central America were already hit by a significant reduction of FDI inflows (-20% with respect to 2007)

• FDI towards LA are expected to decline staidly at least in 2009

6. New technological paradigms

The “creative destruction”:

capitalistic development entails a continuous transformation of production structures and organizational routines, a process that is characterized by given regularities and by unforeseen and random events such as the appearance of new technological paradigms which recompose the way in which production and trade are organized

6. New technological paradigms Opportunities in the post-crisis scenario will be

strictly linked with capabilities in new paradigms in science, technology and production: capabilities will lead the resurgence from the current crisis, and will determine the repositioning in the global economy

US: despite being the source of the crisis started and where its impacts have been dramatic, are still the big technological leader in many new core technologies

LA: lagging behind in terms of development of technology intensive industries and patenting

Towards a consolidation of the markets of knowledge: with the new paradigms, the importance of intellectual property right defence and trade will increase

The knowledge curve: production structure specialization and patenting

0

10

20

30

40

50

60

70

80

90

100

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00

Technological Specialization Index 2001-2003 (share of technology intensive sectors in each geographical area versus

the share of technology intensive sectors in the US)

Cum

ulat

ive

shar

e in

Tri

adic

pat

ent f

amile

s 20

01-

2003

(i.e

. pat

ents

all

aplie

d fo

r at

the

EP

O, U

SP

TO a

nd

JPO

)

Latin American CountriesSouth Africa

Australia & New Zeland

European Countries

Japan

Canada

Emerging Asia

US

Source: Cimoli, Coriat and Primi (2008)

6. New technological paradigms a) New technological paradigms: ICTLA: rising importance of ICT, but still digital divide

Penetration rate differences between LA and EU

0

10

20

30

40

50

60

70

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Telefonía f ija Telefonía móvil Internet Banda ancha

Source: Programa Sociedad de la Información with data from the “World Telecommunications Indicators Database”, 2008

6. New technological paradigms Crisis impacts on ICT diffusion in LA: threats and

opportunities

• effects on supply: not relevant

Big regional leaders (Telefónica and América Móvil) have expressed the intention not to stop investments they have planned in the long run (they have liquidity). Hence, it is likely that ICT infrastructures will continue to expand in the region despite the crisis

• effects on demand: mixed

Some services (telephone land lines…) are perceived as essential, thus their demand tend to be rather inelastic with respect to income conditions, so a contraction is not expected. On the other hand, some more sophisticated services (wide band… ) are still perceived as “luxury goods”, so a reduction in demand is likely to happen, at least in the short run

• opportunities: delocalization and offshoring for the countries which can be able to offer these services (advantaged: Mexico and Central America countries)

6. New technological paradigms b) New technological paradigms: Bio- and Nanotechnology

Still at initial phase: their potentialities under the scientific as well as economic point of view have not been fully disclosed yet

Do LA countries own the adequate capabilities to undertake this new technological pattern?

Diffusion and development of Bio-/Nanotechnology activities in the region still at “embryonic” level:

- only few countries are involved in activities Bio-: Argentina, Brazil, Chile, Colombia Cuba Nano-: Brazil, Mexico, Argentina

- lagging behind in terms of patenting and scientific publications with respect to EU, US, Japan and some emerging Asian countries (China and in particular India)

- low amount of dedicated expenditure in R&D (private as well as public)

- weak support form governments and public sector

Biotechnology outlook in Latin America

Argentina Brasil Chile Colombia Cuba España Portugal China India EEUU Japon Alemania

Patentes Biotecnológicas 4 12 2 2 4 87 5 100 49 3.462 1.214 588(Año 2006)

Patentes Biotecnológicas 11 68 8 6 46 383 32 1.578 324 32.168 6.791 6.209(Acumulado 2000-2006)

Publicaciones 285 990 134 75 56 1.707 302 4.076 1.084 19.876 5.177 4.799(Año 2006)

Nº de Investigadores 916 6.844 1.860 (3)(4) s/d s/d 9.991 s/d s/d s/d 446.890(3)(4) s/d s/d(Año 2006)

Nº de empresas (1) 34(5) 71 (8) 58 10 52(9) 216 20 (7) 136(6) 96(6) 1.510 1007(7)(10) 495(Año 2006)

Empresas por sector:Salud Humana 23,8% 35,2% 27,6% s/d s/d 40,0% 61,0% s/d s/d 65,0% s/d 44,0%

Agropecuario 64,3% 22,5% 39.7% (11) s/d s/d 12,0% 17,1% s/d s/d 12,0%(11) s/d 5,7%

Industria y otros (2) 11,9% 42,3% 32,8% s/d s/d 47,0% 22,0% s/d s/d 23,0% s/d 50,3%

Empresas Biotecnológicas 21 4 35 2 46 20 19 0 0 51 79 60(cada 10 millones hab)

Indice de aprovechamiento 1,4% 1,2% 1,5% 2,7% 7,1% 5,1% 1,7% 2,5% 4,5% 17,4% 23,4% 12,3%(patentes / publicación)

Países emergentes de Asia

Países de Iberoamérica

Fuentes: Anuario Estadístico CEPAL (2008), OECD Factbook 2009 , Albornoz y Barrere (2008), Gutman y Lavarello, 2009, Garcés Toledano y otros (2007), Albornoz (2007), Hernandez Cuevas y Valenzuela (2004), Van Beuzekom y Arundel (2006), Van Beuzekom y Arundel (2009), Ernst & Young (2008), Niosi y Reid (2006) y InvestChile (2008).

Notas: (1) Solo empresas biotecnológicas especializadas o DBF (Dedicated Biotech Firms en inglés). (2) Incluye industria agro-alimentaria. (3) Investigadores en biología, (4) Año 2000, (5) Año 2007, (6) Año 2004, (7) Año 2005, (8) Año 2007, (9) Instituciones del Polo Biotecnológico de La Habana, (10) Total de empresas biotecnológicas, (1) Incluye "Energía y Medio Ambiente", (12) Incluye aplicaciones en alimentos.

IndicadoresPaíses de la OECD

Nanotechnology outlook in Latin America

Brasil Mexico Argentina Chile Cuba

Financiamiento Público NanoCyT 2005 (millones USS) 27–40 (2) 12,4 (4) 2 (3) 10 (2) s/d

Investigadores NanoCiencia 358 s/d 300 s/d s/d

Publicaciones (2000-06) (5) 4521 1938 1184 501 268

% Nanopublicacion Mundial 1,81 0,78 0,47 0,20 0,11

Patentes titulares PCT (2000-06) (5) 45 20 11 9 6

% Nanopatentes Mundial 0,10 0,04 0,02 0,02 0,01

Patentes inventores (2000-2006) (5) 84 41 46 18 7

Empresas 13 s/d 5 s/d s/d

Publicacion/investigador 12,6 s/d 3,9 s/d s/d

Grado aprovechamiento CyT 0,01 0,01 0,01 0,02 0,02

Patentes inventores/patentes titulares 1,9 2,1 4,2 2,0 1,2

Notas: (1) Kay y Shapira (2009) ; (2) Estimado a partir de Niosi y Raid (2007) y Masch (2007); (3) Presupuesto del FAN anualizado; (4) European Comission(2004); (5) CAICyT (2008)

Sources: from Gutman and Lavarello (2009): Anuario Estadístico CEPAL (2008), OECD FactBook 2009, Albornoz y Barrere (2008), Gutman y Lavarello, 2009, Garcés Toledano y otros(2007), Albornoz (2007), Hernandez Cuevas y Valenzuela (2004), Van Beuzekom y Arundel (2006),Van Beuzekom y Arundel (2009), Ernst % Young (2008), Niosi y Reid (2006) y InvestChile (2008).

7. The role of the State

Time has come for a renewed role for the State: the need “more than ever” of active industrial and technological

polices

LA: traditional lack of institutions and policies to boost structural change and productivity

Challenges: after two years of fiscal surplus (2006 and 2007), the crisis led to a reduction of fiscal revenues and consequently of the financial room for policy actions

7. The role of the StateHow should the new industrial policies be?

A smart policy mix…

support “real economy”: avoid the destruction of existing capabilities, give incentive to develop new endogenous technological capabilities

support structural change: towards high-tech intense sectors promote the adoption of new technological paradigms and related

technologies manage uncertainty guarantee financial support during the post-crisis transition

(but “smart spending”) sectoral approach (different incentives to different sectors):

adopt a variety of policies and instruments, because sectoral responses to a crisis are heterogeneous

“green tendency”: actions will be required to account for the increasing environmental sensitivity (eg.: during the recent crisis, many OECD countries have implemented green incentives in order to support the slowdown of automotive industry)

8. Towards a path of sustainable

growth • The sustainability of the “before the crisis” mode of

production have been questioned: energy requirements, environmental sustainability of current industrialization patterns will not allow production to take place following the same pattern for long time

How to move towards a patter of more sustainable growth? Need of undertaking a process of technology foresight

in order to grab a comprehensive overview of future productive paradigms, bringing together in partnership scientists, engineers, industrialists and government officials

Energy consumption vs productivity growth: a new balance is mandatory and urgent

Science as productive input and driver of growth Strengthening public-private alliance Environmental policies as out-of-crisis “emergency

exit”: a stimulus to technological development and job creation

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Creative destruction and an out-of-crisis roadmap Mario Cimoli