Innovation and Competitiveness: A WBI Perspective Carl Dahlman ECA Innovation and Competitiveness Workshop World Bank Institute February 18,2004

Innovation and Competitiveness:A WBI Perspective

Carl DahlmanECA Innovation and Competitiveness Workshop

World Bank InstituteFebruary 18,2004

Structure of PresentationKnowledge and Growth in Historical PerspectiveThe Knowledge RevolutionImplications for Developing CountriesHigh Growth Performance and Knowledge StrategiesBenchmarking the World Knowledge EconomyInnovation in Developing CountriesChallenges to Developing CountriesChallenges to World Bank

© Knowledge for Development, WBI

©Knowledge for Development, WBI

World GDP/capita and Population A Two Millennium Perspective

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World GDP per capita (1990 international $) World Population (Million)

Source: Calculated from Angus Maddison, The World Economy : A Millennial Perspective, OECD: Paris, 2001

GDP per capita

World Population (mill)

World GDP/Capita and Population

Growing Differences in GDP/Capita

Per Capita GDP for Selected Regions or Countries (1990 international $, 1480-1998)

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1480 1560 1640 1720 1800 1870 1950 1998

Western Europe

Eastern Europe

United States

Latin America

Japan

China

India

Other Asia

Africa

Source: Calculated from Angus Maddison, The World Economy : A Millennial Perspective, OECD: Paris, 2001

GDP/Capita Growth: Korea vs Ghana

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1960 1965 1970 1975 1980 1985 1990 1995 2000

K n o w le d g e m a k e s th e D if fe r e n c e K n o w le d g e m a k e s th e D if fe r e n c e b e tw e e n P o v e r ty a n d W e a lth . . .b e tw e e n P o v e r ty a n d W e a lth . . .

R e p . o f K o r e a

G h a n a

T h o u s a n d s o f c o n s ta n t 1 9 9 5 U S d o lla r s

D if fe re n c e a t t r ib u te d to k n o w le d g e

D if fe re n c e d u e to p h y s ic a l a n d h u m a n c a p ita l


Puzzle and Challenge

Puzzle: If it is so obvious that the effective use of knowledge is such an essential element of development,mwhy hasn’t it made a central focus of development strategy and advice?Challenge: What do we need to do to bring it to the mainstream and how can we prepare Bank to provide relevant advice.

New Growth PatternsIn last decade there has been renewed interest in growth because:

Micro level evidence of increasing importance of new technologies

• ICT revolution• Increased share of high tech products in exports• Managerial and organizational changes

Macro level evidence of changes of patterns and nature of growth among OECD countries

• Surprisingly strong growth of US economy 1995-2002• Reversal of trend towards convergence of per capita income

among OECD countries.This has lead to focus on “new economy” to understand what is going on

The Knowledge Revolution and “The New Economy”

Ability to create, access and use knowledge is becoming fundamental determinant of global competitiveness

Seven key elements of “Knowledge Revolution”

Increased codification of knowledge and development of new technologies

Closer links with science base/increased rate of innovation/shorter product life cycles

Increased importance of education & up-skilling of labor force, and life-long learning

Investment in Intangibles (R&D,education, software) greater than half of machinery & equipment investments in OECD.


The Knowledge Revolution -2

Greater value added now comes from investment in intangibles such as branding, marketing, distribution, information management

Innovation and productivity increase more important in competitiveness & GDP growth

Increased Globalization and Competition

• Trade/GDP from 38% in 1990 to 52% in 1999

• Value added by TNCs 27% of global GDP

Bottom Line: Constant Change and Competition Implies Need for Constant Restructuring and Upgrading


World Merchandise and Service Exports (1980-2001)

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Trillions of US$

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Manufactures

Fuel and Ore

Agricultural and Food

Changing Structure of Manufactured Exports Toward High Tech. Products in OECD

High technology industries increased from 18.8% in 1990 to 25.3% in 1999 Medium high technology industries increased from 38.7% to 39.1%Medium low technology industries decreased from 17.9% to 14.1% andLow technology industries decreased from 24.3% to 21.3%

Therefore roughly 2/3rds of manufactured exports from the OECD countries is high or medium technology

Implications for Developing CountriesThe knowledge revolution is being led by the industrialized countriesDeveloping countries run risk of being left further behind. There is also trend towards rising inequality with-in both developed and developing countriesDeveloping countries need to develop explicit strategies to take advantage of knowledge revolution to improve their competitiveness

Improve performance of traditional sectorsLeapfrog technologiesDevelop new sectorsAddress problems of increasing internal inequalities


Eight Fastest Growing Economies (constant 1995 US$)

Few Countries Have Sustained High Growth Rates over Long PeriodsMost of these countries are or were until recently developing countries They have followed successful knowledge strategiesKey elements of those strategies, in addition to appropriate macroeconomic management and good economic incentive regimes have been:

Massively tapping into global knowledgeInvesting strongly in educationAnd now investing heavily in ICT

To Help Developing Countries to this the World Bank has Knowledge for Development Program

Policy Forums, Policy Conferences, Seminars, and Training on K4D

Policy Services on K4D, ranging from full fledged reports to customized policy notes

KAM Web-based tool on country knowledge assessments (do-it-yourself analysis) www1.worldbank.org/gdln/kam.htm

K4D Community of Practice www.K4DCommunity.org

Framework for Using K4D:Four Key Functional Areas

Economic incentive and institutional regime that provides incentives for the efficient use of existing and new knowledge and the flourishing of entrepreneurshipEducated, creative and skilled peopleDynamic information infrastructure Effective national innovation system


KAM Methodology

KAM: 76 structural/qualitative variables to benchmark performance on 4 pillars Variables normalized from 0 (worst) to 10 (best) for 121 countrieswww1.worldbank.org/gdln/kam.htmBasic scorecard for 14 variables at two points in time, 1995 and 2002Aggregate knowledge economy index (KEI)Will illustrate with quick analysis of Slovakia


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10Econ. Incentive Regime

Innovation

Education

Information Infrastructure

most recent 1995Armenia

INFORMATION INFR.:- Tel. Lines per 1,000 people- Computers per 1,000 people- Internet users per 10,000 people

ECON. INCENTIVE REGIME:-Tariff & Non-tariff barriers-Rule of Law-Regulatory Quality

EDUCATION:- Adult literacy rate- Secondary Enrollment- Tertiary Enrollment

INNOVATION:-Researchers in R&D / mil pop- Patents granted by USPTO / mil- Scient. & Tech. Publications / mil pop.

Armenia


ECA & the World: Knowledge Economy Index


ECA & the World: Innovation


ECA & the World: Innovation (absolute values)


New Area of Focus: Innovation Policy and Strategy

Conceptual framework for innovation in context of developing countriesBenchmarking countries in terms of their knowledge capabilitiesDeveloping policy toolkit for policy advice in different archetypes of countries

Conceptual Framework for Innovation in Developing CountriesInnovation in developing countries should be understood broadly as something new to the local environmentTherefore distinguish two broad types of innovation

Local improvements through adoption of existing foreign technologyDevelopment of technologies new to world

Innovation in Developing CountriesIn developing countries the first type is the most relevant, the second is more rare, except for the most advanced developing countries

Developing countries will get a bigger economic impact from raising average local practice to best world practice than from creation of their own new knowledgeThey will also get a bigger impact from raising average local practice to best local practice, therefore the tremendous importance of domestic diffusion

Sources of Domestic InnovationImports of capital goods, components, products or servicesProducts and services brought to and produced in country by foreign investorsCopying or reverse engineering of foreign products and services Technological efforts of domestic or foreign firms, not all of which is based on formal R&D

Bias Towards Formal R&D Efforts

Policy makers in developing countries tend to focus on formal R&D and on publicly funded research effortsThey tend to focus on glamorous high technology sectorsThey tend to focus on industry, to a lesser extent on agriculture, and very little on services They also tend to focus on R&D inputs and outputs, not so much on entrepreneurship and management

ChallengesBut, as noted earlier, focus of policymakers are not the most important elements of the innovation system in developing countries

R&D not the main source of innovationHigh tech sectors are tiny part of developing economiesService sector is largest share of economic activitySuccessfully applying knowledge requires entrepreneurship, management, organizations,and also depends on economic and institutional regime

Need a better conceptual framework and policy tool kit that

differentiates across countriesProvides made to measure policy advice and specific project design

Benchmarking Countries in Terms of Knowledge Capabilities

Education and skillsAcquiring KnowledgeCreating KnowledgeDisseminating KnowledgeApplying Knowledge

Differentiated StrategiesAcquiring Creating Disseminati

ngCatch-Up Most critical:

-lots of relevant knowledge in pubic domain-large stock to be acquired formally

Less relevant or feasible, but still need R&D capability to acquire and adapt.Critical to focus public efforts on most relevant

Very important: -technological extension services-metrology, standards, testing and quality contro-technical information

Countries Nearer Frontier or with Large Critical R&D Mass

Need to continue tapping global knowledge:-FDI-Licensing_Strategic alliances with firms and R&D

Refocus public efforts on commercially relevant researchGet private sector to make major effort efforts to create new knowledge

Dissemination efforts continue to be critical But need special efforts on taking new knowledge to production:-incubators-technology parks-clusters

National Innovation SystemNeeds to include not just R&D institutions and universities, but most critically firms and other knowledge institutionsNeeds to include attention to the broader economic incentive and institutional regime, education and skills, and ICT-hence our K4D framework

Challenges to Developing Countries

Finding advantageous ways to plug into and compete successfully in the global system

Getting into global value chainsMoving up these value chains

Taking advantage of global knowledge to improve welfare

Preventive healthAgriculture

Developing differentiated advantagesBuilding on local resourcesBuilding on culture and other intangiblesStrengthening non-traded services

Challenges to World BankHow to strengthen analytical capability on innovation and growthHow to integrate this element into mainstream of Bank work: CAS, PRSPs, etcHow to learn from our experience and tha of others to design appropriate policy recommendations and project interventions for countries with different endowments and at different levels of developmentHow to develop appropriate skill mix and incentive mechanisms break down internal silos to be able to deliver on these complex projects.How to break down the silos in our clients

Documents

Innovation and Competitiveness: A WBI Perspective Carl Dahlman ECA Innovation and Competitiveness Workshop World Bank Institute February 18,2004