Sanjaya Lall

Sanjaya LallSanjaya Lall

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A primer on industrial and A primer on industrial and technological innovation technological innovation


Oxford UniversityOxford University

What is innovation in What is innovation in developing countries? developing countries?

• ‘‘Innovation’ is usually considered the Innovation’ is usually considered the creation of technology that is new to the creation of technology that is new to the world: this is quite different from using, world: this is quite different from using, adapting, improving adapting, improving existingexisting technologies technologies

• Evolutionary theories regard this a false Evolutionary theories regard this a false distinction: both involve search, risk, effort distinction: both involve search, risk, effort and building new skills & routinesand building new skills & routines

• In poor countries, innovation is largely In poor countries, innovation is largely absorptive & adaptive. Over time it grows absorptive & adaptive. Over time it grows more ‘innovative’ in the normal sensemore ‘innovative’ in the normal sense

The new setting for industrial The new setting for industrial innovation: competing in a innovation: competing in a globalized economy globalized economy

It makes it imperative for all productive activities It makes it imperative for all productive activities to constantly access and use new technologies, to constantly access and use new technologies, while raising the minimum entry levels while raising the minimum entry levels

It changes the dynamics of industrial and It changes the dynamics of industrial and export activity, shifting the structure towards export activity, shifting the structure towards technology-intensive products and activitiestechnology-intensive products and activities

The ‘death of distance’ leads to more immediate, The ‘death of distance’ leads to more immediate, widespread and intense competition than before, widespread and intense competition than before, affecting most industrial & supporting activitiesaffecting most industrial & supporting activities

It raises the role of MNCs in innovation, It raises the role of MNCs in innovation, technology transfer, production and particularly technology transfer, production and particularly exports. Around 2/3 of world trade is handled by exports. Around 2/3 of world trade is handled by MNCs, about 1/3 is within companies MNCs, about 1/3 is within companies

It changes the organization of world trade, with It changes the organization of world trade, with more tightly knit value chains, stronger role for more tightly knit value chains, stronger role for lead players (MNCs or buyers) and higher lead players (MNCs or buyers) and higher minimum entry levelsminimum entry levels

Globalization Globalization offers unprecedented export offers unprecedented export and employment prospects: new markets, and employment prospects: new markets, inputs, specialization in ‘fragmented’ inputs, specialization in ‘fragmented’ production, services production, services and now R&D: it also and now R&D: it also faces enormous challenges to those on the faces enormous challenges to those on the peripheryperiphery

New players, New players, opportunities and opportunities and threats threats

Competing needs greater openness to Competing needs greater openness to trade & technologies, but it needs trade & technologies, but it needs more… more…

• Passive opening is not enough to ensure new Passive opening is not enough to ensure new technologies are used competitivelytechnologies are used competitively

• The efficient use of technology needs the The efficient use of technology needs the development of new skills, routines, development of new skills, routines, institutions, rules and infrastructure institutions, rules and infrastructure

• This requires building a local learning and This requires building a local learning and innovation innovation systemsystem, to absorb the technology , to absorb the technology and then root it and improve on it over timeand then root it and improve on it over time

• The process can be slow, costly & prolonged: The process can be slow, costly & prolonged: it needs policy support at critical pointsit needs policy support at critical points

• FDI can play a critical role in the process but FDI can play a critical role in the process but only under the right conditions and with the only under the right conditions and with the right policiesright policies

Risks and challenges arising Risks and challenges arising from inherent nature of from inherent nature of innovationinnovation

• Learning needs infant industry promotion, Learning needs infant industry promotion, but this is difficult to manage because of but this is difficult to manage because of coordination and implementation problemscoordination and implementation problems

• Cumulative learning, agglomeration, path Cumulative learning, agglomeration, path dependence lead to continued divergence dependence lead to continued divergence between leaders and laggardsbetween leaders and laggards

• FDI spreads very unevenly, particularly in FDI spreads very unevenly, particularly in innovation and high technology activitiesinnovation and high technology activities

• ‘‘Rules of the game’ tightly constrain policy Rules of the game’ tightly constrain policy space to develop new capabilities space to develop new capabilities

Innovation involves 5-step Innovation involves 5-step strategy strategy

Promoting learning within activities that promise sustained growth and

exports

Coordinating learning in industry with factor markets & institutions

Leveraging local capabilities with international factors &

value chains

Step 1Promoting learning

across linked industries, clusters,

value chains

Step 2Step 2

Step 3

Step 4

Step 5

Promoting shifts across activities into dynamic &

technology intensive activities

Innovation is Innovation is relocating, as firms…relocating, as firms…

• Focus on core competencies and outsource Focus on core competencies and outsource non-core components, activities & functionsnon-core components, activities & functions

• Rely more heavily on cooperative design, Rely more heavily on cooperative design, development and research by suppliers, development and research by suppliers, especially first tier suppliers. especially first tier suppliers.

• Look for more economic sites across the globeLook for more economic sites across the globe

• Develop organisational and management Develop organisational and management techniques to manage complex networks over techniques to manage complex networks over long distanceslong distances

• Governments facilitate FDI & service Governments facilitate FDI & service offshoringoffshoring

Global manufacturing value Global manufacturing value added shares (1980-2000) added shares (1980-2000)

Figure 1: Dev eloping regions' shares of global MVA (%)

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World market shares World market shares for manufactured for manufactured exports… exports…

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Structural upgrading is Structural upgrading is closely linked to export closely linked to export successsuccess

Technology structure of manufactured exports in major regions (1990-2000)

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Industrialized EA 8 China South Asia MENA LAC SSA3 (ex c SA +

Mau)

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Export concentration at the Export concentration at the country levelcountry level (12 countries provide over (12 countries provide over

80% of developing world manufactured exports)80% of developing world manufactured exports) Export values (US$ billion)

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All dynamic exporters are integrated into global production

networks, by FDI or building local capabilities

Exports of ICT & other Exports of ICT & other commercial services also highly commercial services also highly concentratedconcentrated

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The top end of service The top end of service offshoring: the globalization of offshoring: the globalization of R&D R&D • China and India are the main recipients China and India are the main recipients

of offshored R&D by developed countriesof offshored R&D by developed countries

• India is now regarded the best location India is now regarded the best location for many kinds of R&D: software, for many kinds of R&D: software, CAD/CAM engineering, chemicals, CAD/CAM engineering, chemicals, pharmaceuticals & biotech. It is also pharmaceuticals & biotech. It is also becoming a highly desirable site for FDI becoming a highly desirable site for FDI in generalin general

• Latin America gets more FDI per capita Latin America gets more FDI per capita but is not geared to hi-tech production but is not geared to hi-tech production (except Mexico) or R&D (except Brazil)(except Mexico) or R&D (except Brazil)

Explaining competitive Explaining competitive lags…lags…

• Conventional wisdom: poor governance, Conventional wisdom: poor governance, instability, external shocks and poor business instability, external shocks and poor business climate. climate. These matter but do not fully explain These matter but do not fully explain the lags in the lagging regionsthe lags in the lagging regions

• Structural gapsStructural gaps are more important – and more are more important – and more difficult to remedy: difficult to remedy: – Domestic capabilities: Skills (esp. tertiary level Domestic capabilities: Skills (esp. tertiary level

skills) and technological effort skills) and technological effort – Leveraging: Attraction of FDI and entry into global Leveraging: Attraction of FDI and entry into global

production networks (linked to targeting and production networks (linked to targeting and domestic capabilities)domestic capabilities)

– Supporting institutions: S&T, R&D, universities, SME Supporting institutions: S&T, R&D, universities, SME extension, worker training and so onextension, worker training and so on

Human capital: tertiary Human capital: tertiary enrolments as % of enrolments as % of populationpopulation

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Within Africa (tertiary enrolments Within Africa (tertiary enrolments as % of relevant age group) as % of relevant age group)

Figure 18: Top 20 SSA countries in tertiary education enrollment (%gross) 1995-1999

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Korea and Taiwan

are at 50-70%

China’s tertiary enrolment rose

from 2% to >20% in about

20 years

Malaysia & Thailand are at about 25-30%

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NOS. OF GRADUATES P.A. IN CHINA (MILLION)

High level High level technicaltechnical skills skills (tertiary technical enrolments per 1000 (tertiary technical enrolments per 1000 people)people)

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R&D financed by R&D financed by productive enterprises ($ productive enterprises ($ per capita)per capita)

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Determinants of global Determinants of global R&D locationR&D location

• China and India are the main recipients of China and India are the main recipients of globalising R&D though on a per capita basis they globalising R&D though on a per capita basis they rank relatively low on all innovation measures rank relatively low on all innovation measures

• Other factors also affect R&D location: Other factors also affect R&D location: – The availability of a The availability of a minimum critical massminimum critical mass of of

researchersresearchers– The cost of researchersThe cost of researchers– First mover advantagesFirst mover advantages– Agglomeration economiesAgglomeration economies, particularly with IT and , particularly with IT and

software, universities and other private research centres software, universities and other private research centres – Base of existing R&D activity Base of existing R&D activity – Quality of R&D and knowledge institutions Quality of R&D and knowledge institutions – The business climate and incentives for R&D The business climate and incentives for R&D – The structure and complexity of the industrial sector The structure and complexity of the industrial sector

(particularly important for adaptive R&D) (particularly important for adaptive R&D)

Shares of R&D in developing and Shares of R&D in developing and transition world: the 12 leaders transition world: the 12 leaders

Figure YYY: R&D by top 12 developing and transition economies as % of total R&D by these economies

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China Korea Taiwan Brazil Russia India Mexico Singapore Poland Argentina Turkey S Africa

1997 2001

Developing world FDI Developing world FDI distribution distribution

Regional distribution of FDI inflows

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E Asia 1

E Asia 2

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MENA

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1981-4

10 COUNTRIES GET 80% OF FDI IN THE DEVELOPING WORLD: AND THEIR SHARE IS RISING OVER TIME

Pharmaceutical R&D Pharmaceutical R&D offshoringoffshoring• Despite the size of the Indian industry, its R&D is Despite the size of the Indian industry, its R&D is

small. The leaders are ambitious: Ranbaxy had small. The leaders are ambitious: Ranbaxy had 900 R&D staff and spent about 7% of sales on 900 R&D staff and spent about 7% of sales on R&D in 2004; it plans to raise it to 10% by 2007R&D in 2004; it plans to raise it to 10% by 2007

• MNCs currently outsource 26% of drug R&D & MNCs currently outsource 26% of drug R&D & this may rise to 36% by 2008. India could attract this may rise to 36% by 2008. India could attract a lot of this. Around $200 million is likely to be a lot of this. Around $200 million is likely to be outsourced to India in 2005.outsourced to India in 2005.

• Clinical trials Clinical trials are already attracting MNCs. Pfizer are already attracting MNCs. Pfizer has invested around $13 million in India in this has invested around $13 million in India in this

• Strength of Indian industry is direct outcome of Strength of Indian industry is direct outcome of earlier industrial and IPR policy: both ruled out earlier industrial and IPR policy: both ruled out now now

Minimum critical mass: the Minimum critical mass: the availability of skilled manpower, availability of skilled manpower, 20012001 Total tertiary enrolmentsTotal tertiary enrolments Tertiary technical enrolmentsTertiary technical enrolments

11 USA USA 13,595.613,595.6 ChinaChina 2,580.42,580.4

22 ChinaChina 12,143.712,143.7 Russia Russia 2,388.02,388.0

33 IndiaIndia 9,834.09,834.0 IndiaIndia 1,913.01,913.0

44 RussiaRussia 7,224.07,224.0 United StatesUnited States 1,718.51,718.5

55 JapanJapan 3,972.53,972.5 KoreaKorea 1,000.41,000.4

66 IndonesiaIndonesia 3,017.93,017.9 JapanJapan 817.1817.1

77 KoreaKorea 3,003.53,003.5 UkraineUkraine 643.8643.8

88 BrazilBrazil 2,781.32,781.3 GermanyGermany 636.6636.6

99 EgyptEgypt 2,447.12,447.1 IndonesiaIndonesia 585.6585.6

1010 PhilippinesPhilippines 2,432.02,432.0 MexicoMexico 576.8576.8

1111 Germany Germany 2,159.72,159.7 UKUK 496.2496.2

1212 ThailandThailand 2,095.72,095.7 BrazilBrazil 467.8467.8

1313 UKUK 2,067.32,067.3 SpainSpain 460.7460.7

1414 MexicoMexico 2,047.92,047.9 IranIran 455.6455.6

1515 FranceFrance 2,031.72,031.7 TaiwanTaiwan 368.9368.9

Where will global innovation go Where will global innovation go in the developing world?in the developing world?• R&D, and innovation more broadly, will R&D, and innovation more broadly, will

remain concentrated in countries with:remain concentrated in countries with:– Large pools of cheap scientific manpower Large pools of cheap scientific manpower – Advanced science institutions Advanced science institutions – Aggressive government policies on R&DAggressive government policies on R&D– First mover advantages (reputation, First mover advantages (reputation,

networks, reliability of IPRs, knowledge networks, reliability of IPRs, knowledge clusters, strong local firms and research clusters, strong local firms and research institutions) institutions)

• If innovation diverges, so will growth of If innovation diverges, so will growth of productive sector and incomesproductive sector and incomes

This is unacceptable in This is unacceptable in development, political and development, political and equity terms equity terms • Growing divergence between ‘haves’ and Growing divergence between ‘haves’ and

‘have-nots’ is travesty of development, ‘have-nots’ is travesty of development, and is harmful in many other waysand is harmful in many other ways

• Divergence is set to grow with current Divergence is set to grow with current globalization and liberalization trends globalization and liberalization trends

• Part is driven by basic technological forces Part is driven by basic technological forces but part is due to misunderstanding of role but part is due to misunderstanding of role of policy – and growing constraints on of policy – and growing constraints on policy imposed by the rules of the gamepolicy imposed by the rules of the game

The way forward…The way forward…

• Provide objective and detailed analysis of Provide objective and detailed analysis of effects of successful innovation policy effects of successful innovation policy

• Create more policy space and help countries Create more policy space and help countries build the policy capabilities needed build the policy capabilities needed

• Actively assist governments in designing, Actively assist governments in designing, implementing and monitoring strategy – a implementing and monitoring strategy – a reversal of the current orthodoxyreversal of the current orthodoxy

• Throwing money at the problem with current Throwing money at the problem with current policies (e.g. UK Africa Commission) may be policies (e.g. UK Africa Commission) may be humanitarian but will not help sustained growthhumanitarian but will not help sustained growth

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