Sanjaya Lall
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Sanjaya Lall
A primer on industrial and
technological innovation
Sanjaya Lall
Oxford University
What is innovation in
developing countries?
• ‘Innovation’ is usually considered the creation of
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technology that is new to the world: this is quite
different from using, adapting, improving
existing technologies
Evolutionary theories regard this a false
distinction: both involve search, risk, effort and
building new skills & routines
In poor countries, innovation is largely
absorptive & adaptive. Over time it grows more
‘innovative’ in the normal sense
The new setting for industrial
innovation: competing in a
globalized economy
The ‘death of distance’ leads to more immediate,
widespread and intense competition than before,
affecting most industrial & supporting activities
It changes the dynamics of industrial and
export activity, shifting the structure towards
technology-intensive products and activities
It makes it imperative for all productive activities
to constantly access and use new technologies,
while raising the minimum entry levels
New players, opportunities
and threats
It raises the role of MNCs in innovation,
technology transfer, production and particularly
exports. Around 2/3 of world trade is handled by
MNCs, about 1/3 is within companies
It changes the organization of world trade, with
more tightly knit value chains, stronger role for
lead players (MNCs or buyers) and higher
minimum entry levels
Globalization offers unprecedented export and
employment prospects: new markets, inputs,
specialization in ‘fragmented’ production,
services and now R&D: it also faces enormous
challenges to those on the periphery
Competing needs greater openness to trade
& technologies, but it needs more…
• Passive opening is not enough to ensure new
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technologies are used competitively
The efficient use of technology needs the
development of new skills, routines, institutions,
rules and infrastructure
This requires building a local learning and innovation
system, to absorb the technology and then root it
and improve on it over time
The process can be slow, costly & prolonged: it
needs policy support at critical points
FDI can play a critical role in the process but only
under the right conditions and with the right policies
Risks and challenges arising from
inherent nature of innovation
• Learning needs infant industry promotion,
but this is difficult to manage because of
coordination and implementation problems
• Cumulative learning, agglomeration, path
dependence lead to continued divergence
between leaders and laggards
• FDI spreads very unevenly, particularly in
innovation and high technology activities
• ‘Rules of the game’ tightly constrain policy
space to develop new capabilities
Innovation involves 5-step
strategy
Promoting shifts across
activities into dynamic &
technology intensive activities
Promoting learning within
activities that promise
sustained growth and
exports
Step 2
Step 1
Step 3
Step 5
Coordinating learning
in industry with factor
markets & institutions
Step 4
Promoting learning
across linked
industries, clusters,
value chains
Leveraging local capabilities
with international factors &
value chains
Innovation is relocating,
as firms…
• Focus on core competencies and outsource
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non-core components, activities & functions
Rely more heavily on cooperative design,
development and research by suppliers,
especially first tier suppliers.
Look for more economic sites across the globe
Develop organisational and management
techniques to manage complex networks over
long distances
Governments facilitate FDI & service offshoring
Global manufacturing value
added shares (1980-2000)
Figure 1: Dev eloping regions' shares of global MVA (%)
14.0
12.0
1980
1990
10.0
2000
8.0
6.0
4.0
2.0
SSA
MENA
LAC
S. Asia
E Asia
0.0
Manufactured export
values ($ m)…
700,000
600,000
500,000
East Asia
400,000
SSA total &
SSA ex. SA &
Mauritius
300,000
LAC
200,000
S Asia
100,000
MENA
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
World market shares for
manufactured exports…
14%
1981
1990
2000
12%
10%
8%
6%
4%
2%
SSA 2
SSA
South Asia
MENA
Mexico
LAC 2
China
E Asia 2
0%
Structural upgrading is closely
linked to export success
Technology structure of manufactured exports in major regions (1990-2000)
100%
HT
90%
80%
70%
MT
60%
50%
40%
LT
30%
20%
10%
RB
MENA
2000
1990
2000
1990
2000
1990
2000
South Asia
1990
China
1990
2000
1990
2000
EA 8
2000
Industrialized
1990
2000
1990
0%
LAC
SSA3 (ex c SA +
South
Mau)
Africa +
Mauritius
Export concentration at the
country level (12 countries provide over 80% of
developing world manufactured exports)
250
1985
1990
2001
Export values (US$ billion)
200
All dynamic exporters
are integrated into
global production
networks, by FDI or
building local
capabilities
150
100
50
H. Kong
Philippines
India
Brazil
Indonesia
Thailand
Malaysia
Singapore
Taiwan
Mexico
Korea
China
0
Exports of ICT & other commercial
services also highly concentrated
20,000
1990
2002
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
Mexico
Egypt
Turkey
Thailand
Malaysia
Brazil
Israel
Korea
Singapore
China
Ireland
0
India
2,000
The top end of service offshoring:
the globalization of R&D
• China and India are the main recipients of
offshored R&D by developed countries
• India is now regarded the best location for
many kinds of R&D: software, CAD/CAM
engineering, chemicals, pharmaceuticals &
biotech. It is also becoming a highly
desirable site for FDI in general
• Latin America gets more FDI per capita
but is not geared to hi-tech production
(except Mexico) or R&D (except Brazil)
Explaining competitive
lags…
• Conventional wisdom: poor governance,
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instability, external shocks and poor business
climate. These matter but do not fully explain
the lags in the lagging regions
Structural gaps are more important – and
more difficult to remedy:
– Domestic capabilities: Skills (esp. tertiary level
skills) and technological effort
– Leveraging: Attraction of FDI and entry into global
production networks (linked to targeting and
domestic capabilities)
– Supporting institutions: S&T, R&D, universities,
SME extension, worker training and so on
Human capital: tertiary
enrolments as % of
population
4.0
1987
1998
2000
3.5
3.0
2.5
2.0
1.5
1.0
0.5
MENA
SSA
S Asia
LAC
China
E Asia 2
Industrialized
0.0
Within Africa (tertiary enrolments as %
of relevant age group)
Korea and
Taiwan
are at 5070%
Figure 18: Top 20 SSA countries in tertiary education enrollment (%gross) 1995-1999
Malaysia &
Thailand are at
about 25-30%
20.0
1995
1999
20
18.0
NOS. OF GRADUATES P.A. IN CHINA
(MILLION)
18
16
16.0
14
12
14.0
China’s tertiary
enrolment rose
from 2% to
>20% in about
20 years
12.0
10.0
10
8
6
4
2
0
8.0
1999
2000
2001
2002
2003
6.0
4.0
2.0
Madagascar
Ghana
Lesotho
Zambia
Somalia
Uganda
Kenya
Zimbabwe
Benin
Togo
Senegal
Botswana
Nigeria
Cameroon
Mauritania
Namibia
Sudan
Cote D'Ivoire
Mauritius
South Africa
0.0
High level technical skills
(tertiary technical enrolments per 1000
people)
10
1985
1998
9
8
7
6
5
4
3
2
1
MENA
SSA
S Asia
LAC
E Asia 2
E Asia 1
Industrialized
0
R&D financed by productive
enterprises ($ per capita)
35
450
30
400
350
1985
1998
300
25
1985
1998
20
250
200
15
150
100
10
5
MENA
SSA 2
SSA 1
LAC
S Asia
0
EA 2
Developing
Industrialized
0
EA 1
50
1.5
SSA 2
SSA 1
MENA
LAC
S Asia
China
EA 1
Industrialized
R&D as % GDP
2.5
2.0
1990
2000
1.0
0.5
0.0
Determinants of global
R&D location
• China and India are the main recipients of globalising
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R&D though on a per capita basis they rank relatively
low on all innovation measures
Other factors also affect R&D location:
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The availability of a minimum critical mass of researchers
The cost of researchers
First mover advantages
Agglomeration economies, particularly with IT and software,
universities and other private research centres
Base of existing R&D activity
Quality of R&D and knowledge institutions
The business climate and incentives for R&D
The structure and complexity of the industrial sector (particularly
important for adaptive R&D)
Shares of R&D in developing and
transition world: the 12 leaders
Figure YYY: R&D by top 12 developing and transition economies as % of total R&D by these economies
1997
2001
30%
25%
20%
15%
10%
5%
0%
China
Korea
Taiwan
Brazil
Russia
India
Mexico
Singapore
Poland
Argentina
Turkey
S Africa
Developing world FDI
distribution
Regional distribution of FDI inflows
10 COUNTRIES GET
80% OF FDI IN THE
DEVELOPING WORLD:
AND THEIR SHARE IS
RISING OVER TIME
MENA
SSA
LAC
1993-7
S Asia
1981-4
E Asia 2
E Asia 1
0%
10%
20%
30%
40%
50%
60%
70%
Pharmaceutical R&D offshoring
• Despite the size of the Indian industry, its R&D is small.
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The leaders are ambitious: Ranbaxy had 900 R&D staff
and spent about 7% of sales on R&D in 2004; it plans to
raise it to 10% by 2007
MNCs currently outsource 26% of drug R&D & this may
rise to 36% by 2008. India could attract a lot of this.
Around $200 million is likely to be outsourced to India in
2005.
Clinical trials are already attracting MNCs. Pfizer has
invested around $13 million in India in this
Strength of Indian industry is direct outcome of earlier
industrial and IPR policy: both ruled out now
Minimum critical mass: the availability
of skilled manpower, 2001
Total tertiary enrolments
Tertiary technical enrolments
1 USA
13,595.6 China
2,580.4
2 China
12,143.7 Russia
2,388.0
3 India
9,834.0 India
1,913.0
4 Russia
7,224.0 United States
1,718.5
5 Japan
3,972.5 Korea
1,000.4
6 Indonesia
3,017.9 Japan
817.1
7 Korea
3,003.5 Ukraine
643.8
8 Brazil
2,781.3 Germany
636.6
9 Egypt
2,447.1 Indonesia
585.6
10 Philippines
2,432.0 Mexico
576.8
11 Germany
2,159.7 UK
496.2
12 Thailand
2,095.7 Brazil
467.8
13 UK
2,067.3 Spain
460.7
14 Mexico
2,047.9 Iran
455.6
15 France
2,031.7 Taiwan
368.9
Where will global innovation go in
the developing world?
• R&D, and innovation more broadly, will
remain concentrated in countries with:
– Large pools of cheap scientific manpower
– Advanced science institutions
– Aggressive government policies on R&D
– First mover advantages (reputation, networks,
reliability of IPRs, knowledge clusters, strong
local firms and research institutions)
• If innovation diverges, so will growth of
productive sector and incomes
This is unacceptable in
development, political and equity
terms
• Growing divergence between ‘haves’ and
‘have-nots’ is travesty of development,
and is harmful in many other ways
• Divergence is set to grow with current
globalization and liberalization trends
• Part is driven by basic technological forces
but part is due to misunderstanding of
role of policy – and growing constraints on
policy imposed by the rules of the game
The way forward…
• Provide objective and detailed analysis of effects
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of successful innovation policy
Create more policy space and help countries
build the policy capabilities needed
Actively assist governments in designing,
implementing and monitoring strategy – a
reversal of the current orthodoxy
Throwing money at the problem with current
policies (e.g. UK Africa Commission) may be
humanitarian but will not help sustained growth