Innovation Networks and Foreign Firms in Developing Countries:
The Turkish Case
Erol Taymaz & Aykut Lenger
Middle East Technical University (METU),
Department of Economics,
06531
Ankara Turkey
1. Outline
There are two strands of the literature in development economics that have attracted
substantial interest in the last couple of decades: the importance of technological change for
long term economic growth and the role of foreign direct investment (FDI) in the process of
economic development. Studies on technological change emphasize the fact that innovation
(the development of new products, processes and organizations) is basically an interactive
process. Recent advances in science and technology have led to, on the one hand, an increase
in the knowledge content of products and processes, and, on the other hand, the importance of
generic technologies that can be used in various products and processes. These two processes,
that form two sides of the same coin, have increased the need to extend the knowledge base of
industrial firms. As Rosenberg already suggested 20 years ago, the process of innovation
cannot fit into the boundaries of a single firm. Therefore, firms can now innovate only within
an intensive web of interactions with other firms (suppliers, buyers, and, even, competitors),
consumers, research institutions, etc, i.e., they can be innovative, and, thus, competitive, only
if they can form and be part of innovation networks (for a small group of studies, see
Lundvall, 1988; Nelson and Rosenberg, 1993; Smith, 1995; OECD 1999 and 2000).
FDI has been considered by many development economists as an important channel for
transfer of technology to developing countries. It is suggested that modern, advanced
technologies introduced by multinational firms can also diffuse to domestic firms through
spillovers (imitation, demonstration effects, training local labor, vertical technology transfers,
etc.). However, empirical studies show that host country characteristics, like industry and
policy environment (Blomström and Kokko, 1998), the level of human capital stock
(Borensztein, Gregorio and Lee, 1995; Noorbaksh and Paloni, 2001), and absorptive capacity
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of domestic firms (Kinoshita, 2001) are important determinants of the net benefits the host
country can enjoy from FDI.
This paper contributes the existing literature by presenting new evidence on the interactions
between domestic and foreign firm within innovation networks in Turkish manufacturing
industries. The aim of this paper is three-fold: i) to analyze differences in innovative
performance of domestic and foreign firms, ii) to investigate the types of interaction domestic
and foreign firms are engaged in, and iii) to test if foreign firms play a role in developing
innovative capability of domestic firms by participating in innovation networks (see also,
Reger, 1998; Smith, 1995). This is an important issue, because as shown in an earlier study
(see Ozcelik and Taymaz, 2001), innovativeness is an important determinant of international
competitiveness in developing countries, too.
2. Hypotheses
The paper aims to test three hypotheses:
•
Foreign ownership, after controlling for all other factors, does not contribute to
innovativeness because foreign firms tend to conduct innovative activities in their
home countries. However, foreign firms rely more on transferring technology from the
parent firm.
•
Horizontal relations are more important for domestic firms, whereas foreign firms tend
to focus on vertical interactions (suppliers and subcontractors).
•
Foreign firms contribute, to some extent, the development of technological capability,
specially production capability, in vertically related industries.
The main data source to test these hypotheses is the Innovation Surveys conducted by the
State Institute of Statistics (SIS). The surveys, the first one conducted in 1998 covering the
period 1995-97, and the second one conducted in 2001 covering the period 1998-2000,
adopted a questionnaire compatible with the Community Innovation Survey of the European
Union, and used the concept of “innovation” as defined in the OECD Oslo Manual. The
response rates were more than 50 percent in both surveys (2200 respondents for the first
survey, and 3000 respondents for the second one). The surveys include questions about
innovative activities, knowledge sources, interactions, etc. We use simple descriptive analysis
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as well as discrete choice (multinominal logit), limited dependent variable and panel data
models to test our hypotheses.
3. Implications and Conclusions
The issue is requires a detailed analysis because technological change and FDI are considered
to be essential for economic growth and generating employment opportunities. Developing
countries adopt various measures to encourage Research and Development (R&D) activities
and to attract foreign investment. Therefore, it is essential to understand the interactions
between domestic and foreign firms if one wants to design effective technology and FDI
policies.
4. Some Preliminary Results
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Arellano-Bond dynamic panel data GMM Estimation (1983-2000)
Number of obs = 1084
Number of groups =
78
Wald chi2(12) = 1815.86
One-step results
Dependent
| Coefficient Std. Err.
z
P>|z|
[95% Conf. Interval]
Lagged dependent
LD
| .3652949
.036796
9.93 0.000
.293176
.4374138
L2D
| .1309364 .0308087
4.25 0.000
.0705525
.1913204
L3D
| .1343169 .0297221
4.52 0.000
.0760627
.192571
K/L(ln)
| .1027074 .0326733
3.14 0.002
.038669
.1667459
WAGE(ln)
| .4005211 .0344636 11.62 0.000
.3329737
.4680684
SIZE (ln)
| -.2573251 .0586713 -4.39 0.000 -.3723187 -.1423316
TRANSFER
| .6835617 .2989714
2.29 0.022
.0975886
1.269535
FSHARE
| .5962897 .1316582
4.53 0.000
.3382445
.8543349
LABOR QUALITY
|
5.32 0.000
.4091305
.8864015
SUBOUT
| .1560111 .3894215
0.40 0.689
-.607241
.9192631
SUBIN
| -1.332625 .6738762 -1.98 0.048 -2.653399 -.0118524
t
| -.0221485 .0047611 -4.65 0.000 -.0314801 -.0128169
.647766 .121755
Sargan test of over-identifying restrictions:
chi2(130) = 312.94
Prob > chi2 = 0.0000
Arellano-Bond test that average autocovariance in residuals of order 1 is 0:
H0: no autocorrelation z = -17.52 Pr > z = 0.0000
Arellano-Bond test that average autocovariance in residuals of order 2 is 0:
H0: no autocorrelation z = -0.64 Pr > z = 0.5190
DEPENDENT
K/L
WAGE
SIZE
TRANSFER
FSHARE
LABOR QUALITY
SUBOUT
SUBIN
t
: Labor productivity (Value added per man hour)
: Capital Intensity (Real electricity consumption per employee)
: Payments to employee
: Proxy for firm size (The average number of employee, employee/number of firm)
: The share of firms with licence, technological agreements, know-how etc…
: Foreign ownership in industry
: Proxy for labor quality (The share of administrative employee in the firm)
: Subcontracted output value
: Subcontracted input value
: trend
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