The Link Between Trade, Innovation& Technology and Achieving Economic Growth - Research Paper Example

INDIA, THE LINK BETWEEN TRADE, INNOVATION& TECHNOLOGY AND ACHIEVING ECONOMIC GROWTH 2 Introduction 2 Literature Review 3 Data Collection and Interpretation 4 Implications of Theoretical Models 12 Analysis of Key Link between Innovation, International Trade and Growth 16 SWOT Analysis of Case Study 17 Conclusion 18 References 19 INDIA, THE LINK BETWEEN TRADE, INNOVATION& TECHNOLOGY AND ACHIEVING ECONOMIC GROWTH Introduction To determine the nature and strength of link between innovation & technology, international trade and economic growth has been always remained an important area of investigation for researchers. In fact, through several ways, international trade combined with innovation and technology directly stimulates economic growth. A well understood reason is that trade boosts the competition and incentives thereby, motivating the economies to innovate. In a very stronger competition, the more innovative and technology-oriented economies get the advantage to excel in international trade, thereby, enjoying economic growth. One thing, which is noticeable, is that this link is more significant in international trade as compared to the domestic trade. The obvious reason is that companies who export their products to international markets are more capable to recover research and development investments over a large volume of sales rather than a small volume. Moreover, companies are more able to explore new opportunities and strengths whilst operation in international trade market. In consideration to this relationship, various policies related to R&D, trade, intellectual property rights and innovation have been designed. Although a great work has been done to evaluate the impact of open trade and investments on innovation processes, however, there is still a need to know more about the impact of trade on the innovation process. Therefore, this project seeks to evaluate the nature and strength of link between innovation & technology, international trade and economic trade in the case of Indian economy. Literature Review Mashelkar (1999), states that nature and implications of geographical dispersal of R&D activities by multinational corporations is important because technology is central to economic growth. Richardson (2002) argues that business success in India has been only possible because of the pressures of international competition for acquiring knowledge creation and exploitation, which resulted in the internationalization of R&D process, thereby, increasing strategic management and strengthening of innovation processes. Lal and Clement (2005) states, “Economic development, achieved largely through productivity growth, is very important to both developed and developing nations.” According to World economic and social survey (2006), developed countries increase their productivity growth through technological innovation. Ray (2008) states, that India’s achievements are brought by innovative capabilities such as skills intensive tasks, products developments and innovation of processes. Inderpal and Amirjit (2009) argues, “Entrepreneurial activities and projects are highly commended for developing countries and country like India can generate additional economic growth and maintain the present level by fostering entrepreneurial activity within its border”. According to US department of Commerce report (2006), nowadays, companies are more focusing towards technology-based economic development. However, it does not mean that innovation can be brought by new product development but it can be innovation in a process such as USAid website clearly states that countries which promote open trade and investments face good economic growth. In an article of Trade, Innovation and Growth published on OCED website, it has been argued that innovation and productivity of competitive industry of Australian motor vehicle and shipbuilding fostered, as a result, of reduced import barriers and subsidies. For example, innovation in shipbuilding enhanced because of the technical shift from steel production to composite materials production whereas, in vehicle industry, a shift from organisational efficiency to just-in-time inventory was observed. Therefore, there is a need to make more research to evaluate the nature and strength of the relationship between innovation, technology, trade and growth. Data Collection and Interpretation The trade data in the table shows that exports of goods and services of India have been also increasing. It is interesting to note that in 2007, the exports of Good of India has increase by more than three folds as compared to its value in 2000. The gross domestic expense on Science and technology shows that although the expense on R&D as a percentage of GDP has been declining but this decline is very small. In short, it can be argued that GDP Expense on R&D has remained consistent from 2000 to 2004. To analyse the extent to which the level of innovation has been increased in India, the data of spending on Patents have been collected from OECD website. It is interesting to note that from year 2000, Patents spending has increased from 44.948 to 135.8 in 2009. The trends of trade, investments in research and technology and innovations show that over the years, positive trends have been seen in all these areas. In order to evaluate the impact of these trends on GDP and Economic growth, the factors like GDP-PPP, Real GDP growth rate, GDP deflator and steel production have been taken into account. The following table shows the statistics of India from the year 2000 to 2009. In order to bring consistency in data, the data has been only collected from OECD website therefore; data for some years is missing. The GDP values show that from the year 2000 to 2007, the GDP-PPP has been increasing, however, during 2008 and 2009, the values of GDP-PPP declined. The reason of this decline in GDP was the global financial crisis impact, which started in year 2007. Indian economy is showing a rapid growth rate during the last few years and it is evident from real GDP Growth rate. By ignoring the values of GDP during the period of Global financial recession, the aim is to check the overall impact of technological advancements and innovations prior to recession. The economic growth data shows that Gross Capital Formation has been also showing an increasing trend. Since, India is one of the major exporters of Steel; therefore, Steel production has been taken into consideration to evaluate the economic growth in India. It is well understood from all values that Indian economy has been growing during the last few years. No doubt, there could be various other factors leading to positive economic growth of India, however, ignoring the impact of all other factors, if only trade growth and technology and innovation are considered, it can be argued that there is a positive link between these factors. Table I: Statistics of India     2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 GDP  Per Capita ($ US)  1800 2200  2540  2540  2900  3100 3400  3800 2600  2500    Gross domestic product - volume - market prices           9.3 9.7 9.1 6.1 6.1   Gross domestic product - deflator - market prices           4.2 5.0 4.9 6.3 2.6 Economic Growth Real GDP Growth 5.689 3.886 4.555 6.856 7.885 9.133 9.809 9.339       Gross Fixed Capital Formation 22.942 23.269 23.733 24.42 27.5 30.37 32.04 33.84       GDP Deflator 3.69 3.5 3.1 3.8 5.299 4.35 4.86 4.69       Steel production 26.9 27.3 28.8 31.8 32.6 38.1 49.5 53.1     Trade Exports of Goods 45.249 44.306 52.471 63.035 79.83 103.4 126.1 145.9       Exports of Services 16.68 17.32 19.47 23.87 38.25 52.59 71.14 85.53     Science & Technology Gross Domestic Expense on R&D 0.7803 0.7633 0.748 0.7389 0.714             Patents 44.948 86.22 105.937 120.04 122.2 132.8 135.8       Source: OECD1 The Chart I contains very useful information regarding the statistics of India however, for explaining the distorting values of GDP during the period 2007 to 2009, Table II has been presented. The following table shows that between 2007 and 2009, the GDP percentage annual growth values for Asia, Middle East, Africa and developed economic have shown a declining trend. It means that GDP values during this period should be ignored because world has been passing through the phase of recession. However, still the growth of GDP of Asian countries is higher as compared to the other economies. Chart I: World GDP, Percentage Annual Growth, 2007-2010(percent) Source: UNCTAD Although Table I is clearly showing the statistics of India however, since Indian economy is considered as one of the top economies in Information Technology, therefore, following charts have been taken from UN report on Information economy 2009. The Chart-II shows that India is ranked on sixth number in the list of top exporters of IT and ICT-enabled services. This chart shows two significant facts about India. The first thing is that Indian economy is technological advanced and continuous innovations have been made in IT field. Second, since it is one of the top exporters of IT and ICT-enabled services, therefore, India must have been competing through innovation and technological advancements to maintain its level of exports. Chart-II: Top 15 Exporters of IT and ICT-enabled Services, 2007 (Billion of dollars) Source: UNCTAD The following chart-III shows that during the period 2000 and 2007, India has appeared as the top dynamic economy in terms of exports of IT and ICT-enabled services. Chart-III: The 15 Most Dynamic Economies in Terms of IT and ICT-Enabled Services, 2000-2007 (change in percentage points) UN report on Information Economy 2009 also shows that the Indian and Chinese markets are considered two largest developing countries mobile markets in the year 2009. Tata Communication deploys the largest world’s commercial WiMAX network and it is expected to have over 10 million WiMAX subscribers by 2013. These facts about India shows that Indian economy has a strong potential growth in technological industry and innovations and advancements may bring a positive impact even on the domestic trade of Indian economy. Furthermore, it is reported that India is considered as a preferred location for ICT and IT services therefore, India has managed to enhance its capabilities and its range of services are continuously expanding thereby, increasing its exports. The following chart shows the patents granted to Indians, which is an evidence of innovations made in India. Chart-IV: Patents Granted to Indians & Foreigners Source: DST Website From the findings of UN report, one thing, which is very significant, is that technological advancements and innovations in India have been more observed in IT area as compared to other industries. The following table shows that significant portions of exports consist of machines, electronic tools, processed metals etc. For example, Indian exports of Engineering goods constitute 20.61 percent of its total export share. Table III: Indian Selective Exports Data 2006 and 2007 Name of Commodity Apr-Feb 2006 Apr-Feb 2007 %Growth %Growth %Share %Share   Export Value Export Value in INR in US$ in INR US$ of Goods  of Goods   Values (INR in Crores Values (US$ in Millions) Values (INR in Crores) Values ( in US$) Millions Values (INR in Crores) Values (US$ in Millions) Values (INR in Crores) Values ( in US$) Millions INDIA EXPORT OF ENGINEERING GOODS 74,614.19 16,860.21 105,201.00 23,171.06 40.99 37.43 20.61 20.61 Machinery 37,064.49 8,375.28 46,541.71 10,251.05 25.57 22.4 9.12 9.12 Machine tools 916.16 207.02 964.67 212.47 5.3 2.64 0.19 0.19 Machinery & Instruments 19,773.71 4,468.17 26,512.59 5,839.53 34.08 30.69 5.19 5.19 Transport equipments 16,374.62 3,700.09 19,064.44 4,199.04 16.43 13.48 3.73 3.73 Manufacture of metals 16,674.57 3,767.87 20,156.05 4,439.47 20.88 17.82 3.95 3.95 Residual Engineering items 273.87 61.89 320.57 70.61 17.05 14.09 0.06 0.06 INDIA EXPORT OF ELECTRONIC GOODS 8,826.86 1,994.56 11,664.67 2,569.20 32.15 28.81 2.29 2.29 Electronics 8,454.86 1,910.51 11,453.82 2,522.76 35.47 32.05 2.24 2.24 Computer Software in physical form 372 84.06 210.85 46.44 -43.32 -44.75 0.04 0.04 INDIA EXPORT OF PROJECT GOODS 596.72 134.84 412.62 90.88 -30.85 -32.6 0.08 0.08 Total 404,719.56 91,452.54 510,488.44 112,437.68 26.13 22.95 100 100 Source: Info Drive Website2 Implications of Theoretical Models Before discussing the implications of theoretical models in the case of Indian economy, understanding important terminologies under discussion is very important. In the report prepared by OECD Secretariat, the term ‘innovation” has been defined as, “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations”.3 Therefore, the term innovation does not only imply new product or process innovations and it cannot be restricted to research and development only. As long as economic theories related to technology and trade are concerned, it has been found that trade enhanced the substantial economic benefits however, it is possible through the efficient utilization of resources. Mercantilism The trade theory of Mercantilism argues that economic well being of any economy can be improved, if the government seeks to boost exports and reduce imports. It is well evident from the case of Indian economy. As shown in the previous sections, the Indian economy has been showing positive growth because of increasing trend in exports. This theory will be further explained with implications to India in the third section of this report. Absolute Advantage The theory of Absolute advantage of trade shows that an economy does have an absolute advantage over the other economy, if it produces more goods with the utilization of same amount of resources than other economy. India has an advantage over the other economies that it has huge population and cheap labour like China, therefore, advancement in technology brought huge international investments in India. However, absolute advantage cannot sustain longer. Comparative Advantage This theory argues that a country gets comparative advantage over the other trading countries, if it produces the products at a lower opportunity cost. Because of low cost technology and cheap labour, India has been attracting FDI as compared to many other Asian economies. This has appeared as a comparative advantage of India but again such an advantage cannot be considered as a sustainable advantage. Heckscher Ohlin Model Leamer (1995) argues that Heckscher-Ohlin theory of comparative advantage is considered a theoretical triumph in the countries rich in labor and land and it states that international commerce recompenses for the irregular distribution of productive resources. In short, the economies having abundant of production resources locally have competitive advantages in these goods. Vernon Model Source: Proven Models Website Vernon model assists the companies to understand their product planning process in international marketing. As described on the website of Proven Models (n.d.), according to Vernon model, there are three stages of International Product Life Cycle. The first phase of Vernon model shows that a company in developed country is more likely to exploit a technology breakthrough by launching a new product. In the second phase, the competition increases because of advancements of local firms in the non-domestic markets. India is a developing economy and its net export increases, once the standardized product phase comes. However, through technological developments and product innovation, Indian companies can boost their international trade especially in advanced countries where the high-income consumers have considerable demand for such products. In a report prepared by OECD Secretariat (2007), innovation and technology were considered as important determinants of economic growth. This report also highlighted that after World War II, technology and innovation were the influential factors of economic growth. Economic growth and innovation are linked because the continuous growth depends on how the level of innovation is maintained. New Trade Theory New Trade Theory challenges the increasing returns to scale and assumptions of International free trade. The implications of this theory will be evident in the section three of this report, where it would be found that survival of local industry of India (Bangalore IT) has become an important concern for Indian government. Analysis of Key Link between Innovation, International Trade and Growth For specifically evaluate the linkage between innovation, international trade and growth, the selected case study is “Innovation and IT in India” by Deepak Kr. Sareen. The selected case study is a clear demonstration of the key role of international trade as a mechanism for global transfer of technology and innovation. Sareen (2005), in this case study shows that about three hundred years ago Bangalore was facing a very slow economic growth. One of the major reasons of this slack economy was the haphazard infrastructure of Bangalore. Sareen has comprehensively described in this case study how the British governance after 1831 bloomed the city with modern facilities thereby, making it an important industrial city. After the independence of India, Bangalore faced a spurt in growth of population because of migration of people in search of jobs and training. With the developments of main IT-clusters of India such as STPI, ITPL and Electronic City, infrastructure further boosted. More and more multinational companies in search of cheap labour and advanced facilities initiated their operations in Bangalore; therefore, the city attracted huge amounts of FDI. Soon, R&D centers of great multinational giants such as Google, Yahoo, and Bose etc. were established in the city. Sareen has given statistics of Bangalore share in the total exports of India and he has highlighted the fact that even government was giving great focus towards promoting Bangalore as an international high tech IT software and services hub. Therefore, in this way, technological advancements, innovation and international trade changed the status of the city from a slump economy to a modernized and rich city of India. Therefore, this case study shows the contribution of international trade and innovation towards spurring the economic growth. SWOT Analysis of Case Study Since the case study deals with the journey of Bangalore to become a strong economy, therefore, the given SWOT analysis of case study has been done in two phases. Strengths (prior to industrialization/after industrialization) Weaknesses (prior to industrialization/after industrialization) Prior Capital and principle administrative city Fifth largest city of India After Availability of world class facilities Development of infrastructure Huge FDI Hub of IT Clusters Establishments of R&D centers Establishments of premium institutions Boosting exports and fast economic growth Prior Facing slow economic growth Weak industries Lack of international and local investments After Increasing competition of international and local companies weakened the local firms Threats (prior to industrialization/after industrialization) Opportunities (prior to industrialization/after industrialization) Prior Declining industries Long run threat to overall economy After Overpopulation Threats to local industries Increasing control of foreign investors Prior Change in governance Attracting FDI Encouraging local investments After Protection of local industries for boosting exports Conclusion From the implications of theoretical models and through substantial evidences of secondary data, it can be concluded that there is a strong link between technology advancements, innovation, trade and economic growth. International trade is the most essential channel for the transfer of technology at international level, which enhances the efficiency of domestic innovation process. Although, the link between, technology, innovation and trade is noticeable in the case of both the developed and developing countries however, the countries like India are more dependent on foreign technology, thereby, making this phenomenon more important for developed economies. Based on this concept, developing economies were not focusing on the advancements of technology and innovation in processes however; the recent trends of India and China are proving the fact that technological advancements for enhancing trade position is very important for developing countries as well. References 1. DST Website, (n.d.). ‘Major highlights’, [Online]. Available at: http://dst.gov.in/majorhighlights.pdf (Accessed: 10 Feb 2010) 2. Inderpal, S., & Amarjit, S., (2009). ‘Economic development in India, [Online]. 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