Appropriate Innovation Policy for Developing Countries - Essay Example

In the of Economic Growth: Appropriate innovation policy for developing countries Introduction Companies and governments all around the globemake extraordinary efforts to generate, improve and enhance technology. Several multinational corporations each spend over $3 billion annually on research and development (R&D). In fact, according to Dodgson and Bessant (1996), the seven of the largest Organization for Economic Co-operation and Development (OECD) countries1 collectively spend over $300 billion every year on R&D. "Technology-based products account for the highest and fastest-growing proportion o the world trade, which explains much of the corporate and public policy interest in technological innovation. Firms use technology as a fundamental driver of competitiveness, and in a wide variety of ways governments support corporate technological activities as the primary agents of technical advance in the economy" (Dodgson and Bessant 1996, p. 3). "In addition to the industrial policies that governments pursue in line with their political philosophies and models of economic growth, some governments develop public policies with varying degrees of explicitness, intended to encourage innovation" (Dodgson and Bessant 1996, p.23). The Role of Government in Innovation To illustrate the role of government in the process of innovation, Shonfield (1981) postulated as his point of entry that public policy-makers need not, or more strongly should not, be concerned with economic innovation, and the to ask what conditions have to be fulfilled by market processes to secure an optimum outcome. This was his first step in his argument: even if it could be shown that the market process was deficient, it would not follow that intervention by public authorities would produce a better answer. Shonfield goes on saying that if markets were to go on their own without intervention from the government as to how they would manage the scientific environment, markets should be able to provide innovators the necessary environment for them to carry their work. This would include the necessary perks to encourage people to innovate. As discussed by Shonfield (1981, p.4), another problem is the measurement: calculating social preference. Social preference here means which projects the society wants to prioritize and those types of innovations that the society wants to set aside for the moment This is partly because market signals are necessarily limited to expressing the preferences of contemporaries. Shonfield's third requirement is that markets must be able to regulate the effects of economic innovation on public goods. On the other hand, Branscomb and Florida (1999) cited the importance of the government's role in support of science and technology on regulating the two kinds of so-called "spillovers." "Knowledge spillovers (italics mine) derive from the public good nature of knowledge, combined with the difficulty of keeping economically useful knowledge secret when it is profitably exploited. Such spillovers can be derived from reverse engineering, when some aspects of a competitor's technology may be discovered by examining how the product is made. Even negative information, the abandonment of a line of work by a respected competitor, for example, can be a useful spillover of his decision" (Branscomb and Florida 1999, p. 30). Branscomb and Florida's second type of spillover is the consumer surplus spillover, which results from the creation of new goods or the improvement of existing ones. "The innovator captures only part of the consumer value in the sales price; there may be a social surplus that exceeds the innovator's profit. Research tends to generate more knowledge spillovers, which is a reason for government support, but research, by itself, cannot generate more knowledge spillovers. Private firms have inadequate incentives (to varying degrees, depending on market structure and other considerations) to take new ideas to market. Furthermore, the transfer of potential useful ideas from the government or university sector to the private sector does not happen cost less or automatically." Branscomb and Florida also warned if government or university scientists are not given any incentive to transfer their commercially useful ideas to the for-profit many of ideas will "languish" (Branscomb and Florida 1999, p. 30). This is in line with Kenneth Arrow's (1962) and Richard Nelson's (1969) logic for the government's support of R&D: "R&D offered tremendous potential social returns but was often too risky for private firms to make the required investments. Government support was required to close the gap, and to ensure that sufficient levels and types of R&D investment were undertaken," (Branscomb and Florida 1999, p. 30). With these essential roles of the government in facilitating innovation, there is a need for innovation policy not just in developed countries, but most importantly in developing countries to fuel innovation and technological advancement and monitor and control such processes. Innovation Policy Approaches in Developed Countries According to Dodgson and Bessant (1996), public policies aimed at assisting innovation can take a number of forms. The following table gives an indication of the range of different measures, including both direct (those which have particular targets) and indirect (those which aim to create a supporting climate for encouraging innovative activities). Dodgson and Bessant, within Europe there is a wide range in the level of direct government involvement in determining the rate and direction of industrial technological change. "In some countries like France, there have traditionally been policies of technology selection and support involving public co-ordination in implementation, the technologies selected having been identified as part of a process of national strategic planning. In contrast, in other countries such as Germany and Britain, direct public involvement is low. Here, market forces dominate with little attempt by governments to influence technology selection; public authorities prefer instead to attempt to create the right 'environment' in which firms can develop technology" (Dodgson and Bessant 1996, p.67). Rothwell and Dogson (1992. p. 226) summarize the differences in the levels of state intervention in Europe as follows: "In some countries, state intervention in industry is seen as a major part of the process of indicative planning. This is the case in countries like, for example, France and Italy, where industrial policy is used as an important instrument for economic policy, and where the objectives of that policy are formulated within the framework of economic, regional and social development plans, which are indicative for the private sector. Industrial innovation policy is then formulated through consultative and coordinative procedures and institutions within government and industry. In other countries industrial (innovation) policy is seen as part of general economic policy, aiming to create a favorable climate for industrial development. Although these countries, like the Netherlands, Denmark and the FRG, use industrial policy instruments or even sectoral policies, these policies are not formulated within the framework of a National Plan, nor are they used as selective policies in an intensive or systemic way." Rothwell and Dogson (1992) also assert that trends are visible in a variety of areas of policy affecting technology and innovation. Table 2 shows how despite some broad differences in policy approach, the same trends can be seen to extend to the United States and Japan. Innovation Policy Approaches for Developing Countries The World Trade Organization states that there is no concrete definition for "developed and developing" countries as members announce for themselves whether they are "developed" or "developing" countries. However, other members can challenge the decision of a member to make use of provisions available to developing countries. On the other hand, the following definbition is provided by One World-Nations [Online]: countries with serious constraints on the overall socio-economic development. According to Jquier (1976, p. 102), in most developing countries as well as in a number of industrialized countries, the science and technology system is highly centralized, both geographically and administratively. Jquier states that this form of organization, which usually results from history or from political and social traditions, is perhaps justified in the case of certain large-scale projects, but it is generally recognized today that the less centralized systems are more efficient. "Before, the idea of a national science plan or technology plan, and the creation of central ministries dealing with science and technology was one of the policy innovations of the late 1950s and early 1960s. One of the next innovations in several countries (United States, Canada, etc.) is the concept of a regional or provincial science and technology plan" (Dodgson and Bessant 1976, p. 102). In general, developing countries can also use public policies for innovation projects similar to that in developed or industrialized countries such as taxation, regulation and financial support schemes. Moreover, developing countries can also benefit from creating a supporting climate to encourage innovative activities, just as the European community does. However, developing countries should model their innovation policies that target on (1) decentralizing their research systems so as to fill the gap between the real needs of the local community and the R&D activities of the scientific establishment and open up research in areas left untapped by the local government; (2) developing indigenous innovations and local technological traditions; and (3) upgrading the credit system through intermediate credit institutions, organizations and groupings. According to Deardorf and Stern (2003), it would also be beneficial for developing countries to provide flexibility for products, such as those of biotechnology and information technology, that are needed to improve their economic health and facilitate their progress. Intellectual property (IP) protection is inherently the result of a tradeoff between incentives for innovation and creative endeavor, on the one hand, and both economic efficiency and distribution of income, on the other. 2 Employment Impact of Innovation: Case Study on How Innovation Conditions in Developed Countries may not Work on Developing Countries A study done by Karamerlioglu and Ansal (2000) focused on the dynamics of the impact of innovation on employment in manufacturing industries for developing countries. The study stated that while the severity of the unemployment problem and the labor-saving nature of technological changes aroused the economists to look into the casual links between technological change, growth, and employment in developed economies, the impact of innovation on employment has been a neglected topic for developing countries (Karamerlioglu and Ansal 2000, p.165). The study sought to determine the applicability of the compensation theory in innovation in developing countries. It examined the applicability of compensation mechanisms to the least developed countries, namely: (1)the job creation associated with demand and output growth following the decline in prices; (2)the increasing employment in other sectors, particularly the new technology supplying sectors; (3)the increasing demand for employees whose wages are lower because of the unemployment, leading to n increase in production; (4)the increased employment in sectors where technological changes re in the form of product innovations; and (5) the profits resulting from innovations are transformed into new investments that do not significantly increase capital intensity of the production processes but rather promote labor intensive techniques to reabsorb the dismissed workers (Karamerlioglu and Ansal 2000, p.166). The study also aimed to validate compensation mechanisms both at the theoretical and empirical levels by specifically using the findings of a case study on the impact of new technologies (NTs) on Turkish manufacturing, chemical, and engineering industries done by Ansal and Karamerlioglu (1999). The first compensation mechanism takes price reductions as given and the existence of unsatisfied market demand. In the words of Karamerlioglu and Ansal, "this assumption is simply not applicable for many developing countries. When prices decrease in a technology applying industry, this does not necessarily create demand in downstream industries. This is because user and buyer sectors of an industry do not necessarily exist in a developing economy. Hence, there may be no chain effect in related industries following technological investment in a particular industry; thereby no employment compensation could be realized as envisioned in the theory. Further, many developing countries face a slow or negative growth, indicating that even though there might be unsatisfied demand, it might not be effective demand. Even when these countries have a high growth rate, this does not necessarily translate to employment as in the case of many European countries" (Karamerlioglu and Ansal 2000, p.167). Regarding the second compensation mechanism that the employment created in technology-supplier sectors is, to great extent, not realized in developing countries with weak - if any - NT producing industries, since in general they import their technologies from advanced countries (Karamerlioglu and Ansal 2000, p.167). "Application of NT's will not necessarily create significant employment in new technology supplier sectors since resource endowments that have influenced the development of such new technologies may not necessarily be the same for that of a developing country," (Karamerlioglu and Ansal 2000, p.167). For example, labor-saving machines from the United States may not necessarily be a hit in most Asian countries where labor is relatively cheap, which leads us to our third mechanism. "The third compensation mechanism indicates that low wages will create demand for new products involving the dismissed employees. This might be true to some extent in advanced countries where wages are high. However, most likely it will have an insignificant impact on firm demand for cheap labor in developing countries that already have significantly low wages. Therefore, the expectation that unemployment and reductions in wages will facilitate an increase in labor demand has no significance in the case of developing countries" (Karamerlioglu and Ansal 2000, p.168). The fourth compensation mechanism, the positive employment impact of product technology, does not necessarily apply to developing countries because of their dependence on foreign technology, Karamerlioglu and Ansal assert . "Some industries such as chemicals are built on the licencee base that restricts the development of independent product technologies. Thus, innovations of developing countries are bound to be limited. In turn, this limits the positive employment results arising from their product innovations. However, Najmabadi and Lall, (1995) importantly note that many Southeast Asian countries started with imitation and developed their unique products in a progressive way by building their research and development competence and industrial infrastructure. Hence, if these countries can develop product innovations and start to produce them on a large cale, then this might result to significant employment gains" (Karamerlioglu and Ansal 2000, p.167-168). "The fifth compensation mechanism foresees a trend towards heightened investments, particularly in labor intensive technologies that will reabsorb the dismissed workers. The expectation is twofold. On one hand, new technologies will increase wages due to increased productivity, accompanied in increased consumption and employment. On the other hand, firms are expected to invest their profits from technological improvements, into labor intensive technologies. Also, even though there is reinvestment, this investment may be again in the form of labor-saving technologies, since the introduction of new technologies becomes compulsory for firms in their efforts to gain international competitiveness. Hence, new investments may intensify the unemployment problem than rather to solve it. In sum, neo-classical theory's compensation mechanisms regarding the impact of new technologies on employment appear to be highly optimistic for developing countries" (Karamerlioglu and Ansal 2000, p.169). Reference List Arrow, K 1962, 'Economic welfare and the allocation of resources for invention', in The Rate and Direction of Inventive Activity: Economic and Social Factors, A Report of the National Bureau of Economic Research, Princeston University Press, New Jersey. Branscomb, L and Florida R 1998, 'Challenges to technology policy in a changing world economy', in L Branscomb and J Keller (eds), Investing in Innovation Creating a Research and Innovation Policy that Works, MIT Press, United States of America. Deardorf, A and Stern, R 2003, Enhancing the Benefits for Developing Countries in the Doha Development Agenda Negotiations, Discussion Paper No. 48. Retrieved 10 March 2006 from http://www.fordschool.umich.edu/rsie/workingpapers/wp.html Dodgson, M, and Bessant, J 1996, Effective Innovation Policy: A New Approach, International Thomson Business Press, United Kingdom. Jquier, N (ed.) 1976, Appropriate technology problems and promises, OECD Development Center, Paris. Karamerlioglu, D, and Ansal, H 2000, 'Innovation and employment in developing countries', in M Vivarelli and M Pianta (eds), The Employment Impact of Innovation, Routledge, Great Britain, pp. 165-181. Najmabadi, F and Lall, S 1995, Developing Industrial Technology: Lessons for Policy and Practice, World Bank, Washington, DC. Nelson, R 1959, 'The simple economics of basic research', Journal of Political Economy, vol. 67, pp. 297-306. Shonfield, A 1981, 'Innovation: Does Government have a role' in C Carter (ed.), Industrial Policy and Innovation, National Institute of Social and Economic Research, Great Britain. Simonneti, R, Taylor, K, Vivarelli, M 2000, 'Modelling the employment impact of innovation', in M Vivarelli and M Pianta (eds), The Employment Impact of Innovation, Routledge, Great Britain, pp. 26-43. Read More