The Technological Divide

1. The Technological Divide Luc Soete UNU-MERIT, University of Maastricht The Netherlands SID lecture series on Economic Growth and the Common Good, Amsterdam March 16th, 2009

2. Outline • The technological divide: “How to reach ‘inclusive growth’, an economic growth which is also benefiting vulnerable groups and which prevents undesirable side effects?” • Knowledge on the move: from S&T to innovation • Past: the emergence of “tight” science • Present: ICT and the change in nature of technological progress • Future: Global research, local innovation • (Development) Research on the move • Past: “Research with borders”. The national research policy focus: technological competitiveness and national dreams of leadership • Present: “recherche sans frontière” • Future: A new emerging innovation development paradigm? • Challenges of the financial crisis

3. 1. The technological divide • What remains striking is how the two largest countries in the world: China and India, saw their population’s share of world population and their share of world GDP fall over the period 1820 till 1973. In 1973, the imbalance between the world’s concentration of GDP and the world’s concentration of population was probably the highest the industrialized world had ever witnessed. • This extreme geographical inequality in world GDP has to some extent formed the basis of the unilateral focus of both social scientists and policy makers on domestic competitiveness and in particular on technological competitiveness as essential feature for a country’s future economic growth. • As Ulrich Beck put it: “The consequences of globalization for sociology have been spelt out most clearly in the English-speaking countries, but above all Britain, where it has been forcefully argued that conventional social and political science remains caught up in a national-territorial concept of society. Critics of ‘methodological nationalism’ have attacked its explicit or implicit premise that the national state is the ‘container’ of social processes and that the national framework is still the one best suited to measure and analyse major social, economic and political changes. The social sciences are thus found guilty of ‘embedded statism’ and thought is given to a reorganization of the interdisciplinary field”.

4. Table 1:China India, Brazil and South Africa in the World Economy Source: Maddison(2003)

5. R&D-expenditures http://www.sasi.group.shef.ac.uk/worldmapper/

6. Technological revenues

7. 2. S&T research on the move: a) the past • Strong focus on industrial R&D a relatively recent phenomenon. • Long before, experimental development work on new or improved products and processes was carried out in ordinary workshops. Technical progress was rapid but the techniques were such that experience and mechanical ingenuity enabled many improvements to be made as a result of direct observation and small-scale experiment. Most of the patents in this period were taken out by "mechanics" or "engineers", who did their own "development" work alongside production or privately. This type of inventive work still continues to-day and it is essential to remember that is hard to capture it in official R&D statistics.” • What became distinctive about modern, industrial R&D was its scale, its scientific content and the extent of its professional specialisation. Joel Mokyr calls “tight” S&T… • Older arts and crafts technologies continued to exist side by side with the new "technology". But the way in which more scientific techniques would be used in producing, distributing and transporting goods led to a gradual shift in the ordering of industries alongside their “technology” intensity. Thus, typical for most developed and emerging industrial societies of the 20th Century, there were now high-technology intensive industries, having as major sectoral characteristic the heavy, own, sector-internal R&D investments and more low-technology intensive, more craft techniques based industries, with very little own R&D efforts.

8. Industrial technology policy • In many policy debates, industrial dynamism became associated with the dominance in a country’s industrial structure of the presence of those high-technology intensive sectors. • In Europe it led to an obsession with national technological competitiveness. European integration: a history of success and failure of industrial policy with as central driver: the elusive pursuit for scale economies • European problem one of scale (going back to M. Abramowitz in the 50’s, see also Jan Fagerberg) from the origin of the European Community for Steel and Coal to sun-rise industries Microelectronics • Focus on sun-rise industries starting with Davignon for political but also economic reasons • The European, so-called Barcelona 3% R&D/GDP target e.g., arose primarily from concerns that Europe’s industrial R&D appeared to lag far behind that of the other technologically leading countries such as the US and Japan. • The assumption was that more R&D carried out in Europe would be a crucial factor behind Europe’s attempt at becoming the most competitive region in the world. Obvious that R&D as an investment cost target is somewhat of an odd policy target. More important is the question what the results are…

9. b) the present: “new” characteristics of innovation • Shift in the nature of knowledge accumulation: from industrial, “tight” to more undetermined outcomes, trial and error science and technology • Traditional industrial R&D based on: • Clearly agreed-upon criteria of progress, and ability to evaluate ex post • Ability to “hold in place” (Nelson), to replicate, to imitate • A strong cumulative process: learn from natural and deliberate experiments • Still the case in many manufacturing sectors from automobiles, to consumer electronics, chemicals but even here tightness is becoming more difficult with the increase in complexity

10. ICT and the change in nature of technological progress • “New” technological change appears more based upon: • Flexibility, hence difficulty in establishing replication; • Trial and error elements in research with only “ex post” observed improvements • Problems of continuously changing external environments: over time, across sectors, in space; difficulty to evaluate • E.g. In many IT-intensive sectors (education, health, mobility, safety, business) efficiency improvements remain complex “stories” only to be told ex post • Particular role of users in the R&D process itself and much larger role for entrepreneurial, “creative destruction” based innovation • “Codified” parts of knowledge easy, but difficult to appropriate the efficiency improvements leak quickly away, tacit parts much more difficult, imitation never complete

11. From industrial to innovation policy • Distinction between novelty and routine reflected in essential features of R&D definition and its policy support: • Professional R&D with professional S&E manpower versus routine production with routine high/low skilled manpower • Dominance in-house R&D over outsourcing, licensing, “open” innovation • STS activities such as design, engineering, etc. outside of R&D • Systemic interactions between various knowledge creation and users’ components • At innovation side blurring distinction between innovators and users: • Innovation sometimes outside of R&D system, associated with entrepreneurs • Innovation as novelty with respect to firm’s market, country’s market, world market? • Role of knowledge management, organisational innovation, social innovation • University-industry interactions, public-private research collaboration

12. c) The future: global research, local innovation • Relevance of innovation (policies) at different levels of development. Three broad categories of innovation policy challenges (Aghion and Howitt, 2005): • For high income countries, such as Japan or the EU, the policy challenge is one of the sustainability of Schumpeterian dynamism • For emerging economies (BRIC), the challenge appears the design of “backing winners” innovation policies based on new comparative cost advantages • For least developing countries, the policy challenge focuses on the disarticulated nature of the local knowledge systems • Growing scope for mutual learning from each others local experiences: • Relevance of “community of practice” in many areas. • Differences in local university-industry-public research interactions. • Sectoral traditions in e.g. extension schemes as way to diffuse new knowledge • Link with local entrepreneurship and local context conditions

13. Global sharing of knowledge as source of innovation • The global dimensions of “collaborative innovation” can go hand in hand with a huge concentration of R&D efforts in the US, Japan, the UK and other EU countries with China and India rapidly catching up… • But such physical concentration will need increasingly to address global welfare problems and demands: • In this sense the most important long term enabling factor of OECD countries’ over-concentration of R&D will be in enhancing A2K • Not just access to the required knowledge but also to the tools to replicate and improve upon knowledge • Access not as passive consumption but as right and ability of participation: as a factor enlarging the resource base of potential innovators • Crucial role of various communities of practice (innovators, local users, implementers, etc.) • Role of (local) public sector in setting the fences of the commons in nature but also in innovation, in “creative commons”

14. First conclusions • Knowledge sharing shifts the attention away from the purely technological aspects of research to the broader organisational, economic and social aspects which are today in many cases a more important factor behind innovation. • This is reflected to some extent in the much greater popularity of the term innovation today than R&D • Innovation is at the same time as relevant to poor countries as it is to rich countries. This holds a priori for countries with large, young populations where the potential for innovation, once users/consumers are identified as source of innovation, can easily be enhanced. • In doing so, innovation is becoming less driven by R&D and at the product end by the continuous search for quality improvements, typical of the old mode of technological progress, identified with the high income groups in society, but by broader user needs across society. • At the same time, such innovation demands might feed back to R&D departments in new ways, further globalising the impact of research.

15. 3. Research on the movea) Past: “Research within borders” • The EU as case in point of research within borders:.the case could be made that as in the case of trade diversion, a side effect of economic integration on research activities within the EU has been intra-European knowledge diversion • Gradual move from national to European borders: the ERA ( in French l’espace européen de recherche) most easily comparable with a research single market. • Lisbon fitted within this view: it should be primarily considered as a correction on the EU institutional set-up. • Competition policy not providing necessarily growth and innovation dynamics, on the contrary it created a lot of legal uncertainty with respect to MS national research policies; • Monetary/fiscal policy with growth and stability pact under the Maastricht Treaty not providing any fiscal prioritisation with respect to knowledge investments. • Culmination of 50 years of European cocooning…

16. b) “Recherche sans frontière” • Research is becoming increasingly globally driven in most applied research in the developed world, yet many of the most challenging research questions are often taking place within development contexts. • Broadening of the scope of research activities to include more systematically users groups, and in particular various communities of practice. With respect to applied research including design, the possibilities of such collaborative innovation processes involve stronger collaboration, interactions, and partnerships with research communities in developing countries. • Growing role in international research partnerships of NGOs, as initiators of research for development projects, as organisations with a wealth of user knowledge, local community expertise and not-for-profit interest which gives a “voice” to needs at the bottom of the income pyramid where markets are invisible. • It is expensive to be poor; it is expensive to service the poor

17. c) An emerging innovation development paradigm • Traditionally consumer product innovation has been driven by professional use demand directed towards the tip of the income pyramid: the long tail of product quality, professional use improvements. • In a global setting, this has offered growth expansion opportunities to firms thanks to rising income inequality in developed and emerging economies. • In the long term though this is likely to be an unsustainable process: high income market penetration offers too little innovation monopoly rents • Need to strengthen the international implementation of IPR • But with major problems of transfer pricing, parallel imports will remain in crucial areas for welfare (health, education, nutrition) • Search on the part of the business community in the absence of Keynesian global redistribution policies for long tails elsewhere (remember Ford’s T-model): • At middle income levels, youngsters, elderly, etc. • Low income, bottom of the pyramid (BoP) innovations (Prahalad), local grassroots innovation (Anil Gupta).

18. Global research challenges: insights from the South • Developing markets appear to raise some of the most motivating research/innovation challenges • Autonomy, unwired to high quality infrastructure (energy, water, roads, terrestrial communication); • Low education hence necessity of simplicity in use; • Less maintenance/repair facilities, so an intrinsic need for long term sustainability; • Extreme income inequalities with strong needs in urban slums and poor rural villages, but little current purchasing power and high living risks, hence low willingness to invest or borrow money in the long term. • All these features appear also and increasingly of particular value to consumers in developed countries: • Autonomy of high quality infrastructure as “freedom of movement”; • Shift in the democratization of innovation: from the needs of sophisticated, bèta users to the needs of (digital) illiterates; • Need for zero maintenance and ecological sustainable: cradle to cradle • Relevance of new financial products such as micro-credit and micro-insurance in poor urban areas

19. Innovation for development • Role of local communities as professionalized non-governmental grass roots organizations becomes crucial. New strategic alliances emerging between NGO’s and multinational firms in the development of BoP laboratories embedded in such environments, not part of traditional high tech R&D centres. • Innovation process is now likely to be reversed, starting with the design phase which will be confronted most directly with the attempt to find functional solutions to the BoP users framework conditions. • This involves not just the need to bring the product on the market at a substantially lower price than existing goods, as Prahalad noticed, but also adaptation to poor local infrastructure facilities: e.g. with respect to energy delivery systems, water access, transport infrastructure or digital access. • Feedback from BoP users and from design developers upstream towards applied, even fundamental research is interesting new example of reverse transfer of technology (from South to North), re-invigorating and motivating the research community in the highly developed world “in search of relevance.”

20. Pro-poor innovation challenges • Private BoP innovation initiatives (BOP learning labs): • Top down (Prahalad) from large Western foreign companies: difficult to implement, insufficient top management support, CSR burden… • Bottom up emerging from grassroots innovation (Gupta) in alliance with firms from emerging economies: Indigenous innovation: difficulties in up-scaling and reaping scale economies; • Need for close link with development of purchasing power (micro-finance and micro-insurance): addresses in general above poverty line households. • Focus at the moment on BoP innovations in health and nutrition area, a sector where applied medical research is dominated by access to new technologically sophisticated equipment (e.g. combined PET - positron emission tomography ct-scanners), and less by down to earth research questions about, and the list is non-exhaustive: anti-biotic resistance, infectious diseases or resistant tuberculosis. • An example: toilet in India (Financial INclusion In Health and Sanitation FINISH project)

21. Toilets in India • The all India coverage of sanitation, according to the National Family Health Survey 3 is 44.6% in 2005-06. Initial indications of an evaluation by the Government of India and UNICEF show that significant numbers of people, especially in below and just above poverty line households (< 3$ a day) are not using their latrines. • A number of studies correlate diarrhoeal disease and morbidity rates to water, sanitation and hygiene components. Open grounds in India receive an estimated 100,000 tons of human faeces everyday. Only one in three Indians has access to any form of a functioning toilet. Less than half of the 738,150 government primary schools are equipped with toilet facilities and out of 5000 towns in India, only parts of 232 towns are connected to a central sewage system. • Sanitation is more than providing toilets; the associated excreta treatment and/or reuse system are the areas where sanitation makes the real impact. But neither really contributes to main motivators for people to buy a toilet, i.e. convenience and privacy. • “The “market” for toilets for the poor is very sluggish as it is considered to correspond to a “merit good” that must be provided by the government or charitable NGOs, as there is a strong preference in the bottom of the income pyramid group to use the scarce revenue for other essential goods or entertainment goods that provide temporary relief.” (Ramani, 2008)

22. Research objectives of FINISH • Integrating sanitation (water, sanitation and hygiene) into the main activities of micro-finance institutions, including enhanced livelihood opportunities arising from sanitation interventions (soap manufacturing, composting, fertiliser usage, construction activities etc). • Increase scope of financial services offered to rural and peri-urban poor through linking micro-insurance (life and health) with micro–credit expanded to include sanitation. This is part of the financial inclusiveness of micro-finance service as offered to the rural poor. • Could there be spin off of the demand for health insurance in rural areas that could be leveraged for enhancing demand for sanitation and water?. The underlying assumption is that health insurance does have a demand which is based on studies indicating that health costs are one the largest unplanned perils that low income households encounter. • By having the MFI distribute micro-insurance as well as sanitation loans their grass root relationships can be maximised. The project will demonstrate to the community the relationship between lowered health costs and sanitation creating awareness for the latter and stimulating a demand for it which the MFI community can then satisfy through innovative funding mechanisms.

24. 4. The financial crisis • A double squeeze: a financial crisis having affected the real economy with a mutual reinforcing double squeeze on the economy. • With practically all large international operating banks technically bankrupt, an economic recession which can not be addressed using traditional financial tools, banks no longer being in a position to carry out that function. • The large financial banks have become “dead bodies”: black holes in our economy, absorbing public money but no longer emitting any economic dynamism. • As a result a declining financial sector in most (small) countries with domestic repatriation of financial services, a reduction in their profitability and a rapid reduction in employment despite heavy state involvement. • From positive to negatively self-reinforcing externality effects (Stiglitz et al.)

25. 0,16 Mutually reinforcing effects • Banks try to restore solvency • Over the past 8 years, leverage has reached unprecedented levels • Sell assets to restore capital ratio • Asset Price Rise • Financial Innovation • Commercial paper markets collapse • Further asset write-downs • Cheap Credit • Lowers asset prices • US Subprime crisis • Lehman Failure • Commercial paper collapses (counter-party risk) • Adverse selection fu rther depresses market • Economic contraction • Companies who can turn to bank credit lines • Economy contracts • Banks further tighten lending standards • Markets are trying to adjust to the changed conditions, but it is unclear what the end-state will be and how long it will take to get there • Increase in non-performing loans Source: Morgan Stanley; Federal Reserve; BEA; The Economist; McKinsey analysis

26. The crisis and need for knowledge investments • Surprising how current financial/economic crisis is being discussed purely in national terms... • Five Dutch economists’ proposals in NRC on economic recovery: purely national; • Nothing on global imbalances to which the Dutch economy contributes; • Nothing on environmental unsustainbaility nature of current growth path. • Global access to knowledge central in current crisis. • HIgher growth in emerging and developing countries dependent on technology transfer and access to knowledge; • Global access to markets raises return to knowledge investments in The Netherlands; • Global and local environmentally sustainable growth is crucially dependent on fast diifusion of technologies and eco-innovation. • Challenge to technology and innovation policy: from national obsession with technological competitiveness to a new global view.

27. The global knowledge challenge

28. Crisis scenarios • Regeneration of old globalization patterns Recession 3-4 quarters, then strong growth • New, effective regulatory regime • Recovery is broad-based • Credit markets recover, safe leverage ratios, cost of capital to historic norms • Global trade recovers rapidly • Battered, but resilient Recession 2-5 years, then strong growth • New, effective regulatory regime • Recovery led by regions (eg. US, China) • Credit Markets recover, safe leverage ratios, cost of capital to historic norms • Slow recovery of global trade Early Recovery Capital Markets Crisis • Disruption Recession > 10 years (“Japan-style”) • Major disruptions bringing about new national regulatory policy experiments • Credit markets rely on government input, cost of capital and energy high • Global trade drops, knowledge as well highly skilled labour mobility increase • Stalled Gobalization Recession 1-2 years • Recovery is based on national markets and national industrial policies. • Financial and credit markets renationalize and downsize. • Recovery growth quickly runs into foreign energy dependence so that global trade recovers only slowly Continued Slowdown Severe Moderate Economic Global Recession Source: McKinsey Global Institute

29. Global developments • Balanced growth • Redirection of global financial flows in a more balanced way • Growth in US and UK savings, reduction in reserves in China and S-E Asia – new role for IMF • Stronger representation of emerging countries in international financial organizations • Growing international trade conflicts • No change • At first rapid recovery • Limits to unsustainable growth (oil price, raw materials, agriculture increases) expressed in re-occurrence of crises in new areas (water, health, environmentally induced migration, …) • Rising inequality and exclusive growth, resulting in unsustainable social exclusion, increased security costs Early Recovery Capital Markets Crisis • Knowledge globalization • Dramatic slowdown in trade of goods, with severe structural unemployment & new specialization patterns emerging • New priority on global implementation of environmental technologies • High skill labour and knowledge mobility • Financial nationalism • Focus on protecting national savings, going for national and international “trust” investments (local banks and global “community” banks) • Regional disparities with growing labour migration pressures • Financial global imbalances limit national growth opportunities Continued Slowdown Severe Moderate Economic Global Recession Source: McKinsey Global Institute

30. Conclusions • Knowledge sharing shifts the attention away from the purely technological aspects of research to the broader organisational, economic and social aspects which are today in many cases a more important factor behind innovation. This is reflected to some extent in the much greater popularity of the term innovation today than R&D • Innovation is at the same time as relevant to poor countries as it is to rich countries. This holds a priori for countries with large, young populations where the potential for innovation, once users/consumers are identified as source of innovation, can easily be enhanced. • In a growing number of areas the over-concentration of research expenditures in the Northern world leads to a too slow spreading of knowledge • In case of Energy saving technologies policy issue is fast “proiferation” of knowledge • Need for multi-disciplinary research programmes on “appropriate innovation”: Local food production, local energy efficiency, water management, transport, logistics, urban mobility, migration, etc. • Need for adjustment of our financial system to focus more on local knowledge impact.