Bridging Development and Innovation Studies for Inclusive Growth

Achieving inclusive and sustainable development: Relevance of bridging development studies & innovation studies K J Joseph, Ministry of Commerce Chair Centre Development Studies, India & Editor in Chief Innovation and Development (Taylor & Francis) KJ1 Indialics CDS 2016

As we proceed • The journey development studies and the new development challenge • Evolution of economics of technology and innovation studies in developing countries • Addressing the challenge; the relevance of linking development studies with innovation studies • Concluding observations KJ1 Indialics CDS 2016

Journey of development Economics • Birth of development economics • Context: Political independence of many of the erstwhile colonies after the world war II • Issue: Bringing about growth and development of these backward economies. • Contributions of : Roden, Myrdal, Rostow, Nurkse, Lewis, Hirchman and others • Paradigms/guiding principles: Export pessimism; infant industry protection; rise of Keynesianism: declining faith in market; imperative of industrialization for development KJ1 Indialics CDS 2016

Journey of development Economics • The trajectory: import substituting public sector led industry oriented development strategy with greater role for the state • 1960s witnessed a consensus that to address the issues of development, economics need to communicate with other disciplines leading to the emergence of development studies KJ1 Indialics CDS 2016

Journey of development Economics • New Paradigms: The 1970s marked the emergence of a large number studies highlighting the efficiency losses associated with the import substituting industrialization. [Little, Scitovsky and Scott (1970), Balassa (1971) Kruger (1974) Bhagawati (1978)]. • The success of the East Asian countries has been cited to suggest that the trade restricting, import substituting policies have failed and should be replaced with trade oriented, export promoting policies. KJ1 Indialics CDS 2016

Journey of development Economics • Since 1980s the policy pendulum in about 80 countries shifted towards globalization mostly under the influence of structural adjustment programme within the “ten commandments” of Washington consensus. • With the establishment of WTO in 1995 and the TRIPS and TRIMS that followed, globalization gathered momentum • Though the developing countries, on a large scale, resorted to multilateral trade liberalization under WTO, the developed countries continued to impose high tariffs, specific duties and NTBs on imports from developing countries. • Given the suboptimal outcome under WTO there have been a growing number of regional trading agreements involving countries in the south KJ1 Indialics CDS 2016

Journey of development Economics After almost 40 years of market oriented policies we have a mixed picture; Based on the observation that 13 developing economies have grown at an average rate of 7 percent a year or more for 25 years since 1951, which is unheard in history, “The Growth Report” by the Commission on Growth and Development (2008) argued that the road to rapid growth is no more an unchartered terrain for the developing countries. KJ1 Indialics CDS 2016

Journey of development Economics • The past episodes of growth, however, are found to be lopsided and that the returns to growth have been mostly confined to select sectors of the economy and sections of the society resulting increasing marginalization and inequalities that coevolved with higher GDP growth rates (Wade 2004). • As Freeman (2011) argued Structural adjustment induced growth has also been characterized by “crises of structural adjustment” because, there has also been growing unemployment, a main source of inequality and poverty, • The inevitable outcome in almost all the fast growing developing countries has been increasing marginalization and inequalities that coevolved along with higher GDP growth rates. KJ1 Indialics CDS 2016

“Globalization itself is neither good nor bad. It has the power to do enormous good, and for the countries of East Asia who have embraced globalization under their own terms, at their own pace, it has been an enormous benefit…..But in much of the world it has not brought comparable benefits. For many it seems closer to an unmitigated disaster” (Stiglitz 2002 p.20). KJ1 Indialics CDS 2016

After analyzing the trade reform policies in developing countries Rodrik (1992) convincingly concludes that • “trade policy plays a rather asymmetric role in development: an abysmal trade regime can perhaps drive a country into economic ruin; but good trade policy alone cannot make a poor country rich” (p 103). KJ1 Indialics CDS 2016

Trade policy, at best, provides an enabling environment for development. Perhaps most emphatic was Arthur Lewis who stated as early as in 1978. To quote • “the engine of growth should be technological change with international trade serving as lubricating oil and not as fuel”. He continued “….international trade cannot substitute for technological change, so those who depend on it as their major hope are doomed to frustration” (Lewis 1978; p 74). • No wonder influential economists like Dani Rodrik argued that Washington consensus has turned into Washington confusion. KJ1 Indialics CDS 2016

While globalisation appears to have enabled many developing countries to enter the growth highway, it has been argued that development needs to be seen as a process of expanding the real freedoms that people enjoy (Sen 1999). • Conventional indicators like growth in per capita income, national income, or in manufacturing output are only partial indicators of development and are at best important means to expanding freedoms. • It appears that while the recipe for high growth is presumably ready, what is missing is a credible cookbook for inclusive and sustainable growth. KJ1 Indialics CDS 2016

Evolution of economics of technology and innovation studies in developing countries KJ1 Indialics CDS 2016

The journey of economics of innovation • Schumpeter invented the economics of innovation • Economics of technology & innovation today is a well defined area of inquiry • Different heuristic frameworks • Classical legacies - Smith & Marx, Schumpeterian Paradigm, Arrovian heritage and endogenous growth models – growth • When it comes to innovation and development we have - technological capability approach (1970s an 1980s) - national Innovation System approach (1980s and beyond) KJ1 Indialics CDS 2016

The journey of economics of innovation • The heritage of Smith and Marx - contribution of technological change to economic growth, mainly at the aggregate level. • The demand pull hypothesis - building up on Smith • Induced approach to technological change building upon Marx • The Schumpeterian legacy - relationships between innovation and competition - implications for the theory of the firm and the theory of the markets. KJ1 Indialics CDS 2016

The journey of economics of innovation • Arrow led the analysis of knowledge as an economic good characterized by non appropriability, non-excludability, non-rivalry and non divisibility – need for public investment in knowledge production • Endogenous growth models and subsequent developments therein highlighting the role of human capital, technology spillovers and other factors. KJ1 Indialics CDS 2016

Technology, innovation and developing countries • 1970s: discourse on appropriate technology and choice of technique • The Sussex manifesto – Singer et al (1974) - technology generation at the centre of the development • Developing countries should have their own scientific and technological capability not only for increasing production, but, more importantly, for improving the capacity to produce innovations • Called for greater access to technology from abroad and LDC R&D to 0.5% of GDP • Studies on technological capability – know how and know why – technology import, in-house R&D and the interaction between the two KJ1 Indialics CDS 2016

Technology innovation and developing countries • The National System of Innovation • Basic ideas behind the concept ’national systems of innovation’ could be traced to Friedrich List (List 1841) • The central concern of List, a staunch critique of Smith, was how to facilitate “catch up” of a backward country (Germany at that time) with with an advanced country (England) • His concept ’national systems of production’ took into account a wide set of national institutions including those engaged in education and training as well as infrastructure such as networks for transportation of people and commodities (Freeman 1995). KJ1 Indialics CDS 2016

National System of Innovation • In fact the National System of Political Economy of List got transformed into ‘national system of innovation’ in the hands of Freeman (Freeman 1982/2004). • Drawing from the Chain-linked model (Kline and Rosenberg 1986) and the Sapho study, Freeman and Lundvall together with Nelson developed further the ideas about innovation as an interactive process not as a linear one where innovation automatically comes out of R&D efforts. • Theoretical base is drawn from evolutionary economics and economics of institutions KJ1 Indialics CDS 2016

National System of Innovation • Thus the NSI framework, deviated from the linear approach to technological progress, went beyond the narrow confines of product and process innovation in an evolutionary perspective with focus on interactive learning, innovation and competence building within organizations and individuals in an economy as key to economic development and welfare. • It emphasizes inter-dependence and non-linearity wherein institutions play the central role. • While being a broad framework to understand the process of innovation, there is substantial flexibility and we find different definitions NSI. KJ1 Indialics CDS 2016

“... The network of institutions in the public- and private-sectors whose activities and interactions initiate, import, modify and diffuse new technologies” (Freeman, 1987) • “... The elements and relationships which interact in the production, diffusion and use of new, and economically useful knowledge... and are either located within or rooted inside the borders of a nation state”(Lundvall, 1992) • “... The set of institutions whose interactions determine the innovative performance of national firms” (Nelson and Rosenberg, 1993) • “... The national system of innovation is constituted by the institutions and economic structures affecting the rate and direction of technological change in the society” (Edquist and Lundvall, 1993) • “... A national system of innovation is the system of interacting private and public firms (either large or small), universities, and government agencies aiming at the production of science and technology within national borders. Interaction among these units may be technical, commercial, legal, social, and financial, in as much as the goal of the interaction is the development, protection, financing or regulation of new science and technology” (Niosi et al., 1993) KJ1 Indialics CDS 2016

“... The national institutions, their incentive structures and their competencies, that determine the rate and direction of technological learning (or the volume and composition of change generating activities) in a country” (Patel and Pavitt, 1994) • “... That set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artifacts which define new technologies” (Metcalfe, 1995) KJ1 Indialics CDS 2016

Functional approach to innovation system • Most of the definitions refer to system components and relationships. But a system can also be defined in terms of what it does (its functions). • This alternative approach is the one proposed by Edquist (2005) and others (Galli & Teubal, 1997; Johnson & Jacobsson, 2003; Liu & White 2001; Rickne, 2000). • Applying the functional approach, it has been argued that the major function of innovation system is to bring forward innovations or to create new knowledge. Scholars in this line of research define different sub-functions or activities that contribute to this overall function. KJ1 Indialics CDS 2016

Edquist lists ten such activities/functions/factors influencing innovation: • Research and development, competence building, • Formation of new product markets, articulation of user needs, • Creation and change of organizations, networking around knowledge, • creating and changing institutions, incubating activities, • Financing innovation, and consultancy services (Edquist, 2005). KJ1 Indialics CDS 2016

One could add several other activities/functions/factors influencing innovation. Eg; competition, openness to international trade and capital flows, labor market dynamics, social welfare systems and ‘social capital’. • Lundvall et al (2009) argued that while it might be unsatisfactory to define the innovation system in terms of its components and their interactions it might be equally unsatisfactory to do it by listing activities or functions. • Hence a third way proposed by Lundvall et al is to focus on the innovation process and to draw upon innovation theory based upon stylized facts and rooted in an evolutionary perspective. KJ1 Indialics CDS 2016

On this basis NIS has been defined as: • “The national innovation system is an open, evolving and complex system that encompasses relationships within and between organisations, institutions and socio- economic structures which determine the rate and direction of innovation and competence building emanating from processes of science based and experience based learning.” KJ1 Indialics CDS 2016

NSI: Two perspectives • From the very beginning there have been two approaches to NSI: the narrow - STI- approach aimed at mapping indicators of national specialization and performance with respect research and development efforts of science and technology organizations. • But the broader approach to NSI, which is of much relevance to developing countries, takes into account social institutions, macro economic regulation, financial systems, education and communication and other infrastructures and market conditions as far as these have impact on learning, innovation and competence building systems and process (Gu and Lundvall 2006). KJ1 Indialics CDS 2016

NSI: Narrow and broader approaches Based on: Cassiolatto and Lastres 2004 KJ1 Indialics CDS 2016

Systems of innovation: other dimensions • Regional (Cooke et al. 1997; Asheim and Gertler, 2004) • sectoral Malerba (2002; 2004) • technological (Carlsson and Stankiewicz 1991) system • These perspectives complement rather than compete each other. • By now NSI literature has emerged as the most important works on innovation published during the last two decades (Fagerberg and Sapprasert 2011) KJ1 Indialics CDS 2016

Innovation system and developing countries • NSI however is based on the developed country experience • Need to characterize NSI from a southern perspective • There have been some attempts but much more needs to be done KJ1 Indialics CDS 2016

Locating characteristics of NSI in the South • Actors • Networks • Institutions – hard and soft/ organisations • Interactions • Innovative efforts • Learning • Innovations • Knowledge sources • The challenge is to locate the distinguishing characteristics and evolve appropriate south-specific indicators to undertake theoretically informed empirical work KJ1 Indialics CDS 2016

Addressing the challenge; the relevance of linking development studies with innovation studies KJ1 Indialics CDS 2016

Issue: fostering inclusive and sustainable development under globalisation • Basic premise: to the extent that innovation system is instrumental in development, if development needs to be inclusive, the underlying innovation system that quintessentially has to be inclusive. KJ1 Indialics CDS 2016

Sen vs NSI approach • Path breaking ideas by Amartya Sen on development centered on capabilities, entitlements and freedoms evolved almost in parallel to the Innovation System (IS) perspective. • While Sen’s thinking has had its profound influence on development studies IS perspective by now has become the most widely used approach in innovation studies. • Sen drew attention to the capabilities, freedom and entitlements: IS perspective is concerned with competence building sytems among people and organizations as an interactive process wherein freedoms and entitlements are integral parts. KJ1 Indialics CDS 2016

Sen vs NSI approach • Sen stressed on public action that involves “not merely the activities of the state but also social actions taken by the members of the public – both collaborative (through civic cooperation) and adversarial (through social criticism and political opposition)”. • IS perspective stressed the role of state and other institutions, and interactions among stakeholders involved. • Thus viewed, these two lines of enquiries, while following different intellectual paths, have many parallels that could be helpful in informed policy making for inclusive development. KJ1 Indialics CDS 2016

Exploring exclusion • In understanding exclusion much could be learned from the conceptual and analytical categories of Sen (2000) • Cause of exclusion (Amartya Sen 2000) • Active exclusion: happens when exclusion come about through policies directly aimed at that result; • Passive exclusion: result from policies that have not been devised to bring about that result but nevertheless have such consequences KJ1 Indialics CDS 2016

Exploring exclusion • In terms of the outcome (Amartya Sen 2000) • Constitutive exclusion: happens when being excluded is in itself a deprivation which can be of intrinsic importance on its own. Cases of such exclusion include inability to read and write or not being able to join the labour market due to physical disabilities. • Instrumental exclusion: refers exclusions that may not be depriving by themselves, but can lead to deprivation through consequences of great instrumental importance. Not having a credit market may not be depriving by itself but it could have consequences of deprivations KJ1 Indialics CDS 2016

Exploring exclusion • Joseph (2014) has added following conceptual categories of exclusion/inclusion • Subordinated/unequal inclusion : included but returns are not equally distributed • Illusive inclusion: included but doesn’t help addressing the issues confronted • Transient exclusion and sustained exclusion KJ1 Indialics CDS 2016

Understanding exclusion: innovation system perspective KJ1 Indialics CDS 2016

Concluding observations • Development studies today is at the cross roads: while there appears to be some clue as to how to breed growth, a cookbook for inclusive and sustainable development is yet to be prepared • NSI framework, especially the broader approach appears to be much useful in understanding the issues of development in the less developed countries • Further, to address the issue of inclusive and sustaible development much could be gained by linking innovation studies and development studies. KJ1 Indialics CDS 2016

However, there is the need for further research at the national regional sectoral level with a view to characterizing innovation system in the south and evolving appropriate indicators such that theoretically informed policy research could be facilitated and help informed policy making. KJ1 Indialics CDS 2016

Bridging Development and Innovation Studies for Inclusive Growth