Economic Development <Lecture Note 7> 2013.05.24

1. Economic Development <Lecture Note 7> 2013.05.24 ED: Technological Catch-up * Some parts of this note are borrowed from some of the references for teaching purpose only. Semester: Spring 2013 Time: Friday 9:00~12:00 am Class Room: No. 322 Professor: YooSoo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home P.: //yoosoohong.weebly.com

2. Technology and Development • Definition of Technology • o Technology is the knowledge useful for production of • goods and services. • Importance of Technology • o The history of human being is the history of knowledge • (science and technology). • o Technology and productivity are the main engines of • economic growth. • o Technology is the main determinant of competitiveness. • o Technology affects welfare of individuals and the society.

3. Industrial Economy Stages of Industrial Development in the World Knowledge-based/ Innovative Economy Agricultural Economy • Land • Labor • Natural Resources • Science & Technology • Innovation • Entrepreneurship • Capital • Labor • Management

4. Technology and Development Social Infrastructure, Culture And Institutions Resources for education, health, communication, Employment Advances in medicine, communications, agriculture, energy, Manufacturing, etc. Knowledge, creativity Economic Growth Resources for technology development Productivity gains Technology Development Source: UNDP. 2001

5. Technology and Economic Development • Two Patterns (Stages) of Economic Growth • o Extensive Growth • - Increasing production by increasing input of production • factors • o Intensive Growth • - Increasing production by productivity increase • (More production is possible with the same resources.) • Technology, Productivity and Economic Growth • Technology → Productivity → Trade and Industry → Economic • Growth

6. Technology and Economic Growth First Stage Investment in Technology Creation of Technology Innovation Increase in Productivity Strengthening International Competitiveness Increasing Trade Second Stage Economic Growth Virtuous Circle (Increase sin Income, Demand, Investment, etc.)

7. ◆ USA ◆ Japan ◆ England France ◆ Korea ◆ ◆ Taiwan ◆ German ◆ Canada ◆ Mexico Italy ◆ ◆ China 0 20 40 60 80 100 120 Innovation and Economic Performance - Technological innovation plays a key role in productivity increase, long-term economic growth and enhancing living standards. (Innovation is the engine of growth.) Relative Economic Performance 120 100 80 60 40 20 0 Innovation Capability Note: As of 2000.

8. Two different Development Stages

9. Sources of Economic Growth in Asia (%) Note: TFP= Total Factor Productivity Source: Japan Economic Research Center(1999)

10. Technology Divide • A small number of industrialized countries provide practically all the world’s technology innovation. • Some developing countries are able to adopt these technologies in production and consumption. • The remaining part is technologically disconnected, neither innovating nor adopting foreign technologies.

11. Barriers to Technology Transfer • Lack of access to information on new technologies and innovations. • Inadequate institutional infrastructure, management and marketing human skills. • Organizational rigidities within the firms themselves. • Limited access to finances. • Regulatory constraints. • Inefficient R&D institutes and disconnection from needs of industry. • Inadequate human resources and mechanism for their upgrading. • Lack of resources, knowledge and capabilities within policy institutions. • Low efficacy of government support schemes.

12. Technological Change • Development consists primarily in employing existing resources in a different way, in doing new things with them, irrespective of whether those resources increase or not. (Joseph Schumpeter) • Technological change is a key element in increasing productivity and output. There are seven elements or ingredients associated with contemporary technological change. • Technical Efficiency • Factor Intensity • Elasticity of Factor Substitution • Scale of Production • New Products • Social Relations of Production • Speed of Change

13. Increases in technical change are recognized and usually accompanied by changes in factor intensity, reductions in the elasticity of factor substitution, increases in scale, shifts in products, changes in the social relations of production, and increases in the speed of change itself. • Diffusion of technological change takes time and involves costs, because of its complexity. The nature of technology appropriate to the development process differs from that elaborated abroad because of the different costs and prices present in rich and poor countries. • An appropriate or intermediate technology is likely to combine labor intensity with other characteristics that differ form the most advanced technologies of the affluent countries.

14. Knowledge Economy  Why knowledge now? - “Throughout history, relative economic performance has been closely associated with the capacity of countries to participate in successive technology/knowledge revolutions (agriculture, manufacturing, services, knowledge societies)”; - “Knowledge has played a critical role in differentiating the long run economic performance of countries”; - “In the last 50 years, economic growth has been closely associated with urbanization, emergence of new organizational forms, and regional and global trade—all these trends, in turn, are closely linked to agglomeration of people and ideas”  Concept of KBE or KE - An economy where creation, circulation (dissemination) and utilization of knowledge is the core (engine) of growth. (OECD)

15. Major Economies and Weights in the World

16. Knowledge Gap and Wealth of Nations

17. Emerging Knowledge Economy  Facts about Knowledge Revolution: • Increased generation/codification of knowledge (e.g., patents granted in the US: from 49,971 in 1963 to 175,983 in 2000) • Closer links with science base/increased rate of innovation/shorter product life cycles • Increased importance of education, up-skilling of labor force, and life long learning • Growing investment in intangibles (R&D, education, brands…) – OECD countries spend more than $520 billion per year in R&D • Value added increasingly associated with investment in intangibles such as branding, marketing, logistics/information management • Innovation and productivity increase more important in competitiveness and GDP growth • Increased Globalization and Competition • Constant change and competition implies the need of constant restructuring and upgrading: the ability to create, access and use knowledge is becoming the fundamental determinant of global competitiveness.

19. Innovation

20. Strong Correlation: GDP/Capita and KEI Source: KAM Africa GDP/capita = $2624

21. Importance of Knowledge-Based Economy (KBE) • Global economy is changing the landscape of economies in the world - Knowledge has increasingly become an important means for value creation. - The knowledge content of goods and services is increasing as manufacturing is “dematerializing” and economies are becoming “weightless”. - Globalization and the ICT revolution are emerging in the modalities of creating value. • The Importance of KBE - Knowledge-based economies is a global trend. - Entering the intensive growth stage, innovation and knowledge economy are the engine of growth and development.

22. Especially, governments in Asia are facilitating and creating opportunities toward a more knowledge-based economy and society. • Four pillars of a KBE - Education, including building a skilled workforce - National innovation systems, including science and technology, R&D - Building networks, including ICT infrastructure and social networks - Policy and regulatory (business) environment • New paradigms for managers and policy makers - Distinction between knowledge and information - Recognizing and managing intangibles - Attention to tacit knowledge - Stakeholder capital in a networked economy and society - Value-driven development

23. Interconnected Interdependent The Four Pillars of the Knowledge Economy Biz Environment and Institutional Regime Education Information Infrastructure Innovation Systems

24. Asian governments envision and plan for a mix of KBE - Thailand’s IT2010: “good use of ICT” - e-Korea Vision 2006: “quantitative expansion of the Internet” - e-Japan strategy: “knowledge-emergent society”

25. Knowledge-Based Economy Indicators for the Asian Region

26. Knowledge-Based Development

27. The Four Pillars of a Knowledge-Based Economy • Education and the skilled workforce - Skills required in a KBE such as communication skill, critical thinking and problem solving, sustainable use of resources, development of self and a sense of community, expanding world vision - New teaching and learning strategies - Diaspora (migration of workforce) is critical issue and Asian countries face the issue of retaining the skilled workers. “Brain drain” can be “Brain gain” which raises the skill level of the home country.

28. National innovation systems (NIS) - “A subsystem of the national economy in which various organizations and institutions interact and influence each other in the carrying out of innovative activity.” - Innovation and improvement in technical capacity are the result of a complex set of relationships among actors creating, acquiring, disseminating, and applying various kinds of knowledge. - Actors are private enterprises, universities and public research institutions, relevant financial institutions, and the government.

29. Building Networks - Capacity of ICT to support the development of networks and to establish and maintain connections among individuals, groups, and organizations is considered to be of great use of and value to others. - Benefits of ICT and Networks (The ICT revolution has fast-tracked the innovation process) - Toward an ubiquitous network society (social computing of voicemail, e-mail, online chats, and collaborative applications) - Elements needed in building ICT are an appropriate regulatory framework, readiness and availability of human resources, research and education of IT skills. • Setting the policy and regulatory environments - Policy: legislation, organization/reorganization, and regulations - Planning: formulation of vision, strategy, and road map - Infrastructure and programs: establishing and implementing the needed physical, institutional, and social infrastructure and programs

30. ICT and Opportunities for Development • Education • Basic • Higher • Professional • Less isolation in remote • and poor areas • Community communication centers • Wireless technologies • Health • Preventive health care • Curative health care • Government • Electronic payments systems • Electronic government (tax, customs) • Land titling, registries • Access to information,democratization • Financial sector • International payment systems • Bulk and high value transaction systems ICT holds major opportunities for development • Environmental and natural • resource management • Teledetection • Computerized databases • Ecologically-balanced agricultural management • Business connectivity • Access to internationalinformation for small and large business • Logistic support; e-com

32. Spending as a share of GDP (%) Country Year Sweden 1997 3.85 Japan 1998 3.00 Korea 1997 2.89 United States 1997 2.60 Netherlands 1996 2.09 Taiwan, China 1997 1.92 United Kingdom 1998 1.60 Singapore 1997 1.47 Chinaa 1997 0.65 Indonesia 1995 0.50 Thailandb 2001 0.16 R&D Spending as a Percentage of GDP, Late 1990s Note: a) Includes non-defense R&D spending only b) World Bank 2002e Source: National Science Foundation (2000, 2002)

33. Gross Expenditures on R&D in PPP by Country and as Percentage of Global Expenditures 2010

34. The R&D Input Landscape

35. Lower middle income 2.4 % Upper middle income 4.1 % Low income 0.8 % High income 92.7 % Global Distribution of R&D Expenditures (1997) Source: World Bank SIMA Database, 2002

36. Lower middle income 0.4 % Upper middle income 0.4 % Low income 0.1 % High income 99.2 % Global Distribution of Patenting (registered in the U.S., 2001) Source: US Patent & Trademark Office (USPTO), 2001

37. 80000 payments 1975 70862 70000 payments 2001 62311 receipts 1975 60000 receipts 2001 50000 40000 30000 20000 10000 5861 231 134 1502 3484 19 183 1997 253 148 125 2 0 5 0 Royalty and License Fees, Payments, and Receipts (BoP, current US$, Millions) 0.05 Low income High income Upper middle income Lower middle income Source: World Bank SIMA Database

38. Network Readiness Index (rankings of 82 countries, 02/03) Source: World Economic Forum, The Global Information Technology Report 2002-2003

39. Public Spending on Education (% of GDP) MEAN: 4.74 Source: World Economic Forum, The Global Information Technology Report 2002-2003

40. Availability of Scientists and Engineers 1=non existent or rare; 7=widely available MEAN: 4.88 India Finland United States Sweden Singapore Korea Russia Brazil Trinidad and Tobago Colombia Thailand Venezuela China South Africa Jamaica Dominican Republic Mexico Honduras Bolivia Haiti 0 1 2 3 4 5 6 7 Source: World Economic Forum, The Global Information Technology Report 2002-2003

41. Brain Drain MEAN: 3.76 Source: World Economic Forum, The Global Information Technology Report 2002-2003

42. Public Access to the Internet MEAN: 3.82 MEAN:3.8 Source: World Economic Forum, The Global Information Technology Report 2002-2003

43. Number of Internet Users (per 100 people) MEAN: 38.44 Source: World Economic Forum, The Global Information Technology Report 2002-2003

44. Lessons from Country Experiences  Asian governments envision and plan for a mix of KBE - Thailand’s IT2010: “good use of ICT” - e-Korea Vision 2006: “quantitative expansion of the Internet” - e-Japan strategy: “knowledge-emergent society”  Lessons • Strong leadership and political will • Clear policy direction and adequate support for implementation • Strengthening linkages with the private sector • Exploring innovative ways of achieving desired outcomes • Use of ICT for marginalized groups - Farmers, poor communities, underprivileged sectors have been provided online support. - Rural kiosks in India, Cybercare in Malaysia, Promotion local products in Thailand, IT education in ROK

45. Policy Implications • Knowledge can make a critical difference in the development process. • The risks of a growing knowledge divide, require special attention from policy-makers. In this context, one needs to focus on: • The importance of an effective institutional and economic regime that fosters the creation, dissemination and use of knowledge; • Investments in education so that the population can use knowledge effectively; • The operation of the innovation system (involving R&D centers, universities, libraries, private firms, etc.); - The implementation of a dynamic ICT infrastructure that fosters information dissemination, transparency and digital literacy.

46. In the process of knowledge generation, dissemination and use in a networked environment, special attention needs to be given to: • The balance between protection of intellectual property rights and the preservation of fair use and access to resources in the “commons”; • The challenges of promoting digital literacy; • The potential of public-private partnerships; • The growing demand for transparency; - The importance of context/localization; and - The role of leadership.

47. There is No Choice “The world is moving fast…with or without you!” • Increasing globalization: reduction of transportation and communication costs, increasing global information, increasingly mobile FDI. • Rapid pace of technological change and innovation: Half life of technology is getting shorter. Keep up or fall behind – these are the only options • Increasing competition: driven by trade liberalization and increasingly larger players (e.g., China, Korea, India) plus laggards that want to catch up – Vietnam, Mozambique, Rwanda • Networking and disintegration of production

48. Stages of Economic Development Factor-driven Economy Investment - driven Economy Innovation - driven Economy • Basic factor conditions (low cost labor, natural resources, geographic location) are the dominant sources of competitive advantage • Technology is assimilated through imports, FDI and imitation • Companies have limited roles in the value chain, and focus on assembly, labor intensive manufacturing, and resource extraction • The economy is highly sensitive to world economic cycles, commodity prices, and exchange rates • Efficiency in producing standard products and services is the dominant source of competitive advantage • Foreign technology is accessed through licensing, joint ventures, FDI, and imitation • The nation is not only assimilating foreign technology, but has the capacity to improve on it • Heavy investment is made in efficient infrastructure, modern production process, and ease of doing business • Innovative products and services at the global technology frontier are the dominant sources of competitive advantage • Characterized by strengths in all areas together with the presence of deep clusters • Companies compete with unique strategies that are often global in scope • The economy has a high service share, and is resilient to external shocks Source: Porter, Michael E. Competitive Advantage of Nations, 1990.

49. Stages of Catching-up Industrialization Internalizing parts and components Internalizing skills and technology Initial FDI absorption Internalizing innovation Pre- industrialization Creativity Technology absorption STAGE FOUR Full capability in in-novation and pro-duct design as glo-bal leader Agglomeration (acceleration of FDI) STAGE THREE Management & te-chnology mastere-d, can produce hig-h quality goods Arrival of manufacturing FDI STAGE TWO Have supporting industries, but st-ill under foreign guidance Japan, US, EU STAGE ONE Simple manufact-uring under forei-gn guidance Korea, Taiwan, China-2 STAGE ZERO Monoculture, sub-sistence agriculture, aid depende-ncy Thailand, Malaysia China-1 Vietnam Border to Middle Income Economies Poor countries in Africa Source: Kenichi Ohno. 2009

50. Catch-Up Oriented Industrial Technological Capabilities inDeveloping Countries ExternalSupports IndependentDevelopment CapabilityEnhancement CapabilityEnhancement InternalEfforts Closing toAdvanced Level Capability Enhancement Core Technologies, Advanced Technologies… Industry Planning, Policy, Effects Source: Hong, Su, Lu