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Title: 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 ST 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 populations share of world population and
    their share of world GDP fall over the period
    1820 till 1973. In 1973, the imbalance between
    the worlds concentration of GDP and the worlds
    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 countrys 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
Year CHINA INDIA BRAZIL SOUTH AFRICA
Percentage share of world population Percentage share of world population Percentage share of world population Percentage share of world population Percentage share of world population
1820 36.6 19.9 0.4 0.1
1870 28.1 17.0 0.8 0.2
1913 24.4 14.2 1.3 0.3
1950 21.7 14.8 2.1 0.5
1973 22.5 14.8 2.6 0.6
2001 20.7 16.5 2.9 0.7
Percentage share of world income Percentage share of world income Percentage share of world income Percentage share of world income Percentage share of world income
1820 32.9 16.0 0.4 0.1
1870 17.1 12.1 0.6 0.2
1913 8.8 7.5 0.7 0.4
1950 4.5 4.2 1.7 0.6
1973 4.6 3.1 2.5 0.6
2001 12.3 5.4 2.7 0.5
Source Maddison(2003)
5
RD-expenditures
http//www.sasi.group.shef.ac.uk/worldmapper/
6
Technological revenues
7
2. ST research on the move a) the past
  • Strong focus on industrial RD 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 RD
    statistics.
  • What became distinctive about modern, industrial
    RD was its scale, its scientific content and the
    extent of its professional specialisation. Joel
    Mokyr calls tight ST
  • 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
    RD investments and more low-technology
    intensive, more craft techniques based
    industries, with very little own RD efforts.

8
Industrial technology policy
  • In many policy debates, industrial dynamism
    became associated with the dominance in a
    countrys 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 50s, 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 RD/GDP
    target e.g., arose primarily from concerns that
    Europes industrial RD appeared to lag far
    behind that of the other technologically leading
    countries such as the US and Japan.
  • The assumption was that more RD carried out in
    Europe would be a crucial factor behind Europes
    attempt at becoming the most competitive region
    in the world. Obvious that RD 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 RD 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 RD 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 RD definition and its
    policy support
  • Professional RD with professional SE manpower
    versus routine production with routine high/low
    skilled manpower
  • Dominance in-house RD over outsourcing,
    licensing, open innovation
  • STS activities such as design, engineering, etc.
    outside of RD
  • Systemic interactions between various knowledge
    creation and users components
  • At innovation side blurring distinction between
    innovators and users
  • Innovation sometimes outside of RD system,
    associated with entrepreneurs
  • Innovation as novelty with respect to firms
    market, countrys 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 RD 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 RD 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 RD
  • 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 RD 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 RD 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 lespace 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
    Fords 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 NGOs and multinational firms in the
    development of BoP laboratories embedded in such
    environments, not part of traditional high tech
    RD 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 (lt
    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
    microcredit 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.

23
(No Transcript)
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
Mutually reinforcing effects
0,16
  • 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
  • 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
  • Disruption
  • Recession gt 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

Continued Slowdown
Severe
Moderate
Economic Global Recession
Source McKinsey Global Institute
29
Global developments
  • 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
  • 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

Early Recovery
Capital Markets Crisis
  • 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
  • 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

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 RD
  • 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.
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