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1.4.1 The relevance of innovation studies

This section gives six main conclusions on the relevance of innovation studies to developing countries. Issues that cut across these points are discussed in Section 1.4.2.

1.4.1.1 Strategies towards innovation

An obvious place to start is with the concept of the firm that emerges from innovation studies. This concept is quite sharply differentiated from the firm of standard Marshallian microeconomics. In innovative industries, firms compete primarily by introducing new products and processes, and not by simply adjusting to the optimum position on a given short-run cost curve. Firms may follow various strategies: they may seek to innovate; they may imitate products and processes brought in by innovating firms; or they may continue with older products and processes and seek other advantages (to compensate for their technological disadvantages), like lower material costs, or lower real wages.

Innovative and imitative strategies require that firms accumulate the appropriate technological capability. Firms' positions in this regard are (obviously) a function of their history: the capacity to innovate or imitate is 'path dependent'. Non-innovative firms try to compete on price-and since product markets are inherently imperfect (partly because of innovative competition), they may survive despite technological disadvantages. These ways of differentiating between firms (by history) might be the basis of a useful typology of industrial firms-somewhat similar to typologies of modes of production employed by agricultural economists. Such a typology would help industrial researchers in developing countries to distinguish the different responses there might be to particular policies - for example, to policies to encourage firms to import technologies from abroad, or to build up their technological capabilities. It would also help to specify which firms would follow technologically static, cost-reducing survival strategies.

1.4.1.2 Accumulation of technological capability

Innovation studies strongly emphasize firms' historic accumulation of technological capability as a basis for innovative competition (i.e., for attaining innovative leads and for successful imitation). There is a presumption that imitation usually calls on a subset of the technological capabilities needed for innovation. In industries in developing countries, imitative strategies, often based on licensing contracts or on deals with foreign machinery suppliers, will have priority. In more technologically advanced countries, there may well be some incremental adaptive innovations. Innovation studies point out the importance of policies to build up relevant capabilities for imitation in Third World industries. They also indicate that access to 'codified' (i.e., 'written') knowledge contained in licence agreements is not sufficient for a firm to imitate successfully, The transfer of 'tacit' knowledge about the new product and/or process is also needed, and this knowledge can usually be obtained from innovation firms. Although there is a consensus that accumulation of technological capability is an essential dynamic requirement for most strategies in innovative industries, knowledge of the underlying learning process is still imperfect, especially in developing countries. It is agreed that learning (including 'learning-by-doing') is not automatic but needs allocation of resources.

1.4.1.3 Changes in the global economy

As far as industries in developing countries are concerned, the need to confront innovative competition and the capabilities required to sustain it has become more pressing because of two important shifts in the international economy. First, there has been a shift away from import-substituting and other closed-economy approaches to industrialization, towards industrialization with a more open-economy emphasis, including, of course, export promotion. Second, new technological developments (in microelectronics, biotechnology, and other fields) have penetrated many sectors that were technologically stagnant during the 1970s and most of the 1980s.

The first of these shifts means that industrialization policies are increasingly concerned with the entry of domestic firms into industrially oligopolistic markets. The second means that innovative competition arises in an increasing number of sectors, including for example, textiles and garments. Third World industrialization policies need increasingly to take innovative competition into account.

1.4.1.4 Intersectoral variability

Despite the widening field of application of new technology and innovative competition, there are still considerable differences between sectors, in terms of the demands for technological capabilities for imitative strategies. Firms in developing countries naturally tend to enter international markets in technologically less demanding sectors. In countries where industrialization has been particularly successful (like some NICs for example), initial entry into technologically simple international sectors has been followed by subsequent entry into technologically more sophisticated industries with higher value added. This strategy (of climbing the technological ladder) has been associated - especially in South Korea- with highly successful learning processes and very rapid growth of exports, based on increasing value added per worker, and accompanied by rising real wages. Other countries, like Hong Kong, have been slower to diversify 'upwards'. Innovation studies, especially as they relate to imitative strategies, give a picture of the kind of learning processes involved in these alternative strategies.

There are, finally, other countries whose industries are initially able to export using relatively old product and process technologies, but whose ability to maintain their position in international markets comes to depend on other (i.e., nontechnological) means of cost reduction. In the longer run, the welfare implications of keeping firms in export markets despite static and backward technology can become unfavourable-for example, if real wages have to be forced down.

1.4.1.5 Intrasectoral variability

There are also intrasectoral differences in the incidence of innovative competition. In some sectors firms using older processes and products adopt strategies which allow them to survive despite rapid technological change in other parts of the sector. They are able to do this because a residual demand may remain for older, less sophisticated products in a part of the market. Firms in developing countries are sometimes able to exploit such 'niche' markets, which result from the high degree of market segmentation and imperfection which characterize innovative industries.

1.4.1.6 Nature of competition

The nature of competition in innovative industries - and the increasing range of industrial sectors experiencing innovation-raise special problems for firms in the least developed countries. It is widely presumed that firms are technologically backward, and, perhaps more important, technologically stagnant and therefore lacking experience in any kind of learning process. Very little research has been done on such firms. Thus, it is as yet not clear how far such strongly pessimistic assumptions are justified.

1.4.2 Some general issues

Cutting across the conclusion discussed above are three main points, which are pertinent to industrial policies everywhere, and which are especially emphasized by innovation studies. At the risk of some repetition they are discussed below.

The first is that technological capabilities, and the way they are organized institutionally, are relevant to industrial policy in the Third World. Initial availability of such capabilities will determine the possibilities of entry into global industries. Furthermore success in building up these capabilities will influence the firm's abilities to survive in these industries in the longer run. This point applies across the board (i.e., to industries where technology at the time of entry is relatively stagnant and price competition may be the norm, as well as to sectors where innovative competition is dominant).

The second point is that the learning processes which underlie cumulation play an important role in determining points of entry. Understanding of these processes is improving through empirical research. The earliest approaches by Arrow (1962), Kaldor and others postulated learning-by-doing as automatic and related usually to the cumulative production of firms. This approach leads to analytically convenient formulations but it does not fit reality and is potentially seriously misleading. Many empirical researchers have pointed out that learning requires resources of various kinds, as well as skilful organization and management. It is not automatic, and the direction it takes depends on the decisions which firms make. It is perhaps fair to add that the 'doing' aspect-that is the link to production experience remains as a necessary, but not sufficient, explanation of the cumulation process.

The third point is that the imitative process becomes a central concern. For the most part, firms in developing countries will be mainly imitators for the immediate future, although the Korean experience shows that this situation need not continue indefinitely. Imitation is mediated in various ways, depending on the sector, the extent of innovative competition, and no doubt on many other conditions. Common modes of imitation are licensing agreements, joint ventures, or other types of foreign direct investment. Other types of technology transfer, through producer goods suppliers or engineering bureaus, also promote the imitation process. Intuitively, there are likely to be relationships between these different types of technology transfer and the process of accumulating technological capability (i.e., learning), in firms. Some may be more favourable than others to local learning.

Acknowledgements

The author thanks his colleagues at UNU/INTECH for valuable comments- especially Larry Westphal-participants at the Development Economics Seminar at the Institute of Social Studies in the Hague, at seminars at Queen Elizabeth House, Oxford, and UNU/INTECH, Maastricht. A draft version of this chapter was previously circulated as UNU/INTECH Working Paper No. 3: Are Innovation Studies on Industrialized Economics Relevant to Technology Policy in Developing Countries?

Notes

1. 'A model which took account of all the variegation of reality would be of no more use than a map at the scale of one to one' (Robinson, 1962, with a reference to Lewis Carroll, 'Sylvie and Bruno').

2. Sanjaya Lall has shown in a series of important papers that, from 1979 onwards Indian technological capabilities have accumulated to the point where India is an exporter of technologies. (See, for example, Lall, 1984a.)

3. Dosi, Pavitt and Soete (190) suggest that Marshallian competition might be a limiting cave appropriate to situations in which innovation teas ceased.

4. Economic theory teas often lagged behind changes in economic systems, or changes in policy. There are many examples, of which the Prebisch justification for import substitution is especially well known. For speculation along these lines about the Prebisch-Singer thesis, see Cooper and Fitzgerald (1989, p. 12). More appositely, it is worth noting that changes in perceptions of the innovative process are quite frequency ascribed to historical changes affecting industry structures. See, for example, Freeman (op cit., p. 10) on Schumpeter's change in view on sources of innovation, in particular his recognition of the role of intrafirm research and development.

5. There are useful surveys in Dosi (1988) and Dosi, Pavitt and Soete (1990).

6. The concept of 'quasi-monopoly' as applied to the temporary advantage of an innovating firm was first used by Vernon (1966).

7. The specifications which follow are drawn in part from the discussion in Dosi, Pavitt and Soete (1990, Chapter 4 on 'The Innovative Process'), which in turn draws on a large body of theoretical and empirical literature.

8. Frances Stewart and Jeffrey James (1982, pp. 9 ff.) apply the idea to the context of developing economies. Elsewhere Stewart (1979) used the localization of technological change in the Atkinson and Stiglitz style to explain why technology from industrialized countries is inappropriate for developing countries.

9. David makes much wider inferences, well beyond the idea of localization: 'Choices of technique become the link through which prevailing economic conditions may influence the future dimensions of technological knowledge' (op. cit., p. 4). There is a useful discussion of these ideas in Rosenberg (1982, p. 166 et seq.).

10. Rosenberg (1982, pp. 120 ff.) broadens the concept to cover 'reaming by using'. The automaticity of the learning process as formulated by Arrow (op. cit.) has been strongly criticized by a number of authors, including Bell et al. (1982, 1984).

11. Or what Dosi describes as 'cumulation ... in the acquisition of problem solving capacities' (Dosi, 1988, p. 1128).

12. In his first formulation of the economics of innovation, Schumpeter was much concerned to explain monopolistic rents from innovations as a return to entrepreneurship (Schumpeter, op. cit.). In a modem setting, the role of these rents is much simpler to understand: they are perceived by businessmen as the 'return' to the (often massive) allocation of resources (like R&D resources) to the production of innovations.

13. The history of industrialization (and of industrial technology) is in a sense an account of sectoral patterns of innovation which change over time: innovations ID the United Kingdom during the Industrial Revolution were centred in the textiles vector itself. Later, as the capital goods sector emerged, innovations in textiles machinery and many other types of equipment came more and more from machine-making sectors. Further in response to bottlenecks in textile inputs (bleaching agents and dyestuffs in the first instance), the chemicals industry-the first 'science-based' vector- emerged. The story continues: it is hardly surprising that there should be intersectoral differences in innovation in modern industry which is a product of the historic process.

14. Discussions of these chapters of Capital can be found in Rosenberg (1982, Chapter 2, an essay reprinted from the Monthly Review, Vol. 28, July-August 1975). See also Cooper (1971). Marshall also reflects on the emergence of new forms of industrial organization and their relationship to the application of science to production (Marshall, 1899, Book IV, Chapters VIII and IX).

15. Freeman (1989) points to the relationship between innovation and product differentiation. He describes 'defensive' innovation (which is highly R&D intensive), as follows: 'Defensive R and D is probably typical of most oligopolistic markets and is closely linked to product differentiation' (p. 176).

16. Cooper et al. (1974) attempted to link the Sylos-Labini framework as developed by Modigliani (1958) to explain barriers to entry and intra-industry patterns of competition.

17. See Mansfield et al. (1981): 'It has long been recognised that the costs of imitating new products have an important effect on the incentives for innovation.... If ... firms can imitate an innovation ... substantially below the cost to the innovator of developing the innovation, there may be little or no incentive for the innovator to carry out the innovation'.

18. On the importance of incremental improvements to production processes see Enos (1962).

19. In fact, Freeman distinguishes six typos. His sixth category, 'Opportunist strategy', is not necessary for our discussion.

20. Freeman may understate the significance of innovation in the traditional sectors, or at least the technological pressure under which such firms have come, especially in recent times. Traditional firms are generally 'supplier dominated', and may from time to time be faced with a critical need to adopt new technologies as a matter of survival (or as an interim measure to drive costs down as far as possible by real wage reductions). This is evidently happening in a number of vectors because of the incidence of new microelectronic control systems, which widen the range for mechanization (see Hoffman and Rush, 1988, for a discussion of the garments industry).

21. An early attempt to specify 'Channels and Mechanisms of Technology Transfer', which draws this distinction, is given by Cooper and Sercovich (1971). There is a survey of literature on this question in Stewart (1981).

22. There is some evidence that European technology-supplier firms to Indian industry are increasingly sensitive to the creation of potential compositors, especially in view of increasing composition in their home markets from the newly industrialized countries (see Cooper, 1988). But Bell and Scott-Kemmis (1988) express doubt whether this is two of British firms.

23. 'It is obvious that there is no room in economics for long chins of deductive reasoning' (Marshall, 1899, edition 1966, p. 644). It is a little unclear whether Marshall intended this as a statement of fact or as a normative judgement. As 9 statement of fact, it has not boon borne out by recent developments in economics, many of which bear witness to a willingness to pursue long chains of deduction, to the almost total exclusion of embarrassing facts. Since Marshall was well aware of the methodological weaknesses of economists, it seems to me more reasonable to regard this as a normative statement-a stern warning in fact.

24. An important qualification to this is implicit in Freeman's further remarks that 'Unless imitators enjoy significant market protection or privilege they must rely on lower unit costs of production', and, in relation to innovative strategy in developing countries, 'even a successful imitative strategy, although it may lead to industrial development, will reach a point where export competitiveness in labour costs may increasingly conflict with the goal of higher per capita incomes' (op. cit., pp. 170 and 184). These arguments as they apply to trade patterns will be developed more fully below.

25. See, for example, Dahlmann and Westphal (1982), and Bell d al. (1982) for a review of some of these. See also Dahlmann et al. (1987), and Pack and Westphal (1986).

26. Subsequently, arguments about tendencies to sub-optimal investments as a justification for interventions by a social welfare state were largely brushed aside by the crude empiricism that 'bad markets are better than bad governments'. This of course is just as impossible of proof as was the crude delinking argument of the descriptive Dependency school.

27. The best known attempt at superordination is Chenery, 1961.

28. For a detailed history of Indian policy and experience see Nayar (1983). A critical accounts of Indian policy is in Desai (1988).

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