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3.3.4 Applications of technological capabilities
At several points we have mentioned the role of government in the processes by which technological capabilities in microelectronics are acquired.64 This role is no less important in determining the types of innovations that flow from these capabilities and it is exercised broadly in two (often closely related) ways. The first is indirect, through the influence of the country's overall development strategy, and the second is in the form of direct interventions.65 We shall discuss each of these in turn.
3.3.4.1 The role of development strategy
One extremely important aspect of development strategy is that large countries have a much greater potential for independence from international trade than small countries. This distinction has powerful implications for the pattern of technical change in general and of innovations in microelectronics in particular.
For example, large 'inward-looking' developing countries have the opportunity to produce a set of innovations that is more appropriate to local circumstances and needs than technologies imported from advanced countries. Achieving this possibility, however, often seems to be hindered by the high degree of protection behind which the technological capabilities themselves are created. India's protected microcomputer industry is an important, albeit perhaps somewhat extreme, example of this problem. In that case, 'so much protection' was granted to the local microcomputer manufacturer that there was no incentive for this firm to produce products that were in any sense appropriate to local needs. In the Brazilian microcomputer case, a more favourable outcome of protection seems to have emerged: 'Despite sometimes higher prices than those in the developed countries, products are more appropriate to the local needs because they are designed to match local requirements' (Tigre, 1983, p. 173).
These examples highlight the possibility that microelectronics innovations in 'inward-looking' developing countries may be appropriate in some dimensions (such as adaptations to the local environment) but inappropriate in others (such as cost). And both examples raise the crucial policy question of how to secure innovations that are appropriate in all relevant dimensions. This is apparently unlikely to occur either with excessive protection, or (for a different reason) with too little (or no) protection.
Small countries, as noted above, are generally much more dependent than large countries on international trade.66 It is sometimes argued that the need to conform to international export standards robs these countries (such as the East Asian NICs) of an incentive to generate appropriate innovations. Fransman's (1986b) study of CNCMT producers in Taiwan and Japan, however, suggests that there may be important ways in which this view fails to capture the reality of the innovation process in 'outward-looking' developing countries. Using a four-dimensional index of product quality, he tries to 'quantify the price and quality differential that existed between Taiwanese CNC machine tools and the best quality competing product in export markets' (Fransman, 1986b, p. 1391). He concluded that the mean price differential was 70%, while the quality differential ranged from 82 to 93 % of the performance of the best competing machine. Thus, the adaptive innovations evolved by Taiwanese producers enabled purchasers of these machines to obtain a somewhat diminished performance (relative to the best competing product), but for a more than proportionate reduction in price. The explanation of this pattern of innovations seems to be that Taiwanese producers are competing principally in the less exacting markets of other developing countries (ibid., Table 5B) and in those markets in developed countries that are highly sensitive to price.67
These few examples are probably enough to suggest that the pattern of innovation in microelectronics is not any simple derivative of a country's development strategy. These examples also raise the issue of precisely which technical capabilities are required for appropriate innovations. For many such innovations (which are often incremental or adaptive in character)68 it would seem, for example, that a full 'own-capability' in microelectronics (in the form of domestic production of semiconductors) is neither a necessary nor a sufficient condition.
3.3.4.2 Direct government interventions
The question of whether microelectronics capabilities can be used to promote the welfare of those who live in poverty (mostly in the rural areas) in the Third World arises more directly in regard to institutions owned by the state itself. For, while privately owned firms respond only indirectly to government policies, the state intervenes directly in many areas of most developing countries (such as telecommunications, health, education, and so on).69 For many of the poorest people in these countries, it is only in such areas that any direct contact with new microelectronic technologies may conceivably come about. To understand the effects these technologies have on income distribution, it is of the utmost importance to recognize the numerous innovations in the public domain that have been designed expressly to make this contact possible.
One example is described by Hobday (1986b) in a study of the Research and Development Centre of Telebras (the Brazilian Telecommunications Administration). He shows how a small-scale, low-capacity, public exchange system for rural and low-density urban use evolved (among numerous other innovations) out of the research activities of this Centre. Another example is the Project for Strengthening Health Delivery Systems in Central and West Africa, which uses microcomputers 'to improve regional and national disease surveillance, health and demographic data systems, and to integrate these systems into national health planning systems' (Munasinghe et al., 1985, p.121). Further examples can be drawn from the ongoing research area known as technological 'blending', which in a narrow sense refers to the possibility of combining elements of new and traditional technologies, but which, more generally, deals with applications of new technologies in traditional sectors (see Bhalla et al., 1984; Bhalla and D. James, 1986, 1988; Rosenberg, 1988). Among the most interesting cases that this research has uncovered are the System for Computer-Aided Agricultural Planning and Action to assist rubber small-holders in Malaysia and the use of electronic load-controllers in micro-hydro projects in a number of tropical developing countries.70
The major question that arises from these direct applications in the public sector is whether (and under what circumstances) they are likely to be replicable on a scale that is significant at the macroeconomic level of developing countries. The answer to this question will depend in part, of course, on the purely technical ease with which these types of applications can be made (see Rosenberg, 1988). But the answer will also depend heavily on political factors, and in this regard much can be learned from the available literature that attempts to explain why so many past efforts to secure more appropriate technologies appear to have been unsuccessful. A major finding of this literature is that past failures are 'to a considerable extent ... the consequence of the political economy of the required policy changes' (Stewart, 1987, p. 295). More specifically, 'many of the policies necessary to promote AT [appropriate technology] would strongly conflict with the interests of dominant groups' (ibid., p. 295).
Two conclusions for policy may be drawn from this overall finding (ibid.) and both of them would appear to condition in a powerful way the feasibility of microelectronics innovations that are designed to benefit those groups living in poverty in the Third World. The first is that any widespread introduction of appropriate technologies will not normally occur without a fundamental shift in political power in favour of these groups.71 The second is that there is (nevertheless) likely to be scope for particular interventions in specific country circumstances depending, for example, on the degree to which processes designed to assist certain disadvantaged groups also threaten the interests of the dominant groups in society.
3.4 Policy implications and future research directions
3.4.1 Normative aspects of policy formulation: 'What governments ought to do'
Formulation of policy towards microelectronics in developing countries requires a sound understanding of the impacts of these technologies. The findings of this chapter suggest, however, that this understanding is lacking in many areas of the existing literature.
The first of these areas is adoption and diffusion of new technologies. In particular, to the degree that the impact of new microelectronics technologies is influenced by the form and rate of their diffusion in developing countries, it becomes essential to throw additional light on the factors that condition these processes. Some excellent case studies provide a start in this direction for specific sectors and regions, but considerable scope remains for further research.
This chapter suggests that it might be helpful to base such research on a distinction between factors of supply and demand. It was suggested, further, that in regard to supply factors, much depends on the degree to which new technologies give rise to a set of proprietary assets and (when they do) on the mechanisms that owners of these assets choose to exploit them. There is some evidence, for example, that this choice depends on whether multinational firms (as the major owners of proprietary knowledge in microelectronics innovations) are oriented towards production for domestic markets in developing countries or for export.
On the demand side, attention was drawn to the need to distinguish different groups of agents involved in the adoption process, namely, privately owned firms, state-owned enterprises, and individual households (or groups of households). The necessity for this distinction was shown to arise not only from the fact that each group generally pursues a different set of goals within a diverse set of constraints, but also because the demands of each tend to relate to a quite different set of microelectronics-based innovations. In explaining the behaviour of these various groups (as well as those on the supply side), this survey took pains to emphasize that, in relation to each, one can point to a substantial literature on which future research can and should draw. We find, tentatively, that on both the supply and demand sides, the bigger and more developed countries of the Third World are generally best placed to benefit from microelectronics-based innovations. In some respects, moreover, this tendency towards polarization may be cumulative, leading to even further divisions in the future.
A second major component of a future research effort will need to address systematically the economic impacts of the diffusion patterns revealed by the research advocated in the previous paragraph. Unlike many studies on the impact of the Green Revolution (cf. Binswanger and Ruttan, 1978; Scobie, 1979; Lipton and Longhurst, 1989), literature on microelectronics has become remarkably dissociated from economic analysis in general and development economics in particular. This tendency has led to neglect (in varying degrees of completeness) of a wide variety of potentially important economic relationships. These can be categorized into three main groups.
The first set of relationships concerns the distinction between sectoral (or partial) and economy-wide (or general equilibrium) impacts in analysis of major government initiatives to address factors such as output, employment, and income distribution. The former method applies when the impact of microelectronics on a sector or region in the Third World is sufficiently small as to be marginal in relation to other sectors (as will tend to be the case, for example, if the relevant region or sector is very small in relation to the rest of the economy). There is not much evidence to draw on at this level. What few studies do exist suggest that unemployment is by no means an inevitable consequence of adopting new techniques. On the contrary, export demand may have more than offset the labour-saving effects of these technologies in several cases, leading to a net increase in labour demand.
I am aware of no studies, however, at the general equilibrium level of analysis. This type of analysis is relevant when the impact of microelectronics in a sector or region is nonmarginal relative to the economy as a whole (a major new investment in a fully automated shipyard, for example, might fall into this category). The point is that in these cases it becomes essential to consider various economy-wide effects of new technologies. Our review of economy-wide models of developing countries that incorporate technical change pointed to some of the forms that these effects are likely to take. One such model, for example, showed how technical change in one sector affects the demands for inputs and outputs of other sectors. Another economy-wide model draws attention to the likely effects of technical change on capital accumulation and population growth in developing countries. To what extent (and in which directions) these (and other) macroeconomic effects are likely to occur in the specific case of technical change in microelectronics is a question that will demand considerable theoretical and empirical analysis.
A second (and related) area of research on economic impacts concerns the relationships between adopters and non-adopters of new technologies. As shown in Section 3.3.2, the literature in this area focuses overwhelmingly on just one aspect of these relationships, namely, the possibly negative effects that adoption of new technologies by developing countries may have on the comparative advantage of developing countries. Our examination of this possibility showed that the (usually implicit) microeconomic model that underlies it is far too simple to capture the variety of adoption patterns and locational tendencies that can be observed in different branches of microelectronics. More complex models of investment behaviour need, accordingly, to be applied to the question. There is also a need to consider other neglected aspects of the relationship between adopters and non-adopters: (1) to consider firms and households (as well as countries) as the relevant trading units; (2) to incorporate demand-side factors of product quality (as well as costs and supply) in analysing the relationships between trading units; and (3) to include the effects of changes in imports (as well as changes in exports) on developing countries. It bears emphasizing that study of these neglected areas will (in most cases) depend upon more data than are currently available on patterns of adoption by the various economic agents identified earlier in this section.
The final aspect of impacts that was addressed in this chapter deals with the acquisition of technological capabilities and the nature of innovations that arise from them. In regard to acquisition, emphasis was again placed on the proposition that the outcome depends on the specific form in which the new technologies are diffused to different parts of the Third World. More specifically, some rather sketchy evidence was cited to suggest that the acquisition of capabilities in microelectronics is sensitive to the form (such as licences, foreign investment, imports of consumer durable goods and machinery) in which the new technologies are actually transferred to the developing countries. Evidence is also available to support the contention that some developing countries have acquired substantial production, as distinct from user, capabilities in electronics. And with respect to these countries, we posed the important question of whether the acquired capabilities have led to a different-and more specifically, to a more appropriate-pattern of innovation than would result from reliance on technology imports from the developed countries. Although there is little systematic evidence on this question, it seems clear to us that in formulating an answer to it, particular attention will need to be focused on the direct and indirect role of government in the developing countries concerned.
3.4.1 Normative aspects of policy formulation: 'What governments ought to do'
Even if a substantial amount of research on the impacts of microelectronics was to be conducted in the areas described above, there would still be an inadequate empirical basis for the formulation of policy. One major reason is that the study of impacts tends to provide only partial information about the social gains and losses from different policies, and it is on the basis of these magnitudes that governments 'ought to behave'. But since governments often have different objectives (or objectives with different weights), and since these differences influence what is considered socially desirable, there is no universally applicable policy prescription. Countries which regard technological self-reliance as highly important, for example, are likely to consider as socially optimal a very different set of policies than countries which accord little or no weight to this objective. Particularly because the rate of technical change in (some areas of) microelectronics is very rapid, moreover, the question of what governments 'ought to do' in this sense has an important dynamic (as well as a static) dimension. For example, Dahlman et al. have suggested that:
A static comparison of the choice of technology to make mechanical watches or electronic watches in a labour-abundant economy may show that the technology for mechanical watches has the highest benefit-cost ratio among existing technologies. But because electronic watches probably will soon make mechanical watches and their technology obsolete, the better choice may be electronic watches, despite their lower apparent benefit-cost ratio. This choice is more apposite if little of the experience acquired by producing mechanical watches can be transferred to the production of electronic watches. Moreover, producing electronic watches from the start may enable the building of skills that will later be useful for more complicated electronic watches and other products that have electronic components.... choosing the right technology involves simultaneously optimising the static and dynamic elements of the choice.
(Dahlman et al.. 1985, p. 13)
Dynamic issues arise, too, in relation to policies designed to protect local technological capabilities. In particular, it is important to be able to establish (albeit somewhat crudely) the differential social costs and benefits of intervening in alternative areas of microelectronics (such as microcomputers, telecommunications, and computer software). However, in part because the literature on what governments 'ought to do' is typically rather general (see, e.g. Wad, 1982; Hoffman, 1984; Commonwealth Secretariat, 1985), there is very little solid empirical evidence available to answer specific questions such as these.72
Part of the problem is that the information needed to address this and similar questions relates to the difficult area of 'dynamic externalities' between sectors, and more specifically to the idea that positive externalities may be created by a certain sequence of policies. Concentration on a particular 'leading' sector, for example, may confer advantages on, and opportunities for, other related sectors (Mody, 1989). Part of the success achieved by Taiwan and Korea in electronics production is thought by some economists to be due precisely to the emphasis that was paid by these countries to policy sequencing in general, and to the role of consumer electronics as a leading sector in particular (ibid.). Much more needs to be known, however, about the circumstances in which particular sequences and packages of policies are likely to yield different types of external effects (and how large these effects are likely to be).
Policy-making would benefit also from a heavier research focus on the problem of uncertainty that is so pronounced in the rapidly changing world of microelectronics. For, in these circumstances, what governments 'ought to do' is often far from clear, especially when scale economies and other forms of cumulative causation are also present (ibid.).
Beyond the related problems created by the pace of technological change, by the specific policy sequences, and by uncertainty, the circumstances under which different policies towards electronics are likely to be feasible needs to be considered. One dimension of feasibility is economic, and in this context it is useful to consider the advocacy of small-scale, decentralized production based on new technologies in developing countries (see, for example, Sahel, 1984; Perez, 1985; Schmitz, 1990; and Kaplinsky, 1990). Though the potential for this type of production does indeed seem inherent in certain aspects of microelectronics (namely, those that reduce the importance of plant-level economies of scale, and allow greater flexibility in production),73 few authors have identified the specific circumstances under which it is likely to be achieved. A notable exception, however, is Maxwell's (1983) study of economies of scale in Argentina. On the basis of detailed case-study evidence, he suggests that small-scale firms are likely to possess a competitive advantage in several specific areas of microelectronics, including industrial process control, office automation, medical electronics equipment, educational computing, and applications software in general. Small firms appear to possess an advantage in these areas, mainly because they are especially well placed to meet what are described as 'idiosyncratic' local needs. But this advantage, as Maxwell is concerned to stress, is inherently self-limiting.
For if the volume of business started to grow to the point where large series manufacture (e.g. of microcomputers) was involved, the business would then be likely to become obvious and attractive for entry by the 'big battalion' companies.... Their strategy would then be to adapt one of their standard-range models in the required direction and proceed greatly to undercut the small local manufacturer in terms of cost and price.
(Maxwell, 1983, pp. 236-37)
Whether findings similar to those described by Maxwell apply also to other developing countries is an important priority for future research.74
Another dimension of feasibility is political. Since so many of the impacts that we reviewed were heavily conditioned by government policies (either directly or indirectly), it is essential to understand the forces of political economy that underlie these actions. Only three of the case studies that we cited (those by Grieco, 1984; Evans, 1985; Evans and Tigre, 1989) sought to undertake this task in a systematic way and there is considerable scope for research along similar lines in other contexts.
Not all the constraints confronting the various policy-making institutions in the sphere of microelectronics, however, are related to political economy factors. Some of them appear instead to involve problems connected with analysis of industrial organization (though, of course, these problems may themselves be intertwined with political economy factors). To this extent, there is additional scope for detailed analysis of how organizational constraints bear on different types of institutions (such as government ministries and state-owned enterprises) involved in making policy towards the electronics sector. In many countries, research of this kind will probably include institutions entrusted with science and technology policy in general. Though they have often performed rather poorly, these institutions have all too rarely been the object of adequate social science research.
Closely related to the question of political and institutional feasibility is what Hirschman (1967, p. 130) called the 'basic dilemma of project design in an underdeveloped country'. This dilemma arises from the following type of technological policy problem.
It could be argued that a country without much experience in solving technological problems should stay away from projects requiring a large capability in this regard. But the opposite course can also be defended: how will the country ever learn about technology if it does not tackle technologically complex and problem-rich tasks? In this reasoning a certain 'unfitness' of the project for a country becomes an additional and strong argument for undertaking it; for the project, if it is successful, will be valuable not only because of its physical output but even more because of the social and human changes it will have wrought.
(ibid., p. 129, emphasis in original)
Because effective operation of so many microelectronics technologies seems to depend heavily on various types of capabilities, this type of policy dilemma is likely to be a very real one indeed for the countries of the Third World. In escaping from it, much can be learned, as Hirschman suggests, from the past experience of development projects.
Many people have contributed to the various stages involved in the preparation of this survey. I am especially grateful to Ajit Bhalla, Wilma Coenengracht, Charles Cooper, Martin Fransman, Gerd Junne, Raphael Kaplinsky, Ashok Mody, Luc Soete, and Rob van Tulder.