Elsevier

World Development

Volume 39, Issue 7, July 2011, Pages 1204-1212
World Development

The Role of Foreign Technology and Indigenous Innovation in the Emerging Economies: Technological Change and Catching-up

https://doi.org/10.1016/j.worlddev.2010.05.009Get rights and content

Summary

This article explores in depth the role of indigenous and foreign innovation efforts in technological change and catching up and their interactions in the emerging economies. It presents original evidence and argues that, despite the potential offered by globalization and a liberal trade regime, the benefits of international technology diffusion can only be delivered with parallel indigenous innovation efforts and the presence of modern institutional and governance structures and conducive innovation systems. This conclusion is compounded by the expected inappropriateness of Northern technology for countries in the developing South that calls for greater efforts to develop indigenous innovation. In this sense, indigenous and foreign innovation efforts are complementary.

Introduction

It is widely recognized that differences in productivity are a major source of cross country income variations and that technological change is a driver of productivity growth. Technological innovation is, therefore, a key element of industrialization and catch-up in developing countries. One of the controversies is whether the sources of technological change are indigenous or rather based on foreign innovation efforts, or a combination of the two, and which combination. On the one hand, innovation is costly, risky, and path-dependent. Hence it is more efficient for developing countries simply to acquire foreign technology created in developed countries. In principle, if innovations were easy to diffuse and adopt regardless of their nature and type, a technologically backward country could catch up rapidly by absorbing the most advanced technologies (Barro and Sala-i-Martin, 1995, Eaton and Kortum, 1995, Grossman, 1994, Romer, 1994). With the expectation to “trade market for technology,” many developing countries “raced to the bottom” to attract foreign direct investment (FDI) using various financial and fiscal incentive schemes.

On the other hand, there is the view that technology diffusion and adoption is neither costless nor unconditional. It relies on substantial and well-directed technological efforts (Lall, 2001, Lall, 2005) and on absorptive capacity (Cohen & Levinthal, 1989). An additional related difficulty in the debate on indigenous versus foreign technology upgrading is due to the fact that technical change is often biased in a particular direction and foreign technologies developed in industrialized countries may not be appropriate to the economic and social conditions of developing countries (Acemoglu, 2002, Atkinson and Stiglitz, 1969, Basu and Weil, 1998). In addition, we cannot simplistically assume that the private interests of multinationals coincide with the social interests of the host countries (Lall and Urata, 2003). The available empirical evidence on the effects of the sources of indigenous or foreign innovation is mixed. Studies largely fail to provide convincing evidence indicating significant positive technological transfer and spillover effect of FDI on the local firms.1

Within this broad and ongoing debate, the role of indigenous innovation and its diffusion/spillover effect in the catching up process has not received the attention it deserves. Many relevant questions still remain unanswered. Thus, what are the drivers of technological change and catching up in developing countries, and in middle income countries in particular? To what extent can developing countries successfully build up their own modern industries through technology acquisition via imports and FDI? What are the roles of indigenous innovation and its diffusion? What is the relationship between indigenous innovation and the acquisition of foreign technology in an increasingly globalized world, and how does this interaction change to respond to the specific characteristics of a country? How does integration in global value chains enable a developing country to access to and learn from foreign technology? This Special Section addresses these questions, based on a series of empirical studies on technology acquisition through FDI and indigenous innovation in the emerging economies.

Impressively rapid economic growth in Brazil, India, and China in the past three decades is changing the landscape of the world economy.2 These countries are catching up fast with the leading industrial countries, and this process is becoming a remarkable economic force influencing the world economy. They account for about 40% of world total population, 13% of world total income (in 2007), and most importantly, their incomes are rising at a speed similar to that of Japan and Korea during their take-off period (World Bank, 2007). The emergence of these economies has important implications for the world, not only in terms of its economic impact, but also in terms of their experiences in guiding and promoting the growth process. These countries have opened up to international trade and investment though to different degrees and with different speed and strategies, while at the same time they all have put an increasing emphasis on indigenous knowledge creation and innovation, though again to different extents and with varying success. Experiences from these emerging economies may provide valuable lessons also for other developing countries with regard to industrial, technology, and trade policies.

The remainder of this introductory article proceeds as follows. Section 2 examines some stylized facts on these emerging economies. Section 3 analyzes the possible benefits from international technology transfer and the transmission channels. Section 4 discusses the importance of the appropriateness of technology for catch-up and the capabilities of developing countries in creating new technology. Section 5 discusses the interactions between foreign technology transfer and indigenous innovation. Section 6 concludes with an evaluation of the evidence and discusses policy implications for other developing countries struggling for technology upgrading and catch-up.

Section snippets

Technology and economic take-off in the emerging economies

The rise of these emerging economies is changing the landscape of the world economy. The average annual GDP growth rate of China in the past 30 years, for instance, has been as high as 9.8%, more than three times the average 3.0% annual growth rate of the world economy. In 2007, the annual GDP growth rate was 13.0% in China, 9.1% in India, and 5.4% in Brazil. Again, all growth rates which were substantially higher than the world average growth rate in 2007 of 3.8%. In 2008, in spite of the

International technology diffusion and technological upgrading in developing countries

As discussed earlier, innovation is costly, risky, and path-dependent. This may provide a rationale for poor countries to rely on foreign technology acquisition for technological development. Foreign sources of technology account for a large part of productivity growth in most countries. In fact, most innovation activities are largely concentrated in a few developed countries: the US, Japan, and a number of European countries. International technology diffusion is, therefore, an important

Indigenous innovations, appropriate technology, and catching-up

Despite the possible benefits from international technology transfer and the prospect of income convergence among countries brought about by this technology diffusion, empirical evidence on the gains from international knowledge spillovers is mixed.5 Cross country studies observed increasing income inequalities between rich and poor countries and the marginalization

Foreign technology transfer and indigenous innovation: complements or substitutes

What is the relationship between foreign technology transfer and indigenous innovation? Should a developing country rely solely on foreign technology because innovation is costly, risky, and path-dependent, or completely depend on indigenous innovation since foreign technologies do not fit the local socio-economic and technical context? Or should they pursue both strategies with different emphasis but at different development stages and in different industries, as suggested by Aghion and Howitt

Conclusions

The articles in this Special Section explore in depth the role of indigenous and foreign innovation efforts in technological change and catching up, and their interactions in the emerging economies. The evidence suggests that, despite the potential offered by globalization and a liberal trade regime, the benefits of international technology diffusion can only be delivered with parallel indigenous innovation efforts (Li, this issue; Fu, 2008) and the presence of modern institutional and

Acknowledgments

The authors thank participants at SLPTMD Oxford Conference (May 2008) and an anonymous referee for helpful and constructive comments and UNIDO for financial support. The opinions expressed in the paper are of the authors and do not necessarily reflect those of their respective organizations.

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