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Challenge of the Knowledge Economy: Towards a Pragmatic Innovation Agenda Carl Dahlman Knowledge for Challenge of the Knowledge Economy: Towards a Pragmatic Innovation Agenda Carl Dahlman Knowledge for Development Program March 16, 2004 Santiago, Chile ©Knowledge for Development, WBI

Structure of Presentation 1. The Knowledge Revolution and Implications for Latin American Competitiveness 2. Structure of Presentation 1. The Knowledge Revolution and Implications for Latin American Competitiveness 2. Objective of seminar: Towards a pragmatic innovation agenda ©Knowledge for Development, WBI

1. The Knowledge Revolution Ability to create, access and use knowledge is becoming fundamental 1. The Knowledge Revolution Ability to create, access and use knowledge is becoming fundamental determinant of global competitiveness Seven key elements of “Knowledge Revolution” Increased codification of knowledge and development of new technologies 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 Investment in Intangibles (R&D, education, software) greater than Investments in Fixed Capital in OECD ©Knowledge for Development, WBI

The Knowledge Revolution -2 Greater value added now comes from investment in intangibles such The Knowledge Revolution -2 Greater value added now comes from investment in intangibles such as branding, marketing, distribution, information management Innovation and productivity increase more important in competitiveness & GDP growth Increased Globalization and Competition • Trade/GDP from 38% in 1990 to 57% in 2001 • Value added by TNCs 27% of global GDP Bottom Line: Constant Change and Competition Implies Need for Constant Restructuring and Upgrading ©Knowledge for Development, WBI

GDP/Capita Growth: Korea vs Argentina ©Knowledge for Development, WBI GDP/Capita Growth: Korea vs Argentina ©Knowledge for Development, WBI

Implications for Latin America With very few exceptions, Latin America’s growth performance has not Implications for Latin America With very few exceptions, Latin America’s growth performance has not been very strong over the past 20 years It is risking falling further behind because it is not successfully tapping into growing global knowledge or exploiting its potential Countries need to develop strategies to use existing and new knowledge to Improve performance in traditional sectors Exploit opportunities for leapfrogging Develop competitive new sectors Countries needs to Assess where they stand Develop concrete action plans ©Knowledge for Development, WBI

% Shares of World GDP - Constant US$ (1960 - 2002) 40 High income: % Shares of World GDP - Constant US$ (1960 - 2002) 40 High income: OECD ex. US & Japan 35 Sub-Saharan Africa 30 United States 25 High Income: Non-OECD (Black) 20 Japan Middle East & North Africa (Light Blue) South Asia Europe & Central Asia (Grey) 15 10 Latin American & Caribbean East Asia & Pacific 5 0 1965 1970 1975 1980 1985 1990 1995 2000

% 4 East Asia and LAC: Shares of World GDP (1980 - 2002) 3. % 4 East Asia and LAC: Shares of World GDP (1980 - 2002) 3. 5 EA NIEs 3 China 2. 5 Brazi 2 Other LAC 1. 5 Upcoming EA NIEs Mexico 1 0. 5 1980 1985 1990 1995 2000 200

% East Asia and LAC: Shares of World Merchandise Exports (1980 – 2002) 10 % East Asia and LAC: Shares of World Merchandise Exports (1980 – 2002) 10 EA NIEs 8 6 China Upcoming EA NIEs 4 Mexico 2 Other LAC Brazil 0 1985 1990 1995 2000 2002

Selected Countries: Real GDP 2002 ©Knowledge for Development, WBI Selected Countries: Real GDP 2002 ©Knowledge for Development, WBI

Selected Countries: GDP 2002 ©Knowledge for Development, WBI Selected Countries: GDP 2002 ©Knowledge for Development, WBI

Benchmarking Countries § KAM: 76 structural/qualitative variables to benchmark performance on 4 pillars § Benchmarking Countries § KAM: 76 structural/qualitative variables to benchmark performance on 4 pillars § Variables normalized from 0 (worst) to 10 (best) for 121 countries § www. worldbank. org/kam § Multiple modes offering wide range of graphic representations and functionalities (1995 - Most Recent, comparison options) § Aggregate Knowledge Economy Index (KEI) – average of performance in 4 pillars: economic incentive and institutional regime, education, ICT and innovation § Weighted and unweighted version – Innovation Variables ©Knowledge for Development, WBI

©Knowledge for Development, WBI ©Knowledge for Development, WBI

LAC and the World: Knowledge Economy Index ©Knowledge for Development, WBI LAC and the World: Knowledge Economy Index ©Knowledge for Development, WBI

2. Towards a Pragmatic Innovation Agenda What do we mean by innovation? §The diffusion 2. Towards a Pragmatic Innovation Agenda What do we mean by innovation? §The diffusion of a product, process, or practice which is new in a given context (not in absolute terms). §Technological innovations often go hand in hand with organizational ones §Innovation promotion often goes with enterprise upgrading Therefore distinguish two broad types of innovation Local improvements through adoption of existing foreign technology Development of technologies new to world ©Knowledge for Development, WBI

Innovation in Developing Countries In developing countries the first type is the most relevant, Innovation in Developing Countries In developing countries the first type is the most relevant, the second is more rare, except for the most advanced developing countries Developing countries will get a bigger economic impact from raising average local practice to best world practice than from creation of their own new knowledge They will also get a bigger impact from raising average local practice to best local practice, therefore the tremendous importance of domestic diffusion

Sources of Domestic Innovation Imports of capital goods, components, products or services Copying or Sources of Domestic Innovation Imports of capital goods, components, products or services Copying or reverse engineering of foreign products and services Products and services brought to and produced in country by foreign investors Technological efforts of domestic or foreign firms, not all of which is based on formal R&D

Bias Towards Formal R&D Efforts Policy makers in developing countries tend to focus on Bias Towards Formal R&D Efforts Policy makers in developing countries tend to focus on formal R&D and on publicly funded research efforts They tend to focus on glamorous high technology sectors They tend to focus on industry, to a lesser extent on agriculture, and very little on services They also tend to focus on R&D inputs and outputs, not so much on entrepreneurship and management

Challenges But, as noted earlier, focus of policymakers are not the most important elements Challenges But, as noted earlier, focus of policymakers are not the most important elements of the innovation system in developing countries R&D not the main source of innovation High tech sectors are tiny part of developing economies Service sector is largest share of economic activity Successfully applying knowledge requires entrepreneurship, management, organizations, and also depends on economic and institutional regime Need a better conceptual framework and policy tool kit that differentiates across countries Provides made to measure policy advice and specific project design

Differentiated Strategies Acquiring Creating Disseminating Catch-Up Most critical: -lots of knowledge in pubic domain Differentiated Strategies Acquiring Creating Disseminating Catch-Up Most critical: -lots of knowledge in pubic domain -also large stock to be purchased Therefore need good global scanning and acquisition ability Less relevant or feasible, but still need R&D capability to acquire and adapt. Critical to focus limited R&D efforts on most relevant areas Very important: -extension services -technical information -metrology, standards, testing and quality control -specialized suppliers -growth of most efficient firms Countries Nearer Frontier or with Large Critical Need to continue tapping global knowledge: -FDI/licensing -Strategic alliances -foreign R&D to tap knowledge Refocus public efforts on commercially relevant research Get private sector to make major effort to create new knowledge Dissemination efforts continue to be critical But also need to take knowledge to production: -technology transfer -tech parks/spinoffs -cluster development

National Innovation System Needs to include not just R&D institutions and universities, but most National Innovation System Needs to include not just R&D institutions and universities, but most critically firms and other knowledge institutions(MSTQ, training, consulting) Needs to include attention to the broader economic incentive and institutional regime, education and skills, and ICT-hence our K 4 D framework

Challenges to Developing Countries Finding advantageous ways to plug into and compete successfully in Challenges to Developing Countries Finding advantageous ways to plug into and compete successfully in the global system Getting into global value chains Moving up these value chains Taking advantage of global knowledge to improve welfare Preventive health Agriculture Developing differentiated advantages Building on local resources Building on culture and other intangibles Strengthening non-traded services

Getting rid of innovation myths About the innovation process: it is not a linear Getting rid of innovation myths About the innovation process: it is not a linear process from research to market About the source of innovation: key role of clients’ needs, suppliers’ ideas, etc About high tech: it is its use which matters (not its production); needs a technical culture About the innovator: it is not a single individual, but a group of people with complementary functions About the role of government: it is important (including in form of direct support) ©Knowledge for Development, WBI

How innovation develops Not a linear process coming from research for going to the How innovation develops Not a linear process coming from research for going to the market, but a design centered project with ideas coming from multiple sources (clients, suppliers, etc); innovation does not derive from research, but it is the reverse (particularly in developing countries) n. Innovation is a project brought about by group of people (not a single individual): the inventor, the entrepreneur, the godfather, the gatekeeper (Roberts, MIT) n. An organic not a mechanistic view; innovation is like a flower that needs gardening n ©Knowledge for Development, WBI

Government Role – Gardening Innovation Watering (finance, support to innovation projects) Removing weeds (competition, Government Role – Gardening Innovation Watering (finance, support to innovation projects) Removing weeds (competition, deregulation) Nurturing soil (research, education, information) ©Knowledge for Development, WBI

Initiating Innovation Policies: Key Actions To ignite interest show cases abroad (study tours). To Initiating Innovation Policies: Key Actions To ignite interest show cases abroad (study tours). To build self confidence, show local success stories; key role of media (radio/TV) Understanding issues and potentials by soft actions (cluster building) Competitive funding to stimulate local/regional interest and investment Building national and cross national innovation champion networks; getting entrepreneurs and citizens campaigning for improvement of business/governance climates ©Knowledge for Development, WBI

Developing national programs and institutions: main issues There already many programs for many different Developing national programs and institutions: main issues There already many programs for many different purposes (SMEs, FDI, RD…) which have a crowding out effect Agencies: need to have multi function-ones, private sector-like management (Fundacion Chile); but usually state agencies are constrained by bureaucratic rules and tend to capture or defend territories Councils (model is ST policy councils of Finland): they exist in numerous countries but they are not working; problem of motivation ©Knowledge for Development, WBI

National Priorities: build on strengths focused on use of available resources, generate income for National Priorities: build on strengths focused on use of available resources, generate income for further investment in education, research and key technology infrastructure, etc Climb up gradually the innovation system steps corresponding to development levels and related value chains ©Knowledge for Development, WBI

Towards a pragmatic innovation agenda It is not about just a about high tech. Towards a pragmatic innovation agenda It is not about just a about high tech. Long-term agenda: Integration into global knowledge networks and value chains. Medium-term priority: promotion of inter-firm and interorganizational linkages horizontal linkages: cluster agenda vertical: supplier and buyer development university-industry linkages Short-term priority: Articulation of vibrant and vocal innovation community in the private sector ©Knowledge for Development, WBI

Towards a pragmatic innovation agenda ©Knowledge for Development, WBI Towards a pragmatic innovation agenda ©Knowledge for Development, WBI

Responding to the challenges of the knowledge revolution To respond to the challenges of Responding to the challenges of the knowledge revolution To respond to the challenges of knowledge revolution , Latin America needs a dynamic innovation and enterprise upgrading system: a network of organizations to enhance firms’ capabilities § Led by private demand responsive to private sector needs; § Characterized by strong academic-industry linkages; § Inserted into international knowledge networks §Providing support to technology entrepreneurs, both financial (early stage venture capital) and technical assistance; and § Characterized by continuous evaluation and monitoring. § Results of evaluation linked to financing of programs. ©Knowledge for Development, WBI

Approaches to reform and enhanced national innovation and enterprise upgrading systems 1. Focus on Approaches to reform and enhanced national innovation and enterprise upgrading systems 1. Focus on knowledge entrepreneurship (high-tech start-ups and spin-offs, venture capital): Israel 2. Focus on innovation strategy of a developing country that has already made transtion to being a global innovator: Korea 3. Focus on a network of private sector-led national technology transfer organizations: Chile (Fundación Chile), Mexico, Russia. These three approaches are complementary and will be considered in this seminar. ©Knowledge for Development, WBI

Annex ©Knowledge for Development, WBI Annex ©Knowledge for Development, WBI

©Knowledge for Development, WBI ©Knowledge for Development, WBI

Knowledge Economy Index (most recent) breakdown ©Knowledge for Development, WBI Knowledge Economy Index (most recent) breakdown ©Knowledge for Development, WBI

Knowledge Index (most recent) breakdown ©Knowledge for Development, WBI Knowledge Index (most recent) breakdown ©Knowledge for Development, WBI

KEI data – most recent KI data - most recent ©Knowledge for Development, WBI KEI data – most recent KI data - most recent ©Knowledge for Development, WBI

Latin America ©Knowledge for Development, WBI Latin America ©Knowledge for Development, WBI

Argentina ©Knowledge for Development, WBI Argentina ©Knowledge for Development, WBI

Chile ©Knowledge for Development, WBI Chile ©Knowledge for Development, WBI

Mexico ©Knowledge for Development, WBI Mexico ©Knowledge for Development, WBI

Israel ©Knowledge for Development, WBI Israel ©Knowledge for Development, WBI

Korea ©Knowledge for Development, WBI Korea ©Knowledge for Development, WBI

Russia ©Knowledge for Development, WBI Russia ©Knowledge for Development, WBI

LAC: Performance Variables ©Knowledge for Development, WBI LAC: Performance Variables ©Knowledge for Development, WBI

LAC: Economic Incentive Regime Variables ©Knowledge for Development, WBI LAC: Economic Incentive Regime Variables ©Knowledge for Development, WBI

LAC: Governance Variables ©Knowledge for Development, WBI LAC: Governance Variables ©Knowledge for Development, WBI

LAC: Innovation Variables ©Knowledge for Development, WBI LAC: Innovation Variables ©Knowledge for Development, WBI

LAC: Education Variables ©Knowledge for Development, WBI LAC: Education Variables ©Knowledge for Development, WBI

LAC: ICT Variables ©Knowledge for Development, WBI LAC: ICT Variables ©Knowledge for Development, WBI

Chile: Performance Variables ©Knowledge for Development, WBI Chile: Performance Variables ©Knowledge for Development, WBI

Chile: Economic Regime Variables ©Knowledge for Development, WBI Chile: Economic Regime Variables ©Knowledge for Development, WBI

Chile: Governance Variables ©Knowledge for Development, WBI Chile: Governance Variables ©Knowledge for Development, WBI

Chile: Innovation Variables ©Knowledge for Development, WBI Chile: Innovation Variables ©Knowledge for Development, WBI

Chile: Education Variables ©Knowledge for Development, WBI Chile: Education Variables ©Knowledge for Development, WBI

Chile: ICT Variables ©Knowledge for Development, WBI Chile: ICT Variables ©Knowledge for Development, WBI

Global R&D Effort in Comparative Perspective ©Knowledge for Development, WBI Global R&D Effort in Comparative Perspective ©Knowledge for Development, WBI

R&D Expenditure, 1981 -2000 ©Knowledge for Development, WBI R&D Expenditure, 1981 -2000 ©Knowledge for Development, WBI

Export Structure (1965 -2000) Export Structure (1965 -2000)

Thank you! cdahlman@worldbank. org Thank you! [email protected] org