GLOBALIZATION OF INNOVATIONHow Emerging Economies Access Global Knowledge

Why different high-tech sectors have become successful in China and India?

Giacomo BovaTudor CarstoiuSzilvia Varszegi

Introduction

China and India - the developing Asian giantso Countries with similar characteristicso Different development pathso “World factory” and “world office”

Purpose of the research:o Why different high-tech sectors emerged successful in these

countries? o Explaining economic diversityo Concentrating only on high-tech sectorso High level of complexity of the issueo Finding an appropriate approach to the problem

Approach 1. – Endogenous growth theoryo Technology is (at least partly) a private good:

o Not freely availableo Requires specific knowledge/skills to exploit is

o The creation of knowledge depends of R&D (local or foreign origin)

o R&D not only to generate, but also to assimilate and exploit existing information! absorptive capacity

o Rate of innovation and growth depends of absorptive capacityo different capabitieso comparative advantages

o Barriers to technology and knowledge diffusion across national boarders

o Tendency of geographical localization of innovative activities

“Being backward in level of productivity carries a potential for rapid advance (M. Abramovitz)

o The larger the technological gap between leader and follower, the larger the follower’s potential for growth

o The process slows down over time(?) - the follower can become an innovator itself

The pace of catch up process depends on:o Factors limiting or enhancing the diffusion of knowledgeo Rate of structural changeo Accumulation of capitalo Expansion of demand

Factors facilitating the diffusion of knowledge:o Channels of international collaboration and tradeo Multinational companieso Direct capital investmentso Conditions of labor supplyo Macro and monetary conditionso “Adequate social capacity”

Approach 2. – Catch up hypothesis

o Technological paradigms/trajectorieso Institutional policy environment

o facilitator oro impediment to technological change and growth of a sector

o Country-specific characteristics

Approach 3. – Evolutionary tradition

o Freeman (1997): “The network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies.”

o Viotti (2001)o Absorb knowledge activelyo Generate opportunities of

learningo Develop technological

capability

Approach 4. – National system of innovation

Hypothesis 1: Those high-tech sectors emerged more successful than others, in which the country was somehow better able to access and absorb global knowledge and become an innovator itself.

Hypothesis 2: National innovation systems have played a crucial role in the emergence of succesful high-tech sectors.

Our approach to the problem

1. Studying the evolution of some of the largest and most successful high-tech sectors within the countries

o Accessing global knowledge through different channelso Role of government regulations and policies o Role of NIS (if any)o Innovation capacity

2. Comparing sectors within the countries3. Comparing China and India

Methodology

Similaritieso Developing countrieso Large economieso Abundant cheap laboro Rich in natural resourceso Gradual opening up of the

economyo Regional inequalitieso Urban migrationo Main destinations of

knowledge flows

China, India

o 1st producer of automobiles in volume in the worldo The Chinese automotive industry was established after Japan’s

occupation of Manchuria that began in 1931o 1950s: plants and licensed auto design founded with the help

of the USSRo Some multinationals (Volkwagen, GM) established themselves

in the market mostly through joint ventures with Chinese counterpart companies

o 2001 joining the WTO: new wave of entry of multinationalso Mostly assembly of ready parts – no local R&D!

o Gov. incentives for foreign investments in vehicles manufacturing allow expansion of multinationals

o Technology transfer through joint ventures, but Chinese brands still inferior to big players

o Objective to establish a new innovation-oriented country - but gap between the government’s objectives and execution

China – Automotive Industry

o One of the fastest growing industries in the worldo Increasing need for energyo 7/10 largest M&As in 2013 in the energy sector with foreign

companieso OFDI $34.6 billion in 2009 on the renewable energy sector

o Eg.: massive Investments in Brazil (2005-2012 $ 18.1bln)o International cooperation:

o CBHCCC (China-Brazil high-level co-ordination and and co-operation committee)

o JUCCCE (Joint US-China Collaboration on Clean Energy)o Increase in the number of patents (from 3.5% to 17.5% of

IEA all patents) - majority submitted by BRIC countries

China – Energy Industry

China - Pharmaceutical industry

o 5th pharma industry in the world (20% annual growth projection)

o Strong gov. funding an increase in middle class spending to overtake western markets

o Macro and micro policies guide almost every aspect of this sector

o The 20 largest MNCs have extensive operation facilities including R&D centers, joint ventures and fully owned companies

o High global competition pushed Chinese companies to innovateo The strength of China is the production of generics and active

pharmaceutical ingredients for export (80% of total export value in 2009)

o Partnerships in target markets through joint ventures, collaboration with research institution or MNC’s and setting up R&D centers

o Improving R&D capabilities in universities and research institutions

o A combination of traditional and next-generation advantages makes China an ideal place for pharma manufacturing

China - Discussion Automotiveo access to global knowledge mainly via MNC’s o Government incentives for FDI Energyo high level of OFDIo international collaborations o driven my strong demand Pharmaceuticalo MNC’s FDI and R&D collaboration emerging local companieso rising income increased the local demand

Hypothesis 1: Accessing global knowledge was crucial is all the sectors, but happened through different channelsHypothesis 2: Crucial importance of policy intervention contributed heavily to the growth.National System of Innovation emerging, but not so dominant in these sectors yet.

o Value: $108 bln, CAGR 9.5% $300 bln by 2020

o Largest sourcing destination - 52% $130bln market

o 4th in India’s total FDI shareo Early 90s: US-based companies began to outsource work on

low-cost, English-speaking talent pool in Indiao 1995-2000: IT industry started to mature, increased

investment in R&D and infrastructure India increasingly seen as a product development destination

o After 2000: firms growing in number, size and complexity & western firms set up a number of captives in India

o Recently: some Indian firms became multinational companies and started to make OFDI and global acquisitions

o Growth drivers: talent pool, domestic growth , infrastructure, policy support and global demand

India – IT Industry

o 1.4% of the global pharma ind. in value terms and 10% in vol. terms

o Cost efficiency and human competencies are main competitive advantages

o Ranked 5th in terms of attracting FDI o Most USFDA-approved manufacturing plants outside the USo The government has invested USD1.1 in the billion Public-Private

Partnership fund to support R&D in India o Before 1970s’ the market was dominated by foreign companies

with little domestic participationo Between 70s’ and 90s’, Indian Patent Act passed in 1970, several

domestic companies started operations

India – Pharma Industry

o 1990-2010: market liberalization, Indian companies increasingly launched operations in foreign countries, India became a major destination for generic drug manufacture & Approval of Patents (Amendment) Act 2005 which led to adoption of product patents in India

o After 2010: increase in patent filing by Pharma playerso Expansion by Indian players abroad, especially Africao R&D spending by Indian multinationals is rising due to the

introduction of product patentso Sector driven by confluence of demand, policy and

capabilities

India – Pharma Industry cont’d

IT industryo Historical coincidences

o Y2K (increase in demand for services)o Internet and dot-com boom

Pharmaceuticals industryo Specific policieso Rising income increased the local demand

Hypothesis 1: Crucial importance of global knowledge (MNCs)Structural and systemic factors common to both sectors:o Human resources (english speaking, highly qualified)o The diaspora (non-resident Indians) and the market linkages

Hypothesis 2: There is also an evident support of a still infant National System of innovationo Institutional networks (clusters)o Government support

India – Discussion

Most important differences in country characteristicso Cultureo Historical rootso Ratio of qualified labor (skills, languages)o Infrastructureo Political systemo Opennes to international cooperationo Pace and way of market liberalizationo Export vs. inward orientation (local demand)o Structure of the economyo Institutions and policies – national innovation systems

Comparision

Foreign born highly skilled expatriates in OECD countries, by country of origin, 2001

Technology content of China and India’s manufactured exports, 1988-2007 (Percentage shares of manufactured exports)

Source: Mani S., IDRC, May 5 2011

Comparision

Infrastructure comparisionIndicator China IndiaTelephone line (pieces/1000 persons) 205.00 46.28 Mobile telephone (sets/1000 persons) 210.20 24.17 Computers (sets/1000 persons) 27.60 7.20 Internet user per 1000 persons 63.25 17.49 Highway Length of Transport Routes (miles)

1,765,222 3,315,231

Highway Freight Ton Kilometers (100 million tonne miles) 6782,5 nullRailway Length of Transport Routes (miles) 73,000 63,140 Railway Freight Ton Kilometers (100 million tonnemiles) 17246,70 3332,28

Education system comparisonIndicator China India China IndiaFinancial expenses on education (billion) 385.06 268.95Financial expenses on education as percentage of GDP (%) 3.3 5Literacy Rate (above 15 years old) (%) 88.4 61.3The percentage of people with high education diploma (%) 5.2 16.2

Data Source: China Statistical Yearbook 2006, Indian government budget and economic research website

Infrastructure: flow of knowledge

China: more efficient logistics infrastructure

Education: Innovate human resource

India: though basic education is better in China, higher education, and therefore supply of innovate human resource is much better in India

Limitations of the research

Hypothesis 1- vast empirical evidence in the case studies Successful developing countries have used different

strategies to build capabilities in the various sectors MNC’s (FDI) OFDI International collaborations

Levaraging on different country characteristics facilitated the access to global knowledge in certain industries

In both countries, increasingly much of innovative activities

Hypothesis 2 – mixed evidence Strong government policy support and interventions But National Innovation Systems are rather recently

emerging in the sectors we covered

Conclusion

Thank you for your attention!

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