June 2008S GU Globelics Academy1 Strategic Adjustment and Challenges: the New Millennium Why decided...

June 2008 S GU Globelics Academy 1

Strategic Adjustment and Challenges: the New Millennium

• Why decided on “Endogenous innovation and harmonious development”？

• Miserable growth and “structural unemployment” • Global value chains and “innovation rents”• Example: the emergence of vegetable sector• Example: a new policy landscape• Discussion and summary** Questions:

What has been changed of development environment in WTO regime? Can export-orientation bring a NIS upgraded? ** Key words: Global value chains; “Innovation and system efficiency rents”


“Endogenous innovation and harmonious development”

• Guiding Vision for the 11th National Economic and Social Development Program (2006-2010) =>economizing material inputs =>upgrading economic structure and innovative capability =>environmental protection =>balance between urban and rural development and between the development in east, middle and west regions =>job creation and social equality


Rapid growth in the past 20 years…… ……however, many limits to growth

• Remarkable global impact and trade disputes

• √“Job less growth”

• Widening income gaps and negative environmental externalities

• √Slow pace in competence and competitiveness upgrading


China’s Domestic market

Both in the high-tech and low-tech, China is locked in the low end of value chains except a few segments

Pursuing solely for high speed growth of GDP proved to be a misleading; Learning potential, and capability/structure upgrading is much more crucial

Low pace in structure/capability upgrading China in the global value-chain governance: high-tech and low-tech “rac

e to the bottom export” (R Kaplinsky)


Employment issue: Displacement of employment, or “jobless growth”

Figure 7 GDP Structure in Comparison

28.1 2518.1 12.5 9 5

25

7

48.243

47.546

29 30

24

34

23.732 34.4

41.5

62 6551

59

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1978 1989 1997 2003 Brazil 1999 S Africa1999

India 2000 Russia1999

First Second Tertiary

Source: For the data on China: Statistical Yearbook 2004 (http://www.stats.gov.cn/tjsj/ndsj/yb2004-c/indexch.htm ), for the Data on Brazil, South Africa, India and Russia: World Facts and Figures athttp://worldfactsandfigures.com

Figure 8 Employment Structure in Comparison

70.560.1

49.9 49.1

23.1 30

67

15

17.3

21.6

23.7 21.6

23.725

15

30

12.2 18.326.4 29.3

53.245

18

55

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1978 1989 1997 2003 Brazil 1999 S Africa1999

India 2000 Russia1999First Second Tertiary

Innovation is a two-edged sword in terms of employment effect.

Process innovation is easy to realize upon international supply, it drops jobs away, if without the capacity in capital goods provision and engineering services (in expanding/deepening system effects).


Increasing in energy consumption, security in energy supply, emission of green gas, and environmental degradation

Source: IEA World Energy Outlook 2006


“Structural unemployment” and urban- & Industry-led solutions

• Daunting Structural Unemployment, associated with development; has been assumed towards solutions arisen from urban and industry development (together with emigration to the “New World”), assuming a passive agriculture people and active elite industrialists

• South Korea had overcome the problem relying on the world market; but very questionable as whether this is workable for China and India

• Even for a small economy of S Korea, it is now faced with the pressure of “agflation” and hit of “food security”.

Net total trade value US$ million Agricultural net trade value US$ Million

1979-1981 1989-1991 1999-2001 2003 2004 1979-1981 1989-1991 1999-2001 2003 2004

USA -28417 -113204 -427969 -580542 -706961 23214 18284 10913 8825 4019

France -17753 -19154 -1011 -6801 -16731 3259 9606 9948 11470 12005

Japan -3436 64942 87083 88010 110568 -16612 -27940 -33436 -35294 -39605

S. Korea -4983 -4523 15021 14991 29382 -2866 -5446 -6354 -7761 -8481

China -2717 16405 27776 34093 25741 -5571 -2727 -6896 -11427 -20862

India -5099 -4058 -8891 -14153 -22272 1096 1879 1352 1601 1950

Brazil -3391 10702 -2474 22419 30529 6325 6330 10351 17314 23617

Thailand -2615 -8275 5389 3759 1682 2853 4183 4641 6756 8096


• In theory, Washington consensus (Liberalization of international trade and FDI; Deregulation and reduction of public subsidies; Privatization of economic activities) and export-oriented theorem The WB summarized Asia “Tiger” Economies experience assume a perfectly competitive global market;

Power/policy rent Trade policy rents

System rentSystemic efficiency

Brand name rants

Relational rents

Organizational rents Innovation rent or e

ntrepreneur surplus

Technology rents

05-4-26 7

P2

MR

Pric

e

(b)垄断竞争

D

Q2Output

P1

Q1Output

(a)平衡竞争

Pric

e

MC

d

AC

MCAC

• However, when the global market is derived far away from being perfectly competitive, as Global value chain theories indicate—sources/reasons for capturing or being prevented from “innovation rents” (Gereffi， Kaplinsky, Cooke, UNIDO)


More on theory and history

• Imitation to innovation—the experience summarized upon Asia “tiger” economies

• How much space remained under the WTO rule? TRIPS TRIMS SCM

• The need to try out new ways for capability and structural upgrading

• The debate on “appropriate technology”

• The key is to gain the capacity in developing technologies fitting to local needs/endowments

• So that to be endogenous and inclusive in innovation


Questions• What makes difference with globally dispersed value chain in

comparison to the situation where value chains mainly restricted in country territories?

• Can capabilities for gaining technological rents, relational rents, organizational rents, and rents from system effects grow automatically through low-end activities in value chains?

Power/policy rent Trade policy rents

System rentSystemic efficiency

Brand name rants

Relational rents

Organizational rentsInnovation rent or e

ntrepreneur surplus

Technology rents

05-4-26 7

P2

MR

Price

(b)垄断竞争

D

Q2Output

P1

Q1Output

(a)平衡竞争

Price

MC

d

AC

MCAC


Technological and structural complexity--Modularity creates design/innovation options

Integrated design：“System option”

Modular design：(Design rules + options at Modules)

=>Multiple options;

=>Decentralized decision centers


“GENERAL FEATURES OF COMPLEX SYSTEMS” by Yaneer Bar-Yam

1970s


Architectural Innovation in complex technologies Rebecca M. Henderson and Kim B. Clark

The case of DVD machine

Transformational

Incremental innovation

Modular innovation

Architectural

innovation Radical

innovation

Unchanged

Changed

Reinforced Overturned

Link

age

betw

een

Cor

e co

ncep

ts a

nd c

ompo

nent

s

Core concepts/ Components

Normal Transitional


Two side effects from technological complexity and modular structure

• “hidden design parameters”

▲ Open architecture in favor of global dispersion and entry

▲ Complex design engineering raises barriers to move up in value and competence ladder

• Only those who “know more than they make” could win the competition based on complexity

• Example: mobile phone set industry

• Easy entry in the second half of the 1990s

▲ Entrepreneurship; “down-stream advantages”

▲ Modular components; production lines; design and engineering services

• 2002-03 at the peak of successes

• 2004 encountered with setback

▲ Multinationals take over again


Year %

of National Income Year

% of GDP

1953 0.1 1978 1.5 1954 0.2 1979 1.5 1955 0.3 1980 1.5 1956 0.6 1981 1.3 1957 0.6 1982 1.3 1958 1.0 1983 1.4 1959 1.6 1984 1.4 1960 2.8 1985 1.2 1961 2.0 1986 1.3 1962 1.5 1987 1.0 1963 1.9 1988 0.8 1964 2.1 1989 0.8 1965 2.0 1990 0.8 1966 1.6 1991 0.8 1967 1.0 1992 0.7 1968 1.0 1993 0.7 1969 1.5 1994 0.7 1970 1.6 1995 0.6 1971 1.8 1996 0.6 1972 1.7 1997 0.6 1973 1.5 1998 0.7 1974 1.5 1999 0.8 1975 1.6 2000 0.9 1976 1.6 2001 0.95 1977 1.6 2002 1.07 1978 1.8 (1.5 of GDP) 2003 1.13

2004 1.23 2005 1.34 2006 1.4

Challenges to policy capacity

Stages of S&T policy, illustrated from R&D investment

--1956-1966 Establishment of the R&D system

--1966-1976 Cultural revolution

--1985-1999 Redeployment of the R&D resources

--Since 1999 Turing to enhancement of knowledge infrastructure


Policies in 1999-2006: Development of high-tech, promotion of commercialization

• Decision on promotion of technological innovation, development of high-tech, and acceleration of commercialization” 1999

• National S&T conference on technological innovation 1999

• In response to challenges and opportunities of IT revolution


Increase in R&D

expendituresince 1999


But innovation capabilities remain low and segmented checked following capabilities in a value chain framework

Sources Strength/weakness Illustration from North-east China Cite from Jon Sigurdson

Technology Rents M-L =Relatively good high education =Considerable industrial base

Organizational Rents L =Planning instruments operate in vacuum =Many plans, but with poor preparation and unrealistic

expectation

Relational Rents L =Lack of internal (in the region) economic cooperation/connections

Brand-name Rants little

Trade Policy Rents L =Lack of awareness/regulatory development for the potential from a greater (cross-board) regional

integration and complementarities

Value added from Assembly H

Systemic Efficiency M-L =Weakness in infrastructure, especially banking and other knowledge-intensive services


Challenges to Policy checked following development goals and a NIS perspective

—Gu and BalAddress Domestic needs --how to manage public investment for

health care and environment protection such as large public R&D project management; and the management of public procurement ?

Engage in product innovation and improve engineering capability

--what might be new approaches of learning/innovation at firm?

Building user competences and institutions supporting SME competence

Develop a responsive science and engineering base

--what are, and how to develop workable university-industry relations?

Develop new forms of participatory governance of economic organization

--especially in populous agricultural regions

Improving education and stimulating the mobility of skilled labour

--labor mobility for learning based development?

Develop networking and learning regions

Improve Social Capital


Challenges to S&T and innovation policy: checked following a policy landscape for the coming years

Specific, dynamic, integration capacity==R&D ==”Matching” and efficiency

==Education and manpower ==Universal education and broad participation of people in learning and innovation

==Sectoral policies for development Industrial policies Agriculture policies

==Balanced between sectors and between urban and the rural ==Social dimension of economic development, e.g. food security and safety Service sector policies

==Regional development policies, Newly emerged Regional development policies Policies for Science Park and SEZs

==Social development ==Becomes equally important Policies for medical development and universal health care Policies on wealth allocation and employment Policies for communities development and harmonious society Policies and management of emergent event

==International dimensions ==Become crucial IPR policies Policies for collaboration in the development of global public goods,

such as those in order to control of global warming

==Policies for sustainable development Policies for energy efficiency, renewable energies, reduction of

emission Policies for reservation of ecosystem Policies for remedy of social divides and for aging society


Policy landscape: ConventionalStatic, General targets, and Central/top-down policies

==R&D policies ==Relatively independent of other dimensions, with inadequate management for matching R&D with real needs (an exception is military R&D)

==S&T education and manpower policies

==”Elite education”

==Sectoral policies for development Industrial policies Agriculture policies

==Industrial development (and high-tech) central

==Policies for social development ==Secondary to economic development

==International cooperation and technology import policies

==With limited scope; Innovation system was largely closed


Will it be a smooth and linear process?

• Change in “mindset”• Renovation of policy institution and improvement in policy capacity• “Government steering”, but not “government controlling”


Challenges to knowledge and innovation based development

Agriculture and traditional sectors:Important roles for sustainable development insights achieved but yet taken into mainstream policy

• Job creation, poverty reduction, social equality: A pivotal contributor

• Food security/ Food quality: The provision of basic necessities and raw materials for the population and for industry

• Modernization of the rural, and the society by and large, by participation of farmers in learning and technological and institutional changes

• Important player in the protection of environmental common goods

• Altogether, the sector is central to economic, societal, and ecological sustainable development


Land endowment: per capita and pre agricultural capita arable land

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

per

capita

ara

ble

land (

ha)

0

5

10

15

20

25

30

35

per

agricultu

ral c

apita

ara

ble

land (

ha)

Per capi ta Arabl e Land(ha) Per Agr i cul tural Capi ta Arabl e Land (ha)Share of Agri-population in total population 2004

64.3 65.7

45.8

40.8

18.9

29.8

51.8

1.96 2.75 3.05

14.3 12.49.45

0

10

20

30

40

50

60

70

%

Agriculture is natural endowments- and consumption- shaped and restricted


The need for local conditions-appreciated WTO regulations—e.g. Shukla

• China and India are in the group characteristic of limited land resource, high population pressure and small-holder farming organization

• In contrast to the group with abundant natural resources and lighter population intensity, like United States and Brazil

• Unified WTO AOA will destroy the agricultural sector in countries of the first group

• Research and negotiation is needed for a WTO AOA which must appreciate very different local conditions among WTO members


Knowledge base is in rapid change becoming modern S&T knowledge intensive, under intensifying global

competition and global knowledge flowse.g. bio-tech—for new variety breeding; instrument—food security

testing and environmental monitoringPreoccupation with “high-end” of biotech has delayed agricultural bio-

tech capability buildingGovernmentinitiatives Technologies and

knowledge base

1988 “Vegetable basket” project starts

Product (new variety) come from international suppliers

mid-1990

Agricultural restructuring

Product tech from outside; National S&T Program invests in production and product tech.

2002 Quality of “vegetable basket”

Standardization & testing tech; R&D for agricultural biotech

=Learning and adaptation of external knowledge is essential-Locally developed greenhouse dominated the production in mid-north China


Governance and farm organization matter

• Governance concerns about the power of actors over the value chain, gives impact on distribution of learning and profiting opportunities

• Smallholder farmers are (1) a reason for the low efficiency of the market structure, and high cost for quality production; (2) of little power, tend to be squeezed and exploited

• Exploration of multiple forms of farm organization in order to overcome the deficiencies under the specific conditions

• Farmer cooperatives are one of the solutions—there are different obstacles to this development in China and India


Innovation systems: from imitative to innovative

Structural upgrading

** Firms become strong in core capability

** Strengths in Capital goods sectors and generic technology

** Engineering capabilities and knowledge-intensive services

** Systems’ efficiency： rely on framework conditions, links and interactions, strength in science and engineering base

** Capabilities in policy and management: steering technological and institutional learning

Complexity US

Korea

China

NIS in mastering technological and societal complexity


Strategic Adjustment and Challenges: the New Millennium

• Why decided on “Endogenous innovation and harmonious development”？

• Miserable growth and “structural unemployment” • Global value chains and “innovation rents”• Example: the emergence of vegetable sector• Example: a new policy landscape• Discussion and summary** Questions:

What has been changed of development environment in WTO regime? Can export-orientation bring a NIS upgraded? ** Key words: Global value chains; “Innovation and system efficiency rents”


Thank you

June 2008S GU Globelics Academy1 Strategic Adjustment and Challenges: the New Millennium Why decided...

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