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Determinants of Technological
Progress: Recent Trends and
Prospects
As discussed in the previous chapter, the pace at least cost. However, no matter how com-
at which technologies spread between and pellingly useful a technology may be, the
within countries has picked up. As a result, process by which it spreads within a country
most developing countries are narrowing the can be lengthy.
technological divide that separates them from The speed with which a country absorbs
high-income countries. Nevertheless, the tech- and adopts technology depends on many fac-
nology gap remains large; for many, including tors, including the extent to which a country
several low-income countries, it is widening has a technologically literate workforce and a
rather than closing, in part because of the highly skilled elite; promotes an investment
slowness with which technologies spread climate that encourages investment and per-
within countries. For virtually all developing mits the creation and expansion of firms
countries, the domestic pace of technological using higher-technology processes; permits
progress is determined mainly by the speed access to capital; and has adequate public sec-
with which already existing technologies are tor institutions to promote the diffusion of
adopted, adapted, and successfully applied critical technologies where private demand or
domestically, and done so throughout the market forces are inadequate.
economy, not just in the main cities. The process of technology absorption is also
This chapter explores some of the major subject to virtuous circles. Scale economies
determinants of this kind of within-country in technologically sophisticated sectors and in
diffusion of technology. It adopts an analyti- learning by doing tend to make the acquisition
cal framework that distinguishes between the of technology a nonlinear process, character-
factors that dictate the extent to which an ized initially by slow penetration until some
economy is exposed to external technologies threshold is reached, followed by a period of
on the one hand and the efficiency with which rapid acceleration, and finally by a period of
it absorbs them on the other hand. Among the slower diffusion as saturation is achieved. As
most important channels through which low- a consequence, while gaps in technological
and middle-income countries are exposed to achievement create opportunities for acceler-
foreign technologies are trade; foreign direct ated growth and convergence in lagging
investment (FDI); and contacts with highly economies, they can also lead to divergence if
skilled diaspora members (nationals working the conditions for technology adoption in
abroad) and with other information net- lagging countries are insufficient. Many tech-
works, including those of academia and the nologies operate synergistically to reinforce
media. Maintaining an open environment to the demand for each other and the effective-
such flows is critical for accessing technology ness and capacity of supply.
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Although the process of technological dif- from less than 50 percent in 1990 to
fusion has a clear logic, the process is by no more than 62 percent, and among youth
means mechanical. It occurs through interac- they now exceed 74 percent. In addition,
tions among individuals, entrepreneurs, firms, the macroeconomic, governance, and in-
and governments. The role of government is vestment climate that innovative firms
both direct, as a supplier of many technologi- and entrepreneurs need to operate is im-
cal services, and indirect. In particular, the proving. More countries are operating
efficiency with which firms can diffuse tech- in a context of close to stable prices (me-
nology within the domestic economy depends dian inflation in low-income countries
on the overall political and economic context, declined from 9.2 to 4.2 percent be-
the level and distribution of human capital, tween 1990 and 2006) and flexible ex-
the quality of the macroeconomic environ- change rate regimes, while government
ment, and the rules and regulations governing finances are better balanced.
the conduct of business, all of which are heav- Technological diffusion among
ily influenced by governments. middle-income countries has benefited
This chapter discusses the principal chan- from the reorientation of global produc-
nels through which developing countries are tion processes. Advances in communica-
exposed to advanced technology, analyzes the tions and transport technology have
main determinants of domestic absorptive given rise to the growth of global pro-
capacity, and indicates likely future trends in duction networks, facilitating increased
technological diffusion. The following six trade and technological advances in
main messages emerge from this analysis. many developing countries, particularly
The principal channels by which middle-income developing countries.
developing countries are exposed to Until recently, low wages and a solid, if
external technology—which include low, level of basic technological literacy
trade, FDI, and a highly skilled dias- have been sufficient to capture a signifi-
pora—have increased substantially over cant role in global networks in many
the past several decades. The share of countries. As wages rise, however, these
imported high-tech products in gross countries will need to make substantial
domestic product (GDP) has risen by additional investments in human capital
more than half in both low- and middle- to maintain their share of global produc-
income regions since the mid-1990s, tion and continue the technological con-
that of imports of capital goods by 37 vergence of the past few years. They will
percent, that of imports of intermediate also need to adopt a more proactive ap-
goods by 26 percent, and that of FDI in- proach to developing local competencies
flows by sixfold since the 1980s. Finally, and to using research and development
the size and sophistication of global di- (R&D) and outreach programs to bol-
asporas has increased markedly, along ster the diffusion process.
with substantial improvements in the For low-income countries, poor tech-
technology by which migrants can trans- nological adaptive capacity and limited
mit their know-how and interact with dissemination of often simple technolo-
their home economies. gies to the countryside are severely con-
The ability to absorb foreign technol- straining technological progress. Despite
ogy, which depends on domestic policies progress in basic technological literacy,
and institutions, has also improved in extremely low levels of income, weak
many developing countries. Reflecting governance structures, and, in some
rising school enrollment, literacy rates in cases, ongoing conflict continue to
low-income countries have increased stymie the ability of low-income, and
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Figure 3.1 Domestic absorptive capacity both conditions and attracts external flows
Technological frontier
Transmission
Diaspora
channels
- build infrastructure
Basic technological literacy
- foster an innovation-
friendly business climate
Finance of innovative firms
Pro-active policies
Technological
absorption
the extent to which the business and macro- which need to serve as a two-way conduit,
economic climate fosters an environment in both informing the population about techno-
which firms—the main mechanism for tech- logical solutions and providing feedback to
nological diffusion within a country—are able providers concerning the usability of and de-
to form, grow, and expand. Absorptive capac- mand for proposed solutions. Taken together,
ity also depends on the levels of basic techno- these factors act as filters (the rings in the
logical literacy and advanced skills found in drum) that dictate how much of the potential
the country, which together dictate the coun- technological flow is actually absorbed
try’s capacity to implement technologies on domestically.
the one hand and to do the research necessary The overall process is, of course, more
to understand, implement, and adjust im- complicated, with both technological flows
ported technologies on the other hand. Also and technological adaptive capacity influenc-
important are government actions designed to ing each other. For example, international
help overcome market failures that might trade is perhaps the most important vector for
limit the financing of innovative activity, plus the transmission of technology, but the extent
actions that focus technology policy on adapt- of a country’s openness to trade depends sig-
ing and adopting those existing technologies nificantly on the amount of FDI that has oc-
for which there is a market and for which ad- curred, the existence of a vibrant and techno-
equate domestic competencies exist. Critical logically literate diaspora, and the domestic
here are outreach and dissemination policies, business climate. Similarly, the quantity of FDI
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and its overall effectiveness depends on the adequate savings to invest in a new technol-
quality and technological literacy of the labor ogy, or may lack the collateral required to bor-
force. row. Thus poverty is a major cause, as well as
a result, of low levels of technology.
Increasing returns and spillover effects Affordability is also an issue at the macro
can magnify these effects. . . level. Low incomes constrain government fi-
Both domestic and external determinants of nance, limiting the government’s capacity to
technological transfer are affected to varying put into place both the level of physical infra-
degrees by increasing returns to scale and structure and the investments necessary to
spillover effects that can magnify the absorp- develop a level of domestic human capital
tive impact of these flows. Access to foreign capable of supporting and exploiting even
markets may allow domestic firms to grow and simple technologies.
exploit economies of scale associated with
some technologies, raising the overall wealth Policy should not impede innovative
and technological sophistication of an econ- firms
omy. Meanwhile, the technological spillovers Finally, firms, entrepreneurship, and govern-
that can be expected from FDI, including ment action that actively supports the diffu-
demonstration effects and the transfer of busi- sion of economically relevant and profitable
ness process and human capital to domestic technologies are the grassroots mechanisms by
firms through employee turnover, are likely to which technologies diffuse within countries.
be greater the more qualified is the labor force. Firms must be able, and entrepreneurs permit-
Both FDI and trade can contribute to cluster ted, to profit from the exploitation of new-to-
effects and networking externalities that in- the-market-technologies if those technologies
crease the potential for spillovers and to tech- and products are to diffuse. This means that
nological diffusion from individual sectors and policy must be welcoming of such profits and
firms to the rest of the economy. Alternatively, that both R&D and dissemination efforts not
economies of scale and agglomeration effects only need to focus on creating or adapting
may prevent entry by new firms in some mar- products and ideas (domestic or foreign) to
kets, cutting off otherwise promising opportu- the local market, but also must give priority to
nities for technological learning. In addition, assisting firms to exploit them.
imitators may limit entrepreneurs’ ability to
capture the returns to new-to-the-market External transmission channels
innovations, thereby reducing incentives for
technological progress. T his section presents data and describes re-
cent trends concerning the external chan-
nels through which developing countries are
. . . but a lack of financing can stymie exposed to foreign technologies. Where rele-
innovation vant, it also draws on the literature to com-
Affordability issues can influence both the size ment on how specific elements in a country’s
of initial inflows and a country’s technological technological absorptive capacity (discussed in
absorptive capacity. Even if profitable invest- more detail later in this chapter) interact with
ments in technology are available and the do- these external flows to determine the extent to
mestic environment encourages the absorption which these channels translate into technolog-
of new technologies, low incomes may make ical achievement.
new technologies unaffordable to individuals
and firms in developing countries. At the ex- Trade
treme, individuals near subsistence levels may Trade is one of the most important mechanisms
be unwilling to risk adopting a new-to-the- by which embodied technological knowledge
market technique, may be unable to generate (in the form of both capital and intermediate
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goods and services) is transferred across coun- goods in their manufactured exports is higher
tries. Imports of technologically sophisticated than these goods’ share in manufacturing
goods help developing countries raise the qual- value added, reflecting the dependence of
ity of their own products and the efficiency their high-tech exports on imports of techno-
with which they are produced. Countries can logically sophisticated components and the
also absorb new technology by exporting to relatively low technological complexity of
customers who implicitly or explicitly provide domestic manufacturing operations. By con-
guidance in meeting the specifications required trast, “active FDI-dependent” countries, such
for access to global markets. For developing as Chile and Hungary, strike a better balance
countries with low R&D intensity, trade open- between the share of high-tech goods and ser-
ness and exposure to foreign competition vices in overall exports and domestic value
provide powerful inducements to adopt more added, reflecting greater domestic technologi-
advanced technology in both exporting and cal competencies. For the Russian Federation
import-competing firms and are likely to pro- and some of the other countries that belonged
duce large technology spillovers and produc- to the former Soviet Union, a strong techno-
tivity gains (Schiff and Wang 2006a). logical base and relatively low import shares
However, the extent to which exposure to of high-tech goods reflect their more advanced
foreign technologies is reflected in the export learning style, which places greater emphasis
and import patterns of individual countries on domestically developed technologies.
depends on, among other things, the absorp- Nevertheless, these technologies mainly feed
tive capacity of individual countries. As Soub- into products that serve the local market,
botina (2006) discusses, countries with rela- because both high costs and quality concerns
tively weak domestic scientific capacities tend keep these sectors from being internationally
to follow a more passive approach to technol- competitive.
ogy absorption that is characterized by limited
efforts to leverage the technology imported by The potential for technology transfer
foreign firms operating on their soil. For these through imports has risen
countries, most technology transfers take Imports improve domestic technology because
place either through imports of high-tech embodied technology both allows firms to em-
goods, or perhaps through an apparently ploy more efficient production processes and
high-tech export sector that is, in reality, dom- affords the possibility that firms can copy
inated by assembly operations associated with more advanced products and processes. At the
elevated imports of high-tech goods. Where same time, competition from technologically
sophisticated domestic capacities coexist with superior imports may boost domestic produc-
a significant degree of basic technological lit- tivity.1 Developing countries that have a large
eracy in the population, technology diffusion share of imports from high-income countries
is enhanced and, in general, the technological with large R&D expenditures have signifi-
content of exports is higher. cantly higher productivity than developing
Following Soubbotina (2006) classifica- countries that import from advanced coun-
tions, “traditionalist slow learners,” such as tries with lower R&D expenditures (Coe,
Bangladesh and Burkina Faso, which have low Helpman, and Hoffmaister 1997).2 There also
levels of technological competency and tech- is evidence for a positive relationship between
nological literacy, tend to rely to a large extent access to imported intermediate goods and
on imports of machinery and equipment. performance (Handoussa, Nishimizu, and
Other countries, such as Malaysia, Mexico, Page 1986). More recent literature highlights
and the Philippines, appear to follow a “pas- the indirect benefits for developing countries
sive FDI-dependent” learning style. For these from North–North trade in R&D. The ex-
countries, the share of high- and medium-tech change of high-tech goods and services among
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Source: World Bank calculations using Centre d’Etudes Prospectives et d’Informations Internationales’ database, Banque Analytique
de Commerce International.
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G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
95
96
97
98
99
00
01
02
03
04
94
95
96
97
98
99
00
01
02
03
04
19
19
19
19
19
19
20
20
20
20
20
19
19
19
19
19
19
20
20
20
20
20
East Asia and the Pacific South Asia
Europe and Central Asia Sub-Saharan Africa
Latin America and Middle East and
the Caribbean North Africa
Source: World Bank calculations using Centre d’Etudes Prospectives et d’Informations Internationales database, Banque Analytique de
Commerce International.
1.8 percent between 1994 and 2001, the aver- 2007). As a result, the benefits of exposure to
age share of high-tech imports in low-income trade also tend to be unevenly distributed.
countries’ GDP began to rise in 2002, reaching
3.2 percent in 2004 (figure 3.2). Both South Capital goods imports have also increased
Asia and Sub-Saharan Africa have enjoyed sig- Although imports of high-tech goods provide
nificant increases, although the ratio of high- an indication of an economy’s exposure to
tech imports to GDP remains extremely low in technology, this indicator does not distinguish
South Asia, less than 3 percent of GDP. In most between imports of technology for consump-
countries in Sub-Saharan Africa, the share of tion and imports for production, nor does it
imported high-tech goods fluctuates between indicate the extent to which these imports im-
2 and 5 percent of GDP from year to year. prove the technological content of a country’s
Mauritius and South Africa import the most economic activities. Technological content
high-tech goods relative to the size of their depends importantly on the structure of the
economies, between 6 and 8 percent of GDP in economy and the nature (assembly or high
any given year, while Somalia imports the valued added transformation) of the work
least, less than 1 percent of GDP. done with the imports (box 3.1).
Despite developing countries’ increased ex- Imports of capital goods, such as machinery
posure to foreign technology through trade, its and equipment, which enable the production of
distribution across regions within countries higher quality and more technologically sophis-
tends to be extremely uneven, with foreign ticated goods, have a less ambiguous impact on
trade concentrated in a few major cities or re- a country’s technological capacity. For coun-
gions. For example, 70 percent of high-tech tries operating within the technological fron-
trade (both imports and exports) in China orig- tier, a higher share of imported capital goods
inates in four regions and is highly correlated in GDP can reflect the presence of strong in-
with R&D intensity and foreign firms (OECD vestment activity; a process of technological
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upgrading; and, over the longer term, a presumably reflecting the relatively autarchic
relatively sophisticated structure of produc- policies that governments in the region have
tion.4 As a result, relatively technologically so- followed until recently. By contrast, Sub-Saha-
phisticated middle-income countries import ran Africa imports substantially more capital
more capital goods (as a share of GDP) than less goods, although the ratio of capital goods im-
sophisticated low-income countries (table 3.1). ports to GDP has increased less than in other
Overall, the share of capital goods in the developing regions since the mid-1990s, with
GDP of developing countries has risen substan- the exception of East Asia and the Pacific. The
tially over the past decade. Upper-middle- story is particularly varied in Latin America,
income countries saw a 51 percent increase in where some countries, such as Costa Rica and
the share of these goods in GDP, while lower- Mexico, increased their imports of capital
middle-income countries have boosted their re- goods following liberalization policies in the
liance on such goods by 33 percent. The former early 1990s, while others did not. The increase
group of countries continues to have the largest in the share of capital goods in GDP was par-
share of capital goods in GDP, about 13 per- ticularly notable in Costa Rica, where it rose
cent, more than double the share of low- from about 7 percent in the mid-1990s to about
income countries. As a consequence, the gap 18 percent in 2002–04.
between low-income countries (especially the
Least Developed Countries [UNCTAD 2007]) Exports of technological goods have
and other developing countries has widened. also expanded
Europe and Central Asia saw the biggest re- Participation in high-tech export markets has
gional increase in imports of capital goods, also been identified as a channel through which
reflecting the substantial economic recovery in technology is diffused within developing coun-
these countries following the recession that ac- tries. Many case studies suggest that exporting
companied the transition to market economies. firms in developing countries benefit from im-
As was the case for high-tech imports, South plicit and explicit technological transfers that
Asia has the lowest level of imports of capital occur as a result of their interactions with for-
goods and has shown little improvement, eign buyers. Benefits accrue because foreign
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D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
of technological capabilities and learning translate that into improved export perfor-
styles. Since the early 1990s, Latin America mance and an increase in the technological
has almost doubled its share of high-tech sophistication of their own exports has varied,
products in world markets and now has the with countries like those in Europe and Central
second largest market share after East Asia Asia that have relatively well-educated popula-
and the Pacific. However, in contrast with Eu- tions and a strong institutional structure hav-
rope and Central Asia and the Middle East ing extracted the greatest benefits. Among
and North Africa, it has done so with rela- other countries, notably low-income countries,
tively little input from imported technology weak absorptive capacity may be restricting
(imports of high-tech and capital goods as a the extent to which their economies have ben-
share of GDP in Latin America and the efited from the increased exposure.
Caribbean are half the rate of Europe and
Central Asia). Partly as a consequence, Europe Foreign direct investment
and Central Asia has gained market share in Like trade, FDI can be a powerful channel for
high-tech goods much more quickly than the transmission of technology to developing
Latin America, and based on recent perfor- countries by financing new investment, by
mance, is poised to overtake that region soon. communicating information about technology
Low-income countries remain marginal to domestic affiliates of foreign firms, and
players in the world market for high-tech by facilitating the diffusion of technology to
goods, and even though their global share of local firms.
exports of medium-tech goods has doubled, be-
tween the mid-1990s and 2002–04, it remains Foreign investors bring both equipment
low at 0.8 percent. The share of low-income and know-how
countries in world exports of low-tech goods Measuring the technological contribution of
is more substantial and has increased from FDI is particularly difficult, in part because
3.5 percent to 5.2 percent. Among these coun- the standard measure from the balance of pay-
tries, Vietnam has improved its global market ments includes both physical (brownfield and
share of low-tech products from 0.2 to 0.8 per- greenfield) investments and financial invest-
cent, a 250 percent increase. India remains the ments (mergers and acquisitions). This said,
most important exporter of low-tech products FDI inflows to developing countries rose from
in this income group with 2 percent of the $10 billion in 1980 to an estimated $390 bil-
world market, second after China among de- lion in 2007, or from 0.4 to 2.9 percent of
veloping countries, which accounts for about GDP, with the bulk of the increase occurring
17 percent of the world’s low-tech exports. during the late 1990s in response to the liber-
alization of FDI policies.9 Assuming that for-
Overall exposure to foreign technologies eign firms employ a higher level of technology
has increased than the average domestic firm, then this ris-
Overall, the increased participation of devel- ing trend will have increased the average level
oping countries in global trade has substan- of technology in these countries, as well as
tially increased their exposure to foreign tech- their exposure to higher technologies.
nologies. For middle-income countries, this FDI as a share of GDP has risen in all de-
exposure and the attendant expansion of high- veloping regions and income groups since the
tech exports have likely yielded important side 1980s, but the increase has been concentrated
benefits that are reflected in the sustained in middle-income countries, where FDI rose to
acceleration in developing country growth almost 3 percent of GDP (table 3.2). East Asia
rates over the past 15 years. While the increase and the Pacific had the highest ratio during the
in trade openness has been generalized, the 1990s, but it has since declined, in part be-
extent to which countries have been able to cause of a collapse in FDI inflows to a few
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G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
countries affected by the East Asian financial in total FDI has been rising. Nevertheless, the
crisis in the late 1990s (particularly Indonesia), foreign component of aggregate investment in
and in part because FDI inflows to China, al- developing countries has likely been rising
though still high, have failed to keep pace with along with the extent of technological transfer
the rapid growth of output. Meanwhile in through this channel. Moreover, the transfers in
Latin America and the Caribbean, efforts to in- know-how, business process technology, and
crease trade openness resulted in a boom of FDI market knowledge associated with mergers and
inflows, which reached an average of 3.5 per- acquisitions can occur whether or not any asso-
cent of GDP in 2000–06. In Europe and Cen- ciated physical investment is involved, and may
tral Asia, FDI rose from next to nothing before even be more important.
the breakup of the Soviet bloc to 2.2 percent of Foreign firms may also improve the tech-
GDP in 2000–06. In the Middle East and nological capacity of developing countries by
North Africa and South Asia, FDI remains low
at around or less than 1 percent of GDP. Most
recently, FDI inflows to Sub-Saharan Africa Table 3.3 Foreign direct investment as a
percent of fixed capital formation
have surged, reflecting substantial investment
in oil and mineral production and a more 1970s 1980s 1990s 2000s
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D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
ov P tvia
(2 a
La a
In (2 ia
ai )
B y
C Es 0)
(1 2)
9)
ex thu il
C d
rk pu d
Th 01
Ar hin
o ni
in
r
Li raz
le n
n
Tu Re lan
ey b
ga
di 00
99
ic a
nt
hi to
la
0
un
ak o
H
Sources: OECD; Activity of Foreign Affiliates database. owned international call centers have risen in
http://www.sourceoecd.org; UNCTAD 2005; Eurostat;
R&D statistics. imitation of foreign firms (box 3.2).
Note: The year is 2003 unless otherwise indicated. If multinational entry leads to an increase
in demand for intermediates, it may result in
the expansion of upstream domestic industries
financing R&D. Multinational corporations (see the experience with Zambian supermar-
undertake most of their R&D activities in kets in box 3.3). Downstream industries may
their home country or in other high-income also benefit from the increased competition
countries.10 Nevertheless, the role of develop- and added variety of inputs created by the for-
ing countries appears to be rising. R&D eign investment. In addition, foreign investors
spending in developing countries by majority- may provide advice, designs, direct produc-
owned foreign affiliates of U.S. parent compa- tion assistance, or marketing contacts to sup-
nies increased from $0.9 billion in 1999 to pliers, which the latter can then deploy more
$1.6 billion in 2003 (Bureau of Economic broadly than simply providing cheaper or
Analysis 2007). The contribution of multina- more reliable inputs to the foreigners.12
tionals’ R&D to total measured R&D activity The entry of multinationals is likely to in-
in developing countries varies from more than crease competition for the domestic firms
60 percent in Hungary to less than 5 percent in within the industry, potentially forcing them
India (figure 3.4). to improve their efficiency and introduce
new technologies or business strategies
FDI may generate technology spillovers (Blomstrom, Kokko, and Zejan 2000), as in
In addition to its technological impact on the Wal-Mart’s joint venture in Mexico (box 3.4).
firm directly touched by the investment, FDI Such competition can make surviving domes-
may also affect the level of technology in tic competitors stronger, but other domestic
domestic firms.11 Spillovers can arise when firms may be driven out of business, lose mar-
workers receive training or accumulate experi- ket share, and experience a loss of high-skilled
ence working for multinationals and then workers and higher costs for intermediate
move to domestic firms or set up their own en- goods resulting from increasing demand from
terprise (Fosfuri, Motta, and Ronde 2001; the foreign-owned firms.13 These effects may
Glass and Saggi 2002). For example, within vary by industry depending on factors such
six years of the beginning of FDI-led export as the market structure before the entry of
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foreign multinationals, the R&D intensity of The level of spillovers also depends on the
the products, and the links between foreign domestic absorptive capacity. For example,
firms and domestic firms in upstream and other advanced countries tend to gain from
downstream sectors.14 technology spillovers from the activities of
subsidiaries of U.S. multinationals, while poor
Outsourcing decisions, domestic policies, countries do not (Xu 2000). Firms using ad-
and absorptive capacity all affect spillovers vanced technology in low-income countries
Evidence indicates that spillovers to local sup- fail to achieve the same level of productivity as
pliers are not uniform across countries or firms in industrial countries (Acemoglu and
across industries within a country.15 Multi- Zilibotti 2001) or the same kinds of spillovers
nationals may choose not to source inputs lo- as in middle-income countries, in part because
cally because of concerns about the quality of the gap between the quality and human capi-
local inputs or the time required to develop tal of the domestic workforce and that for
relationships with local suppliers or because which the equipment was originally designed
of centralized sourcing arrangements that may is too large (Borensztein, de Gregorio, and Lee
provide volume discounts or access to cus- 1998). In general, spillovers may be more
tomized inputs (UNCTAD 2001). In host common when the difference in technological
countries with underdeveloped upstream sec- levels between the foreign multinational and
tors or in cases of FDI with very specialized the domestic economy is not too large.
input needs, the scope for spillovers to up- As discussed earlier, the extent to which a
stream sectors may be limited. Policies may country benefits from spillovers to the rest of
also reduce the potential for spillovers. For ex- the economy also depends on the country’s
ample, in a highly protected market, foreign policy stance on basic technological literacy
plants may operate at an inefficiently small and more advanced skills and on promotion
scale (Moran 2007). Requirements that for- of the adoption and diffusion of technologies
eign firms enter into joint ventures with local within the economy. For example, some coun-
companies may discourage use of the most ad- tries such as Mexico and the Philippines have
vanced technology to avoid leakage to poten- benefited relatively little from FDI spillovers
tial competitors (Beamish 1988). because FDI inflows, although abundant, have
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been oriented toward exploiting low wages licensing of technologies are two other, more
and have not built many links to the domestic direct mechanisms by which developing coun-
economy. In contrast, countries like Singapore tries acquire foreign technologies and research
have actively sought to maximize the technol- expertise.
ogy spillovers from FDI by investing in the Over the past 20 years, firms domiciled in
domestic skills and competencies necessary to developing countries have increasingly turned
support high-skill and high value added indus- to foreign acquisitions as a means of expanding
tries and by welcoming and promoting FDI in their market share and gaining control over
such sectors (Lall 2003). technology. Cross-border mergers and acquisi-
tions by multinational corporations located in
Spillovers might be highly concentrated
developing countries increased from $400 mil-
in certain regions within a country
lion in 1987 (less than 1 percent of global
Geographic proximity also determines the
merger and acquisition transactions) to almost
extent of technological spillovers observed.
$100 billion in 2006 (almost 9 percent of global
The closer a local firm is to a foreign-owned
merger and acquisition transactions) (World
firm, the more frequently will the firms’ em-
Bank 2007a). Although technology may not be
ployees interact with each other, increasing the
the primary motivator in many of these pur-
likelihood that employees (and their acquired
chases, technology transfer is associated with
knowledge) will move between the two firms.
nearly all of them in the form of control over
The spatial aspect is also important for verti-
patents and knowledge of manufacturing
cal spillovers between foreign-owned firms
processes, marketing, and business process ex-
and their local suppliers, which are often lo-
pertise. Table 3.4 summarizes some of the more
cated close to each other (Jaffe 1989).
technologically important recent acquisitions
The existence of such cluster effects may
of high-tech firms by developing country firms.
explain why FDI tends to be geographically
Developing country firms may seek to ac-
concentrated within a country mainly around
quire a brand or a marketing or distribution net-
large cities or coastal states. In Russia, for ex-
work. Examples include the Thai Union Frozen
ample, more than two-thirds of the FDI stock
Company’s purchase of the Chicken of the Sea
in 2000 was in Moscow and three surround-
brand; the South African Brewery’s purchase of
ing regions (Broadman and Recanatini 2005).
Miller Brewing (a major U.S. beer maker); and
Similarly, almost half of FDI flows in India go
Malaysian Berjaya’s purchase of Taiga, the
to the Mumbai and Delhi areas (Reserve Bank
largest Canadian distributor of building materi-
of India 2007), while in China, almost 90 per-
als. Developing country firms may also purchase
cent of FDI flows go to the western coastal re-
foreign firms to acquire R&D capacity. For ex-
gion (Kui-Yin and Lin 2007). This said, be-
ample, the Chinese company Shanghai Automo-
cause of data limitations and conceptual
tive Industry Corporation bought Sangyong of
problems, econometric support for the notion
the Republic of Korea to enhance its R&D
that such clusters generate important technol-
capabilities in sport utility vehicles. Accessing
ogy spillovers is limited (Lipsey and Sjohom
foreign technology also takes the form of estab-
2005), with some studies supporting their ex-
lishing R&D centers in developed countries. For
istence (see Girma and Wakelin 2001 for the
example, Huawei Technologies and ZTE
electronics sector in the United Kingdom) and
Corporation, both Chinese companies, have
others not (see Aitken and Harrison 1999 for
established R&D centers in Sweden.
Venezuela and Sjoholm 1998 for Indonesia).
Developing countries also purchase foreign Developing countries can also license
high-tech firms foreign technologies
Outward FDI, that is, the purchase of foreign Developing countries can also gain access to
firms by domestically owned ones, and the technology through licensing, which typically
120
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
Netcare South Africa 2006 General Health Care United Kingdom Health
Tata Tea India 2006 Tetley United Kingdom Tea
Videocon Industries Ltd. India 2006 Daewoo Electronics Korea, Rep. of Electronics
Chalkis China 2005 Le Cabanon France Food processing
Essel Propack India 2005 Telcon Packing United Kingdom Tube packing
Wipro India 2005 New Logic Austria Semiconductors
Orascom Egypt, Arab Rep. of 2005 Wind Italy Telecommunications
Lenovo China 2004 IBM United States PC manufacturing
TCL China 2004 Alcatel France Telecommunications
Ranbaxy India 2004 RPG France Pharmaceuticals
BOW Technology Group China 2003 Hynix Korea, Rep. of PC manufacturing
PKN Orlen Poland 2002 BP (500 petrol stations) United Kingdom Downstream oil
involves the purchase of production or distri- rights is weak, multinationals may be less will-
bution rights for a product and the underlying ing to license technology for fear of it being
technical information and know-how for pro- copied by domestic firms. Alternatively, they
ducing it. As measured by the payment of in- may only be willing to license out-of-date
ternational royalties and fees in countries’ technologies (Maskus 2000). Data on U.S.
balance of payments, licensing fees paid by de- multinationals show that the likelihood of
veloping countries increased from $7 billion in entering into licensing agreements increases as
1999 to $22 billion in 2006, about a fivefold developing countries increase their protection
increase when expressed as a percentage of of intellectual property rights (Antras, Desai,
developing country GDP.16 The increase was and Foley 2007).
sharpest for oil- and mineral-exporting coun- Some countries have pursued a licensing-
tries, reflecting higher prices for oil and based strategy of technology acquisition in the
contracts that often expressed these fees as a
percentage of revenues or profits. Nevertheless,
licensing fees paid by other developing coun-
Figure 3.5 Licensing payments have risen
tries also tripled, and for both low- and middle- sharply
income countries these fees represented a larger
Percent of GDP
share of overall GDP than they did for oil- and
0.25
mineral-exporting countries (figure 3.5). Middle-income countries Low-income countries
121
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
belief that domestic firms will be able to up- electronics sector in Taiwan, China (Chandra
grade their own technological capacities by and Kolavalli 2006). The latter study also
working with licensed technology. For exam- highlights that even though licensing may en-
ple, in the 1950s and 1960s, Japan kept its able rapid acquisition of product and process
economy relatively closed to FDI to encourage know-how, it also requires a significant level of
multinationals that wished to gain from the local technological capability to put the
growing Japanese market to license technol- licensed technology to work.
ogy to domestic firms (Pack and Saggi 1997).
China has also encouraged joint ventures, as International migration
opposed to FDI, to maximize technology Along with trade and FDI, international mi-
transfers to local firms. This strategy is likely grants are another important channel for the
to work only if the country has sufficient mar- transmission of technology and knowledge.
ket power. Moreover, such discriminatory From the perspective of developing countries,
policies run the risk of resulting in the transfer however, the direction of technology transfer
of substandard technologies (Hoekman and can be both outward (as migrants take away
Javorcik 2006). In contrast, several Latin scarce skills) or inward (through contacts with
American countries discouraged the licensing the diaspora).
of technology from abroad because of con- The direction and scale of technology flows
cerns about unfair pricing and competition that result from international migration are
with local technologies, a strategy that re- less clear than for FDI and trade. On the one
tarded or skewed technological development hand, the brain drain associated with better
in that region (Pack and Saggi 1997). educated citizens of developing countries
The bulk of international royalties and fees working in high-income countries is a serious
stems from intrafirm transfers. In part, this problem for many developing countries. On
may reflect a preference by multinational the other hand, the contribution that these in-
firms to transfer more advanced technologies dividuals would have made had they stayed
only to wholly owned subsidiaries rather than home is uncertain given the lack of opportuni-
to partially owned affiliates and to enter mar- ties in some countries. Moreover, developing
kets through wholly owned subsidiaries rather countries can benefit from the immigration,
than through joint ventures (Javorcik 2006; albeit often temporary, of managers and engi-
Mansfield and Romeo 1980). However, it may neers that often accompanies FDI; the return
also mean that these fees are being used as a of well-educated developing country emi-
mechanism for repatriating profits, perhaps grants; and the contacts with a technologically
for tax reasons. As a result, the level of royal- sophisticated diaspora.
ties and fees may not be a market-based re- High rates of skilled out-migration imply a
flection of the value of technology purchased net transfer of human capital and scarce re-
by the local subsidiary (Robbins 2006). sources (in the form of the cost of educating
Partly because of intrafirm payments and of these workers) from low- to high-income
the close relationship between licensing and countries (UNCTAD 2007; World Bank
FDI, economists have had difficulty in evaluat- 2006a). For some countries, the brain drain
ing the impact of licensing on technology represents a significant problem: emigration
transfer. Nevertheless, a few case studies have rates of highly educated individuals can ex-
documented its benefits. Brazil and Korea ceed 60 percent in some small countries (fig-
achieved considerable success in absorbing ure 3.6), and since 1990, the highly educated
new technologies through licensing (Correa diaspora of developing countries has doubled
2003), and licensing agreements were an in size.17 However, the share of developing
important factor for the success of flori- country tertiary-educated individuals living
culture in Kenya, maize in India, and the abroad remained stable and relatively low,
122
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
ric n
r ic t
l A and
As
Af as
Af ara
Pa s
ib ri
an
fic
a
e tA
a
th tin ia
th E
ar e
h
C Am
tra e
s
ut
or le
Sa
en p
N dd
So
C uro
E
b-
d Mi
Su
E
d La
e
an
an
Source: World Bank staff calculations based on Docquier pected based on income alone. Other factors
and Marfouk 2004. explaining high retention rates include the
Note: OECD = Organisation for Economic Co-operation and quality of living conditions and research facili-
Development.
ties in high-income countries, as well as the
density of research networks and the size of the
preexisting diaspora. Factors favoring a return
ranging from 5 to 13 percent depending on the include proximity to family, cultural affinities,
region (figure 3.6), because the number of and emigrants’ desire to contribute to techno-
such individuals also doubled. logical progress in their native country.18
The emigration of professionals who make
a direct contribution to production, such as The diaspora is a major source of skills
engineers, may result in reduced rates of do- and capital
mestic innovation and technology adoption Repeated waves of emigration have led to the
(Kapur and McHale 2005a). Emigration rates creation of vibrant diasporas that possess
for scientists, engineers, and members of the cutting-edge technology, capital, and profes-
medical profession tend to be higher than for sional contacts. For example, developing
the general university-educated population. countries accounted for three-quarters (ap-
For example, in India, the emigration rate for proximately 2.5 million) of the 3.3 million
123
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
Figure 3.7 Share of Ph.D. students still living in the United States five years after graduation
a. Share of foreign Ph.D. graduates who remain in b. Higher home-country incomes are associated with
the United States for five or more years lower retention rates
60 60
TUR ARG
800
EGY ZAF
40 40 PER
COL
BRA
400 CHL MEX
20 20 IDN
KOR
0 0 0
6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5
In a
Ar Ir a
ge an
ab ur a
So R key
an Pe a
M bia
C o
re B ile
ne f
a
om a
, C ru
Af f
do . o
In ep il
h o
n
di
Ar T tin
ric
ic
si
ol in
R z
h
hi
ut ep.
a, ra
ex
C h
n
iw
Ko
Ta
t,
yp
Eg
ric n
Af nd
tin l A nd
As
Af ara
ib a
an
a
e tA
a
fic
th t a
La tra a
th Am ia
h
r ic
ar a
h
s
e
ut
or as
C ric
th as
Sa
en p
N E
e e
E
b-
e
Su
E
dl
id
M
an
124
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
have made major contributions to technologi- culturally and nationally linked groups, and
cal progress in their home countries (box 3.5). shared ethnicity appears to counteract the kind
The diaspora also contributes to technology of home bias effects that underpin the geo-
transfers and adoption by strengthening trade graphic network or the cluster effects that give
and investment linkages. The high-skilled dias- high-density R&D zones an innovation advan-
pora of countries such as India has contributed tage (Agrawal, Kapur, and McHale 2004).
to the growth of the information technology
sector, outsourcing (Kapur and McHale 2005b; Diaspora networks and returnees help
Pandey and others 2006), and FDI in their promote technology adoption
home countries. The flow of outward FDI from The diaspora’s political engagement in home
the United States is strongly correlated with the countries can also improve local technological
stock of migrants from the origin country.23 absorptive capacity, both through return and
Nearly half of the $41 billion in FDI that China by exercising pressure on home country politi-
received in 2000 may have originated from its cians from afar. Many leaders of developing
diaspora abroad (Wei 2004). Similarly, 60 per- countries were educated abroad and returned
cent of the increase in bilateral trade in differ- to strengthen political institutions in their coun-
entiated products within Southeast Asia may be tries of origin (Easterly and Nyarko 2005). In
attributable to ethnic Chinese networks (Rauch addition, migrants have often played a valuable
and Trindade 2002).24 Moreover, technology role in the transfer of market-based institutions,
appears to diffuse more efficiently through such as venture capital, entrepreneurship, and
125
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
corporate transparency, to their countries of billion in 2006, and are now are larger than
origin.25 Overseas Taiwanese engineers and FDI and equity inflows in many countries, es-
returnees, for example, worked closely with pecially small, low-income countries. Remit-
policy makers to establish a successful venture tances can support the diffusion of technology
capital industry. This has provided local entre- by reducing the credit constraints of receiving
preneurs with an alternative source of finance, households and encouraging investment and
which has helped them overcome the constraint entrepreneurship (Fajnzylber and López 2007;
posed by the reluctance of state-owned finan- Puri and Ritzema 1999; Woodruff and
cial institutions to lend to high-risk entrepre- Zenteno 2007; World Bank 2006a). A survey
neurial activities in the technology sector of self-employed workers and small firms in
(Kuznetsov 2007). Mexico found that remittances were responsi-
Expatriate knowledge networks have been ble for one-fifth of the capital invested in mi-
created to foster regular contacts; transfers of croenterprises in urban Mexico (Woodruff
skills; and opportunities for business with re- and Zenteno 2001). In the Philippines, house-
searchers, scientists, and entrepreneurs in the holds work more hours in self-employment
country of origin. Brown (2000) identified 41 and become more likely to start relatively
such networks for 30 different countries. capital-intensive household enterprises in re-
These networks tend to be rich depositories of sponse to an exogenous increase in remit-
talent with high concentrations of members tances (Yang 2006).
with advanced degrees, many earned in the Remittance flows have also contributed
host countries.26 Colombia’s Red Caldas net- to the extension of banking services (often
work, set up with government assistance in by using innovative technologies), including
1991, was one of the first diaspora networks microfinance, to previously unserved, often
that succeeded in promoting collaborative re- rural, sectors. This has improved the access
search between domestic scientists and Colom- of households and firms to financial services
bian researchers abroad through workshops (box 2.8; Gupta, Pattillo, and Waugh 2007),
and symposiums, joint research programs, vis- and their ability to purchase and invest in
iting researchers, scientific events, publica- technology. For example, remittance rev-
tions, and research and training opportunities enues may have helped Ghana’s ApexLink
(Chaparro, Jaramillo, and Quintero 2006). and Mongolia’s Xac banks to expand their
Less formal networks played an important role networks and services (Isern, Donges, and
in the transition of the Republic of Korea and Smith 2006). Cell phone money transfers,
Taiwan (China) from developing to high- such as G-cash and Smart Padala in the
income economies.27 Some diaspora networks Philippines, and card-based remittances are
have failed, principally because they were too becoming prevalent in a number of countries,
ambitious, particularly in cases where the pol- including Mozambique, South Africa, and
icy and institutional environment in the home the United Arab Emirates, and are likely to
country were not supportive.28 Research sug- expand to other countries in the coming
gests that the most successful models start years (Helms 2006; Jordan 2006). Remit-
small to build up trust and credibility before tances have also helped domestic banks
attempting to sponsor a major research project foster links with banks in high-income
or cooperative agenda (Kuznetsov 2006). countries. In turn, such links have fostered
technology transfers as banks in high-income
Remittances can promote technology countries have helped local partners to up-
diffusion by making investments grade their systems to comply with the anti-
more affordable money-laundering, antiterrorism, and know-
Remittances to developing countries have your-customer regulations in developed
grown steadily in recent years, reaching $207 countries.
126
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
127
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
Figure 3.9 Most developing countries have increased their exposure to external technology
Exposure to external technology
Index
0.25
0.20
0.15
0.10
0.05
0
High-income Upper-middle-income Lower-middle-income Low-income
countries countries countries countries
150
100
50
⫺50
⫺100
High-income Upper-middle-income Lower-middle-income Low-income
countries countries countries countries
rights, by limiting corruption, and by not im- conflict, as measured by the International
posing onerous requirements that make the Crisis Behavior Project, has declined signifi-
creation or expansion of firms or their cantly (figure 3.10). The decline has been most
adoption of new technologies unnecessarily pronounced in Sub-Saharan Africa, where the
difficult also contributes to an economy’s tech- total number of countries in conflict declined
nological adaptive capacity. from a peak of 10 in 1998 to only 2 in 2004.
Among its many benefits, the cessation of
Political and macroeconomic stability conflict can provide an environment that is
have improved countries’ ability to more conducive to both private and public
exploit technology sector investments in technology. For example,
Over the past 15 years, the number of coun- 12 years after the end of hostilities, the gov-
tries involved in international or domestic ernment of Rwanda launched an ambitious
128
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
Table 3.5 Increases in exposure to external investment. High government deficits and debt
technologies index, 1990s to 2000s also increase uncertainty, especially when
(excluding Europe combined with a rigid exchange rate regime, a
All countries and Central Asia)
combination that increases the likelihood of an
Regions (percent change) abrupt revaluation that would further cloud
East Asia and the Pacific 13.4 expected future returns. The median inflation
Europe and Central Asia 83.7
Latin America and the
rate in developing countries fell from 19 per-
Caribbean 33.4 cent in the early 1990s to 4 to 6 percent during
Middle-East and North Africa 37.8 the first half of this decade, exchange rate
South Asia 13.7
Sub-Saharan Africa 33.4
volatility is down, and government deficits
have declined across the board and are now
Income groups
High-income countries 27.7 27.7 below 3 percent of GDP in every developing
Upper-middle-income countries 45.1 24.4 region except South Asia. Moreover, the accel-
Lower-middle-income countries 36.2 31.7
eration of per capita income growth over the
Low-income countries 33.5 33.5
past 15 years, which has been most marked
Source: World Bank.
Note: Values are unweighted averages of country-specific over the past 6 years, has improved the overall
changes. affordability of technology (table 3.6).
30
25
20
15
10
0
60
65
70
75
80
85
90
95
00
50
19
19
19
19
19
19
19
19
20
20
129
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
130
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
Table 3.7 The regulatory burden is heavier in developing countries than in the OECD
Procedures Duration Cost Minimum capital requirements
131
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
ia
40 45 50 55 60
Su As d
D
Af nd
ric n
Pa an
Af ara
EC
As
ib a
tra e a
a
th t a
b- ia
an
C uro c
ric
E ifi
ar a
e ia
h
O
th
or as
Sa
th s
La Sou
A
N E
l
e e
th Am
st
e
dl
Ea
id
tin
132
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
markedly improved their governance over the Low incomes and poor health impair skill
past decade. Despite individual country im- formation for technological progress
provements and marked gains in the regula- Low income and poor health are perhaps
tory environment in Europe and Central Asia, among the most basic constraints to techno-
on average, the quality of governance around logical progress. Even if profitable investments
the world has not improved much over the in technology are available, inadequate income
past decade (see the World Bank’s Governance limits the ability to generate resources for
Matters series). For each country that has investment. At the level of the economy, low
done well, one has experienced deterioration income is both a cause and an effect of low lev-
in its governance indicators. Two countries els of human capital, limited funds allocated to
that have experienced notable deterioration research, thin financial markets, often poor
are Belarus and the República Bolivariana de governance, and sometimes violence and
Venezuela. Many countries have not experi- macroeconomic instability, all of which limit
enced any significant change in either direc- the ability to absorb technological innovations.
tion. On the positive side, the Governance Recent developments in relation to income
Matters series shows that where countries are levels are heartening. Growth rates of GDP
committed to reform, improvements can per capita have picked up throughout the
take place relatively quickly. For example, developing world over the past 15 years
during the relatively brief period of 2002–06, (figure 3.14). The number of people living in
Kenya, Liberia, and Ukraine made significant absolute poverty has declined by more than
advances in voice and accountability, while 250 million, and their share in the population
Algeria and Angola made substantial progress of the developing world is expected to fall
in political stability. Thus the potential exists from 18 percent in 2004 to around 11 percent
for a rapid, substantial improvement in the by 2015 (chapter 1).
133
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
65
70
75
80
85
90
0
19
19
19
19
19
19
19
19
20
20
134
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
(Caselli and Coleman 2001), the extent to primary school completion rates) and more
which a given technology is used within a sophisticated indicators, such as tertiary edu-
country depends importantly on the educa- cation enrollment rates (table 3.8). Over the
tional attainment of the population, both be- past 15 years, literacy rates have increased
cause such skills help individuals learn how to throughout the developing world, with the
make effective use of a new-to-the-firm or farm biggest increases recorded among low-income
technique, and because they increase the likeli- countries, particularly in South Asia. Reported
hood that firms will learn of new innovations literacy rates in Europe and Central Asia rival
beyond the scope of their local communities. those in high-income countries, while in East
Although the gap between the educational Asia and the Pacific and Latin America and
attainment of individuals living in developing the Caribbean, literacy rates are at or close to
countries and those in high-income countries 90 percent. Elsewhere literacy lags consider-
remains wide, it is closing, both in terms ably, with only 73 percent of the population in
of the most basic indicators (literacy and the Middle East and North Africa being able to
(% of population (% of female
(% point aged 15 (% point population aged (years of
Regions change) and older) change) 15 and older) (% change) schooling)
East Asia and the Pacific 10.7 91 14.9 87 1.9 11.2
Europe and Central Asia 1.3 97 1.8 96 0.8 12.7
Latin America and the Caribbean 2.3 90 2.6 89 0.5 13.1
Middle East and North Africa 14.7 73 16.5 63 2.1 11.7
South Asia 11.6 58 12.8 46 4.0 9.7
Sub-Saharan Africa 5.1 59 5.2 50 3.5 8.0
Income groups
World 6.0 82 7.3 77 2.0 10.9
High income 0.3 99 0.3 98 0.4 15.8
Upper middle income 0.8 93 1.9 92 0.5 13.3
Lower middle income 9.2 89 12.0 85 2.0 11.5
Low income 9.3 61 10.1 50 3.5 9.0
(% of
population
(% point (% of relevant (% point (% of population (% point aged 15
Regions change) age group) change) aged 15 and older) change) and older)
East Asia and the Pacific ⫺1.7 97.7 1.5 13.7 0.8 2.5
Europe and Central Asia 2.2 94.9 0.1 13.5 1.6 5.5
Latin America and the Caribbean 16.9 98.5 1.1 8.7 1.2 4.9
Middle East and North Africa 13.7 90.7 2.1 10.0 1.4 3.4
South Asia 18.1 83.5 0.5 7.0 0.5 2.0
Sub-Saharan Africa 11.5 60.8 0.5 2.3 0.4 1.0
Income groups
World n.a. 87.6 0.4 11.9 1.0 4.9
High income n.a. 97.4 ⫺0.7 18.6 2.9 13.3
Upper middle-income 10.3 98.5 0.7 12.4 1.4 4.9
Lower middle-income 2.7 96.6 1.4 12.4 0.9 2.9
Low income 17.0 75.9 0.5 6.1 0.4 1.8
135
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
read and write and about 60 percent in South Table 3.9 Relatively high youth literacy
Asia and in Sub-Saharan Africa. Moreover, rates
there are concerns about the comparability of Youth literacy rate
these data, as some low-income countries re-
1990–2005 2005a
portedly define literacy as the ability to read
and write one’s own name. (% of
Divergence in the literacy rates for women (% point population
explain much of the disparity. For example, in Regions change) age 15–24)
East Asia and the Pacific 3.43 98
South Asia fewer than half of women age 15 Europe and Central Asia 1.67 99
and older are literate. Women in the Middle Latin America and the Caribbean 2.29 96
East and North Africa and Sub-Saharan Africa Middle East and North Africa 12.23 88
South Asia 13.72 73
fare somewhat better, with literacy rates of Sub-Saharan Africa 5.42 70
63 and 50 percent, respectively. Although Income groups
the technological consequences of such wide- World 4.16 88
High-income countries 0.23 99
spread illiteracy are difficult to quantify, illiter-
Upper-middle-income countries 1.82 98
ate mothers are much less successful in assist- Lower-middle-income countries 3.68 96
ing their children to learn (Behrman and others Low-income countries 10.41 73
1999), have much more difficulty in absorbing Source: World Bank; World Development Indicators.
new techniques and instructions that are trans- a. Actual reference year varies by country.
136
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
137
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
Figure 3.17 Many developing country students fail to meet literacy standards
Fourth grade reading performance on OECD test Sixth grade reading performance on South African
regional test
Percent Percent
100 100
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
Turkey Argentina Colombia Morocco South Africa Uganda Namibia Malawi
Percent ever enrolled Percent enrolled and achieved minimal literacy
knowledge) is not necessarily rising in accor- toward their most productive use (investments)
dance with higher educational attainment. is an important determinant of its technological
The availability of international test scores adaptive capacity.
across countries is very limited outside of
high-incomes countries, but some data under- Limited financial intermediation restricts
score these concerns. For example, in a num- technology diffusion
ber of middle-income countries, the majority Neither the banking system, nor equity mar-
of primary school students fail to meet OECD kets, nor private sector bond markets in devel-
literacy standards. In Sub-Saharan Africa, de- oping countries have channeled savings into
spite enrollment rates of close to 100 percent, the private sector to the same extent as they
in some countries fewer than half of grade six have in high-income countries (table 3.10). As
students are deemed literate (figure 3.17). a result, the arm’s-length channels through
Although based primarily on data from high- which private savings can be directed toward
income countries, research suggests that innovative firms are limited. While banks in
teacher quality is a key determinant of differ- high-income countries play a significant role in
ences in student outcomes (Hanushek and relaying private savings to investors (private-
Woessmann 2007). sector debt is equivalent to some 50 percent of
GDP in high-income countries), this kind of in-
Financing innovative firms termediation occurs at about half that level in
So far, the discussion has described how the pol- middle-income countries and almost not at all
icy environment and human capital can pro- in low-income countries. On a more encourag-
mote technology diffusion. At the same time, ing note, the run-up in international investors’
and as indicated in chapter 2, affordability, both appetite for risk has increased market capital-
at the level of the firm and of the consumer, can ization in developing countries by significant
be a major impediment to the diffusion of tech- margins since 2000 (with the exception of East
nology within a country. In this regard, the suc- Asia, where valuations declined). Valuation
cess with which an economy’s financial system ratios are now much closer to those observed
succeeds in channeling resources (savings) in high-income countries.
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D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
(% GDP) (% GDP)
Regions
East Asia and the Pacific 40.9 41.7 45.6 11.5 38.7 44.1 51.3 32.5
Europe and Central Asia 23.8 22.8 31.2 31.0 8.5 13.8 19.7 130.8
Latin America and
the Caribbean 31.1 39.9 39.8 28.1 11.7 28.2 46.4 298.3
Middle East and
North Africa 46.5 47.4 59.8 28.7 16.0 26.1 63.8 298.3
South Asia 22.5 33.3 43.7 94.0 6.7 13.4 26.1 290.0
Sub-Saharan Africa 18.5 19.9 24.4 31.4 31.0 27.0 34.9 12.4
Income groups
High-income countries 76.0 87.0 91.4 20.4 45.1 105.0 112.2 148.7
Upper-middle-income countries 34.3 43.6 45.2 31.8 37.7 36.5 50.2 33.4
Lower-middle-income countries 36.0 34.3 39.4 9.7 13.4 20.4 34.3 156.7
Low-income countries 16.7 17.4 21.8 30.7 7.6 10.8 22.3 194.7
(% GDP) (% GDP)
Regions
East Asia and the Pacific 30.3 36.7 44.9 48.2 — 37.5 31.0 ..
Europe and Central Asia 22.3 18.2 27.9 25.3 — 12.7 12.2 .
Latin America and
the Caribbean 28.6 40.6 32.1 12.3 — 27.2 23.3 ..
Middle East and
North Africa 35.3 40.5 46.1 30.7 — — — ..
South Asia 16.2 21.6 34.1 110.4 — 1.9 4.0 ..
Sub-Saharan Africa 17.4 16.3 18.2 4.4 — 20.1 30.2 ..
Income groups
High-income countries 81.1 94.2 108.2 33.3 — 47.9 50.0 ..
Upper-middle-income countries 32.8 42.5 40.5 23.6 — 27.5 26.1 ..
Lower-middle-income countries 27.3 29.3 31.9 16.7 — 27.7 23.4 ..
Low-income countries 14.9 13.4 16.4 9.7 — 1.9 4.0 ..
Source: Beck, Demirgüç-Kunt, and Levine 2000. Financial Structure Dataset updated March 20, 2007. For Private Sector
Debt the source is World Bank, Financial Sector Development Indicators. http://www.financial-indicators.org (February 2007).
Note: — ⫽ not available; .. ⫽ undefined.
Barriers to the finance of high-risk entrepreneurs are less likely to obtain financ-
activities severely impede the spread ing than experienced entrepreneurs operating
of technology with proven techniques. Coupled with thin
Although weak intermediation is a general markets, this translates into higher capital
problem in developing countries, the problem costs for innovative firms in developing coun-
for innovative firms or companies seeking to tries than for those in high-income countries, a
employ an untested new-to-the-market tech- fact that is reflected in lower R&D intensities
nique or product is more severe. Innovation (Lederman and Maloney 2006) and a reduced
can involve high risk, and traditional sources likelihood that their financing needs are met.35
of capital—banks, stock exchanges, and Innovative firms in developing countries
bond markets—often lack the technical exper- are also less likely to have access to equity
tise to evaluate innovative investments. Thus financing than do their counterparts in high-
in the absence of demonstrated cash flows income countries because of strict listing
or enforceable collateral, innovative firms or requirements imposed by the regulators of
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G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
140
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
Higher Higher
R&D spending Business Government education Business Government education
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G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
high-income countries (table 3.12). Note, the diffusion of often simple but important
however, that in China, despite rapid techno- technologies. Agricultural outreach programs
logical progress, the efficiency of R&D spend- were instrumental to the green revolution,
ing is relatively low and the impact of R&D is even though it took much longer than initially
impaired because of poor linkages among gov- expected for those programs to bear fruit
ernment R&D institutes, businesses, and uni- (World Bank 1998). Difficulties encountered
versities (Zeng and Wang 2007). In Europe in other efforts to disseminate technology
and Central Asia and in Latin America and the include a lack of skilled personnel to staff
Caribbean, academia and the government are the outreach program and the need to earn the
responsible for a much higher share of R&D. trust of the local population. Here challenges
Moreover, in the latter region coordination include minimizing the risks people run in
between R&D carried out by government in- trying a new technology, listening to their ex-
stitutions and private firms has been poor, periences, and adapting techniques as a conse-
reducing the impact of R&D on productivity quence (World Bank 2007d). Enhancing the
growth (de Ferranti and others 2003). role of farmers in agricultural outreach pro-
Research on OECD countries suggests that grams and relying more on cooperation be-
the more R&D is conducted at the firm level, tween government and the private sector—in
the higher the rate of return to public and aca- those areas where private benefits from
demic R&D, presumably because having R&D technology transfer can be substantial—may
expertise close to the firm increases the likeli- improve both the impact and financial sus-
hood of successful adaptation of a technology tainability of outreach efforts.
created in government, academic, or even for-
eign laboratories (Guellec and Pottelsberge de Direct government policies to
la Potterie 2004). Maloney (2006) concludes promote technology
that state-funded R&D that is too academic Innovation requires entrepreneurs: people
and/or too disconnected from the private sec- who are willing to take risks to invest in un-
tor is less effective at promoting technological certain projects and who have the organiza-
progress than firm-conducted R&D or state- tional skills required to bring new products to
supported R&D that has a strong connection the market. Given the high risks involved, the
to business needs. Indeed, the relatively high returns to successful entrepreneurship must
share of private sector R&D in East Asia and be high, but the returns to investment in new
South Asia may have contributed to the more technology in developing countries can be lim-
rapid technological progress in those regions ited, because potential profits may be reduced
than in Latin America and the Caribbean and by imitation, because of a lack of coordination
Europe and Central Asia. between firms that produce complementary
inputs, or because economies of scale and ag-
Outreach plays a critical role in bringing glomeration generate threshold effects that
technology to the broader population prevent firms from breaking into mature mar-
Too often the overall effectiveness of R&D kets (box 3.6).
undertaken by government and specialized re-
search institutes is reduced because such orga- Government policy can play a central role
nizations are divorced from their eventual in helping firms overcome market failures
clients and their incentives are poorly aligned The difficulties that these externalities pose for
with the ultimate dissemination of their inven- firms in certain sectors and those seeking to
tions and adaptations.39 Especially in poor adopt a new-to-market (or even new-to-
countries plagued by illiteracy and weak com- the-firm) technology imply that specific
munication networks, technology outreach government interventions may be necessary to
programs can play a critical role in increasing encourage investment in technology.
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D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
Governments in developing countries have un- technologies that it would not otherwise adopt
dertaken a host of direct interventions in because of capital market imperfections. These
productive activities to provide demonstration steps have included the following:
effects, encourage innovation that otherwise
would not occur because imitators reap the • Providing support for industry-specific
lion’s share of benefits, resolve coordination research. For example, Malaysia
failures, and move an industry toward efficient funded industry-specific R&D, provided
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G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
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D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
subsidies, government influence over the Embraer did not become commercially suc-
allocation of production, and directed cessful until it was privatized. More generally,
credit programs. The extent to which such the import-substitution policies followed by
policies were necessary to these countries’ many countries in Latin America and Africa
success has generated some controversy and India’s inward-focused policies severely
(Hernandez 2004), and the forms of hampered economic and technological devel-
intervention in high-growth East Asian opment. To take two of the countless exam-
economies were by no means identical. ples, first, rather than promoting the develop-
For example, Korea (box 3.8) favored tar- ment of a technologically sophisticated export
iff protection and constraints on FDI to industry, the tariffs, price harmonization, and
maximize technology transfer; Singapore import licensing programs imposed in Côte
encouraged FDI; and Hong Kong, China, d’Ivoire diminished incentives for efficiency in
practiced laissez-faire policies. Neverthe- its textile industry, making it internationally
less, some observers doubt that such in- uncompetitive. Second, Brazil’s attempts to
terventions were pervasive in many of the promote its domestic personal computer sec-
most successful East Asian economies. tor by banning imports and FDI, awarding li-
censes for production, providing fiscal incen-
But government efforts at promoting tives, and establishing a public research center
technological champions have often failed resulted in an inefficient industry, high domes-
Notwithstanding the wide range of support tic prices, and lagging technology (World
policies that governments have tried and the Bank 1998).
existence of many apparent success stories, Two important issues distinguish industrial
such policies have often been spectacular fail- policies in the successful East Asian countries
ures. Even among the examples cited, it is not with those in many other countries. First, in
clear that all should be considered successes. contrast to Latin America, where subsidies
For example, the Brazilian aircraft maker were often provided free of performance
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G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
criteria, East Asian countries conditioned Branstetter, Fisman, and Foley 2005; Maskus
subsidies on performance (often export per- and Konan 1994). Other studies show a posi-
formance), essentially relying on external tive effect of strong intellectual property
competition to discipline the market.41 Sec- regimes on FDI both in influencing location
ond, East Asian countries maintained high- decisions by multinational corporations and
quality bureaucracies that for the most part in inducing foreign firms to invest in produc-
avoided capture by industrial interests, thereby tion rather than in distribution activities
maintaining a balance between knowledge (Javorcik 2004; Lee and Mansfield 1996;
and involvement in productive activities and Mansfield 1994; Maskus 1998).42 Some evi-
state autonomy. In Latin America, industrial- dence suggests that while a stronger intellec-
ists often captured bureaucracies, while in tual property rights regime is associated with
many Sub-Saharan African countries, the in- a rise in flows of knowledge to affiliates and in
terests of industrialists or corrupt officials inward FDI toward middle-income and large
dominated government interventions. developing countries, this is not the case for
poor countries (Fink 2005; Hoekman,
Imitation opportunities may boost Maskus, and Saggi 2005; Smith 2001).
technological diffusion, but have costs Overall, the impact of intellectual property
The possibility of adopting technologies rights on FDI depends on the nature of the
already elaborated in more technologically sector. Intellectual property rights appear to
advanced economies represents a fundamental have little impact on investment in lower-
advantage of less-advanced developing technology goods, such as textiles and ap-
economies and is the basis for much of their parel; services sectors, such as distribution and
R&D and outreach activity. Indeed, many de- hotels; or in sectors where the sophistication
veloping countries with relatively advanced of the technology itself or the cost of produc-
levels of technological achievement (Brazil, tion already serves as an effective barrier to
China, India, the Republic of Korea, Mexico, entry. Indeed, the increased ease with which
and Malaysia), as well as Japan, initially used some products such as pharmaceuticals, chemi-
an explicit policy of copying foreign technolo- cals, food additives, and software are reproduced
gies. While this strategy proved successful to a
point, eventually the successes that these
economies had in the markets of their higher- Figure 3.18 Levels of intellectual property
technology competitors meant that these protection
competitor countries became increasingly Index
unwilling to share technology with them. 5
A substantial literature attempts to grapple High-income countries
empirical evidence is ambiguous overall. Source: World Bank calculations based on individual country
Some studies find no relationship between data provided by Walter Park, American University.
Note: A higher score on the index indicates stronger
the level of intellectual property rights and intellectual property rights.
FDI or licensing (Primo Braga and Fink 2000;
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D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
may explain the rising interest in establishing in- corruption and is frequently biased in favor of
tellectual property rights (Maskus 2000). local products (most developing countries pro-
Perhaps reflecting such considerations, a vide preferential treatment to local suppliers in
general trend toward strengthening the legal government procurement [Kohr 2007]), the
protection afforded by intellectual property use of advanced communications and informa-
rights has been apparent since the latter half of tion technologies can raise the transparency
the 1980s (figure 3.18). Among developing and efficiency of government procurement
countries, the legal basis for such rights has and can ensure greater competition, thereby
progressed most in upper-middle-income contributing to an overall improvement in the
countries, where levels of protection now ex- quality of government services.
ceed the levels in high-income countries in the More broadly, the integration of informa-
mid-1990s. Progress in lower-middle-income tion and communications technology tools
and low-income countries has been less has tremendous potential for improving access
marked, reaching about the same level as in to government information, increasing public
high-income countries in the 1990s and 1970s participation in government decision making,
respectively (note, however, that the index in and making government services more readily
figure 3.18 refers to the protection offered in available to the public (World Bank Informa-
statutes, not in practice). tion for Development Program and Center for
Democracy and Technology 2002). In addi-
Governments can also promote tion to enhancing government efficiency, such
technological progress in their own improvements can help reduce costs and im-
operations . . . prove services to private sector firms, thereby
In many developing countries the government increasing the potential for technological
accounts for a significant share of productive progress. While many industrial countries
activities. Using technology to increase the pro- have used the Internet to improve local access
ductivity of government operations can help to information and services, its potential re-
raise the efficiency of the economy as a whole mains largely unexploited in many developing
by improving health and education services countries. Nevertheless, some developing
(see chapter 2 and the foregoing discussion of countries are implementing e-government sys-
human capital); enhancing the effectiveness tems that are as or more sophisticated than
and reducing the costs of publicly-provided those used in some high-income countries
power, telecommunications, and water and (United Nations 2003). Also, the use of
sanitation; providing approaches to regulation electronic systems has helped improve the effi-
and tax administration that are less burden- ciency of customs services in many countries.
some to firms; and demonstrating the feasibil- A survey of case studies in developing
ity of new technology that firms can copy. One countries outlines some initial steps in use of
area where dramatic efficiency gains are possi- the Internet to improve tax administration
ble is greater use of technology in government and general services and to enhance the trans-
procurement. Countries that have imple- parency and efficiency of government opera-
mented Internet-based procurement systems tions (Ndou 2004). The survey underlines the
include Brazil (including in some local govern- importance for the success of e-government
ments), Chile, Mexico, and the Philippines.43 initiatives of appropriate stocktaking of the
Implementing e-procurement systems may re- current state of telecommunications networks;
quire changes in laws and policies governing of raising awareness of the potential for, in-
government operations (for example, ensuring formation and communications technology
that government agencies can contract with beginning with relatively small projects to test
foreign firms that can provide such systems. feasibility; of stimulating collaboration among
Although procurement is often a focus of government departments; and of making
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G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
substantial investments in equipment and soft- product and the market structure involved.
ware, human capital, and appropriate organi- Standards may be defined by private firms with
zational changes. Other important issues perti- dominant market shares or agreed on through
nent to implementing e-government systems a collaborative process negotiated within the
include its coverage (comprehensive, national context of professional organizations. They
efforts may be appropriate for small countries, may also be imposed by government regula-
but may be too complex and difficult in large tion, or they may derive from some combina-
countries); the ability of the enabling environ- tion of collaboration and imposition. Partici-
ment to support e-government initiatives, for pation in international organizations can help
instance, adequate infrastructure, an appro- developing countries understand and influ-
priate legal framework, political commitment, ence international standards. The Interna-
and public involvement; and the availability of tional Organization for Standardization, with
strong project management skills (Bhatnagar 132 developing country members, is a forum
and Deane 2002). for agreement on technical specifications for a
variety of products.44
. . . and encourage improved technology
through product standards Coherent policies and committed
Governments can play a key role in boosting government leadership are critical for
technological progress by defining and pro- technological progress
moting standards for products made by pri- No single blueprint for technological progress
vate firms and by facilitating quality control exists, but most success stories have involved
to help firms comply with standards. Good strong central leadership to ensure a consis-
standards support technological progress by tent and effective policy framework that sup-
increasing consistency and ensuring minimum ports the development and commercialization
product performance; facilitating the connec- of innovations. Technological progress is
tion of components in complex systems by largely implemented by private firms. How-
standardizing the interfaces between different ever, progress at the firm level requires gov-
parts of the system; offering buyers a greater ernment support, elements of which include
choice of suppliers at lower risk and lower the following: an appropriate incentives
cost and the prospect of faster and more framework, including overall political and
reliable system development; and offering economic stability and government trans-
manufacturers and vendors easier entry to parency, along with specific technology poli-
markets, economies of scale, and lower prod- cies such as protection of intellectual property
uct liability risks (Yokota and Weiland 2004). rights; investments in human capital, includ-
The transmission of information about stan- ing general education and technical training
dards can be an extremely useful channel for where firms underinvest in training because of
technology transfer. Implementing well-defined the potential mobility of trained staff; support
standards, including testing and sanctions for for R&D of new-to-the-market technologies
noncompliance, can be critical in maintaining because of difficulties in appropriating the full
a country’s reputation for quality, which is im- benefits from such efforts; and, where appro-
portant for establishing and maintaining ac- priate, government interventions to overcome
cess to global markets. market failures involving coordination,
The value of a country’s reputation, the ben- threshold effects, and agglomeration effects
efits of coordination, and the protection of (box 3.6). Most technological success stories,
health and safety underline the government’s including Germany in the 19th century, Japan
role in promoting and enforcing standards, before and after World War II, the East
even in competitive product markets, but the Asian miracle countries, Chile, Ireland, and
government’s specific role will depend on the Israel have involved strong national leadership
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D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
Index
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
High-income Upper-middle-income Lower-middle-income Low-income
countries countries countries countries
% change
40
30
20
10
⫺10
⫺20
High-income Upper-middle-income Lower-middle-income Low-income
countries countries countries countries
and a coherent strategy for promoting two-step procedure was followed. The first
technology. step was to estimate a separate summary
index of the quality of the macroeconomic
environment, financial market intermedia-
An overall index of technological tion, human capital, and governance. The
absorptive capacity technical annex to chapter 2 describes
Figure 3.19 summarizes countries’ level of the estimation process used and the results of
technological absorptive capacity and the principal components analysis in more
changes over the past 10 years. The overall detail than provided here and table A2.2
index was generated following the same summarizes the individual indicators that
methodology used to construct the index of went into the index.
technological achievement discussed in chapter The most important determinants of the
2 and the index of exposure to external tech- overall index are the governance variables
nologies discussed earlier in this chapter. As (with a 37 percent weight), followed by
was the case for technological achievement, a human capital variables (with a 25 percent
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G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
weight), and financial intermediation (with a has reached the limits that can be achieved
27 percent weight), followed by the macro- from relatively easy adoption and imitation of
economic environment (with an 11 percent existing technologies given current levels of ab-
weight). sorptive capacity and that further improvement
Compared with the technological achieve- may require substantial enhancement of ab-
ment index, technological absorptive capacity sorptive capacity.
is more clearly correlated with income, with
less of an overlap across countries in different
income groups. This probably results from the Conclusion
complex causal relationship that may exist be-
tween technological absorptive capacity, tech-
nology, and income, in which technology is a
T echnology diffusion in developing coun-
tries depends both on access to foreign
technology (through trade, FDI, international
function of technological absorptive capacity migration, and other networks) and on the
and affordability, income is a function of tech- ability to absorb technology (as determined by
nology, and affordability is a function of in- the quality of government policy and institu-
come, with income being both an indirect tions, the stock of human capital, the efforts at
cause and an effect of technological absorptive R&D, and the financial system). One implica-
capacity. tion of the analysis and data presented in the
Reflecting the complexity of the institu- preceding two chapters is that prospects for
tions that generate technological absorptive further technological progress in low- and
capacity and the difficulties of reforming middle-income countries are good. Over the
some of the measures included in the index past 15 years, the main international channels
(see technical annex to chapter 2), progress through which technology is transferred have
has been more limited than was the case for increased. Developing countries’ imports of
technological achievement (where the index high-tech goods and of capital goods have
increased by 160 percent for low-income risen relative to GDP, and their share in global
countries). Relatively few countries improved high-tech export markets has increased. In-
their overall score for absorptive capacity by flows of FDI have increased sixfold relative to
more than 10 percent between 1990 and developing countries’ output, and opportuni-
2000 (the strongest negative score in low- ties to purchase technology have risen along
income countries was recorded by Zimbabwe with FDI outflows.
and reflects mainly the deterioration in Simultaneously, the absorptive capacity of
macroeconomic and governance conditions developing countries has been increasing, al-
there in recent years). Moreover, in contrast beit more slowly. Youth literacy rates are as
to technological achievement, there is little much as 15 percentage points higher than for
sign of catch-up. Developing countries are the adult population. As a result, the basic
improving their technological absorptive ca- technical literacy of the population has been
pacity at about the same rate as high-income increasing, and it should continue to do so for
countries.45 many decades. The macroeconomic instability
The relatively weak improvements in ab- that plagued developing countries during the
sorptive capacity notwithstanding, the relative 1970s and 1980s has declined, and the busi-
strength of the technological improvement ob- ness climate has improved, although not by
served to date might be comforting. At the as much or as uniformly as one might have
same time, the relatively weak increases in tech- hoped. Technological achievement should
nological achievement in Latin America and continue to rise over the medium term as long
the Caribbean and in the Middle East and as these trends continue and assuming there
North Africa may reflect that technological are no major disruptions to global trade and
progress (and TFP growth) in those countries financial systems.
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Of particular note is the speed with which middle-income countries. However, this find-
communications technologies are evolving ing reflects rapid progress in a few countries
and diffusing in the developing world. Only and more modest performance in many others
27 years after the introduction of cell phone that are only maintaining their ground relative
technology, mobile phones are being used in to high-income countries.
virtually every country, and penetration rates Notwithstanding strong technological
are rising rapidly. Moreover, the range of eco- progress in some cities and greater openness to
nomic activities that were once heavily depen- technological flows, the gap between existing
dent on infrastructure and that are now being competencies and those needed to converge
conducted using mobile phone technology is with technological progress in high-income
impressive and growing daily. Already mobile countries is immense, especially in rural areas.
phones are bringing banking, remittances, and Moreover, the pace at which absorptive ca-
arm’s-length financial transactions to regions pacity is rising is disappointing. While some
of the world that until recently were unserved. countries have recorded significant increases,
Given the pace at which things are changing, on average, developing countries are not
most developing countries should continue catching up to high-income countries, suggest-
to see a rise in their ability to communicate ing that the gap in their technology potential
and process information over the next few is not closing. As a result, unless substantial
decades, which should help speed the diffu- steps are taken to raise basic competencies
sion of other technologies as well. and invest in local networks that successfully
For middle-income countries, the relatively disseminate technologies and technological
rapid technological progress of the past few competencies, many of these countries are not
years and the improvements in both openness expected to be able to master anything more
and technological adaptive capability suggest than the simplest of forthcoming technologies
that their level of technological sophistication (box 3.9).
should continue to converge with that of higher- One bright spot is the relatively rapid dif-
income countries. However, even the most ad- fusion of some new technologies in low-
vanced of the middle-income countries will be income countries. Declining computing costs
unable to benefit fully from the new technolo- and prospects for rapid declines in the cost
gies that are expected to become both techni- of wireless Internet connections may en-
cally and economically viable over the next hance the efficiency of ongoing economic
several years because of inadequacies in their activities in low-income countries and may
infrastructure (unreliable power or communi- enable them to leapfrog into more advanced
cations systems), insufficient technical literacy, technologies (Primo Braga, Daly, and Sareen
or the absence of a critical mass of scientists and 2003).46 However, successful exploitation of
engineers necessary to exploit the technology these new technologies will require stepped-
(box 3.9). For some countries, the relative slow- up investments in human capital and reforms
ness with which technological absorptive in policy and regulation to provide an ap-
capacity has been advancing could slow the propriate incentives structure for invest-
pace of convergence as missing competencies ments in information and communications
become an increasingly binding constraint on technology.
the absorption of additional technologies. A rigorous road map for achieving rapid
For low-income countries, the prospects are technological progress does not exist. Never-
more complex. On average, among the low- theless, the evidence presented in this report
income countries for which sufficient data are points to a number of conclusions, principles,
available to calculate recent increases in and policy directions that appear likely to pro-
technological achievement, convergence is mote technological progress and that may be
occurring and is doing so more quickly than in able to guide policy makers. Exactly how
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D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
much weight to give to each of these conclu- testing, marketing, and dissemination
sions and how they interact depends on spe- activities. The huge rural–urban divide in
cific country circumstances and should be the both technology and absorptive capacity
subject of future research. These policy direc- in many developing countries underlines
tions include the following: the importance of such activities to in-
clusive development.
• Openness to external technologies • The government can also have an impor-
through foreign trade, FDI, diasporas, tant impact on economic progress by in-
and other international networks is criti- tegrating new technology into its own
cal for technological progress for both operations, including in the provision of
low- and middle-income countries, education, health, and publicly-provided
where most progress occurs through the infrastructure; in the procurement of
adoption, adaptation, and assimilation goods and services; in the provision of
of preexisting but new-to-the-market or information and in fostering public dia-
new-to-the-firm technologies. logue; and in the definition of standards
• The capacity of firms or individuals to use for commercial products.
a technology depends critically on the • The principal challenge facing many low-
basic technological literacy of workers and income countries is not their access to
consumers. The level of technological lit- technology, but their absorptive capacity,
eracy, in turn, depends on the government’s including physical, human, and institu-
capacity to deliver a quality education to tional capacity; their limited financial
the largest number of people possible. resources; and the extent to which their
• The preeminent vehicles for the dissemina- social and political environments are
tion and diffusion of technology in a mar- supportive of entrepreneurship, invest-
ket economy are firms and entrepreneurs. ment, and technological progress.
Their success in doing so depends on their
These conclusions highlight the critical role
ability to undertake and expand new activ-
of the government in establishing the general
ities. This requires a stable macroeconomic
conditions that support rapid technological
environment, together with a regulatory
progress, in helping to overcome market fail-
environment that effectively enforces
ures that constrain innovations by firms, and
property rights and the rule of law, does
in providing (and purchasing) high-quality
not excessively restrict firms’ ability to hire
goods and services. Countries that have
and fire, and does not impose excessive
achieved sustained and rapid technological
regulatory or financial burdens.
progress have generally benefited from com-
• The capacity of firms or individuals to
mitted national leadership that follows coher-
take advantage of a technology can be
ent development policies, although the nature
constrained by affordability and by li-
of these policies—in particular, the degree of
quidity, thereby placing a premium on the
public sector intervention in private markets—
efficiency with which the financial system
has varied enormously.
intermediates between savers and bor-
rowers both domestically and abroad.
• Given the existence of market failures, Notes
the government has a role to play in as- 1. The econometric evidence is mixed. Harrison
(1994) for Côte d’Ivoire and Haddad, de Melo, and
sisting firms to learn how to adapt,
Horton (1996) for Morocco find no statistically signif-
adopt, and market new technologies. In icant impact of import penetration on productivity fol-
addition to focusing on R&D in new-to- lowing trade liberalization. Nishimizu and Page (1982)
the-market technologies, applied R&D for the former Yugoslavia; Tybout, de Melo, and
agencies need to emphasize outreach, Corbo (1991) for Chile; and Tybout and Westbrook
153
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
(1995) for Mexico find a positive relationship between (2000) find that Ghanaian firms with higher technical
import penetration and firm efficiency. Grether (1999) efficiency become exporters. Isgut (2001) finds that
and van Wijnbergen and Venables (1993) for Mexico, exporting firms in Colombia had higher labor produc-
Earle and Estrin (2001) for Russia, Falk and Dierking tivity than nonexporters three years before entering the
(1995) for Poland, Levinsohn (1993) for Turkey, and export market, but that afterward there is no difference
Roberts (1996) for Colombia find a positive impact of in the growth of labor productivity of exporters as com-
import penetration on either industry markups or mea- pared with nonexporters. Fafchamps, Zeufack, and
sured labor productivity. El Hamine (2002) find that in Morocco, more produc-
2. Keller (1998) casts doubt on these results by tive firms move into exports. However, after initiating
showing that the relationship also holds for randomly exports they do not achieve more rapid reductions in
generated import shares, but Lumenga-Neso, Olarreaga, production costs than nonexporters, although they do
and Schiff (2005) find that imports from countries that learn to improve product design to suit foreign markets.
import from other R&D centers are positively related 7. Following Lall (2001), the nomenclature used is
to productivity and that these indirect spillovers are at SITC 3-digit, Rev. 2.
least as important as direct spillovers. 8. Costa Rica has emerged as a high-tech platform
3. Lall (2000, 2001) identifies four categories of for foreign investors and increased its world market
products: resource-based products; low-tech products, share of high-tech products from 0.01 to 0.20 percent
which include textiles and fashion; medium-tech prod- between the mid-1990s and 2002–04.
ucts; and high-tech products. According to this classifi- 9. Between 1992 and 2003, developing countries
cation, which is defined using SITC 3-digit rev. 2, made some 2,563 favorable changes to national laws
technological products do not include agricultural and regulations relating to FDI. The most frequent
products, moderately processed food products, to- changes concerned FDI promotion and incentives
bacco products, minerals, construction materials, and (855), sectoral restrictions (497), operational condi-
energy products. tions (406), guarantees (304), and corporate regula-
4. Available data provide only a rough indication of tions (153). During the same period, 113 developing
the sophistication of economic activity, because ascer- countries became members of the World Trade Orga-
taining the level of sophistication of the capital goods nization, which required the elimination of many re-
imported is not possible. Also some countries may im- strictions and impediments to FDI, particularly in the
port relatively sophisticated capital goods for use in en- services sector (World Bank 2004a).
clave production (for example, oil and minerals) with 10. The world’s largest R&D investors conducted
little spillover into the rest of the economy. an average of 28 percent of their R&D outside their
5. Chandra and Kolavalli (2006) cite important home territory in 2003 (UNCTAD 2005).
spillover effects from exporting electronics and software. 11. This section builds on many studies of FDI
6. The contradictory evidence from case studies spillovers that have identified possible channels for
and econometric studies may be due to the different technology transfers and knowledge spillovers
impacts of exports across industries and countries, as through FDI (Görg and Greenaway 2004; Görg and
well as difficulties inherent in classifying firms (some Strobl 2001; Javorcik 2007; Lipsey 2002; Moran
studies classify exporters on the basis of surveys with 2007; Saggi 2002).
yes-no answers rather than measuring the volume of 12. Javorcik (2004) finds that the TFP of Lithuan-
exports) (Keller 2004). Also the argument for tech- ian firms is positively correlated with the extent of po-
nology transfers through exports refers only to some tential contacts with multinational customers in down-
exports—namely, new products or products that have stream sectors. Blalock and Gertler (forthcoming) and
evolved over time, and export statistics may not cap- Kugler (2006) find strong evidence that vertical supply
ture such subtleties. Firms that export the same prod- chains were a channel for technology transfers in
uct that is not subject to significant upgrading may not Colombian and Indonesian manufacturing sectors.
benefit from spillovers. If some firms improve their Swinnen and others (2006) show that investments by
productivity through exports and some do not, and foreign companies in processing and retailing in East-
available data do not permit distinguishing between ern Europe have introduced higher standards, which in
these firms, measuring the extent of productivity im- turn led to significant efficiency gains by suppliers.
provements over time may be difficult. For specific ex- 13. Javorcik (2007) documents the increased com-
amples, see Tybout and Westbrook (1996), who find petitive pressures from foreign entry in Czech and Lat-
that trade liberalization in Mexico benefited exporters vian firms, and the McKinsey Global Institute (2003)
because of declines in prices of imported inputs, but cites case studies where competition is a key factor in
had no effect on productivity. Soderbom and Teal diffusing FDI-introduced innovations.
154
D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S
14. Ayyagari and Kosova (2006), using Czech FDI sending countries, (b) knowledge spillovers when re-
data for 1994 to 2000, show that spillovers vary sub- turning migrants assume managerial positions in their
stantially across industries. Although service industries home country, (c) networks of diaspora researchers
benefited from huge FDI spillover effects through both and scientists performing research directed at the needs
horizontal and vertical channels, manufacturing indus- of their country of origin, (d) “virtual” return through
tries did not show any significant positive spillover ef- extended visits and electronic communication in fields
fects from FDI. such as medicine and engineering, and (e) return to
15. Belderbos, Capannelli, and Fukao (2000) find permanent employment in the country of origin after
that the proportion of inputs sourced locally by Japan- gaining work experience in the host country.
ese multinationals increases with the number of years 23. Estimates suggest that a 10 percent increase in
of operation in a given host country. skilled migrant stock in the United States is associated
16. These data are incomplete, as only 90 of 150 with a 4 percent increase in the flow of FDI (in current
developing countries (on average across 1999–2006) dollars) to the home country (Mattoo, Özden, and
reported royalty and license fee payments. The data Neagu 2005).
may also overstate payments for technology transfer, as 24. This result is supported by work on high-
developing countries with mineral or oil investments income countries that shows immigrant ties have been
abroad may report the payment of substantial royalties important determinants of U.S and Canadian bilateral
that represent fees for extraction rights rather than for trade (Gould 1994; Head and Ries 1998; Wagner,
the purchase of technology. Head, and Ries 2002).
17. Between 1990 and 2000, the number of tertiary- 25. Kuznetsov (2007) argues that diasporas can act
educated emigrants from developing countries that as global search networks by leveraging their contex-
resided in OECD countries rose from 19.1 million to tual knowledge of their home countries’ economy and
37.8 million (Docquier and Marfouk 2004). institutions to identify untapped resources and oppor-
18. Even though a majority of Argentine doctoral tunities, such as research capabilities, availability of
graduates in the United States prefer to remain in the technical manpower, and business-friendly local gov-
host country, most respondents in a survey of high- ernments.
skilled Argentine diaspora members in Europe, the 26. Among members of the Philippines Brain Gain
United States, and elsewhere expressed their willing- Network, 35 percent have a master’s degree and 23 per-
ness and interest in helping develop science, technol- cent hold a doctorate, while 49 percent of the members
ogy, and education in their home country (Kuznetsov, of the South African Network of Skills Abroad have a
Nemirovsky, and Yoguel 2006). master’s degree and another 30 percent have a doctor-
19. Of these technologically sophisticated émigrés, ate (Brown 2000).
56 percent were born in Asia, with Latin America and 27. The Taiwanese diaspora and returning migrants
the Caribbean accounting for another 15 percent were active conduits for technology transfers. For ex-
(Kannankutty and Burrelli 2007). ample, in 2000, 113 out of 289 companies at the Hin-
20. Agrawal, Kapur, and McHale (2007), using schu Science-Based Industrial Park in Taiwan, China,
patent data, find evidence of the influence of the dias- were started by U.S.-educated Taiwanese (O’Neil 2003).
pora in technology transfers to home countries. 28. Countries with strong institutions such as
21. The Mexican Ministry of Science and Technol- Chile, the Republic of Korea, and Scotland have been
ogy views the presence of 1 million tertiary-educated able take advantage of their high-skilled diasporas,
Mexican migrants in the United States, with an esti- while others such as Argentina, Armenia, and
mated 400,000 in managerial positions, as a unique, un- Colombia have not succeeded as well despite having
explored opportunity for knowledge transfers many programs (Kuznetsov 2006).
(Kuznetsov 2006). Emigrants from China and India 29. Finding a relevant, available indicator of the
were running almost 30 percent of Silicon Valley’s size of the diaspora to include in the index proved dif-
(California) technology businesses by the end of the ficult. The data series used included FDI net inflows,
1990s (Saxenian 2000, 2002). In addition, 25 percent of royalties and license fee payments, imports of high-
all engineering and technology companies started in the tech goods, imports of capital goods, and imports of
United States during 1995–2005 had a foreign-born per- intermediate goods—all as a percent of GDP. Imports
son as a key founder (Wadhwa and others 2007). of intermediate goods and net FDI inflows have the
22. Page and Plaza (2006) argue that technology largest weight in the calculation, accounting for more
transfer by migrants takes place through several chan- than half the total.
nels: (a) licensing agreements between diaspora-owned 30. The productivity benefits from the adoption of
or managed firms in host countries and firms in new technology are best realized in the context of low
155
G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8
inflation, stable exchange rates, sustainable government not very effective on average, with success being heav-
finances, and positive income growth (Pack 2006). ily dependent on the design of the tax measures.
31. Liu and Tybout (1996) and Roberts and Tybout 41. Such programs are more difficult to implement
(1997) present data from Chile, Colombia, and today in light of World Trade Organization restrictions
Morocco confirming that the entry and exit of firms on export subsidies (Rodrik 2004).
makes an important contribution to productivity 42. The intellectual property regime is only one
growth. consideration among many, including various local
32. Data are taken from the World Bank’s Doing market and sector characteristics, that enter into multi-
Business Web site (http://www.doingbusiness.org). national corporations’ decisions on how to deploy
33. See Keller (2004) for a survey of the economic technology internationally (Mansfield 1994, 1995).
literature on this topic. Education levels are typically 43. See World Resources Institute Digital Dividend
important in empirical studies of cross-country differ- (http://www.digitaldividend.org) and the Working
ences in growth rates and in labor productivity (Chen Group on E-Government in the Developing World
and Dahlman 2004), but these studies do not deter- (http://www.pacificcouncil.org/pdfs/e-gov.paper.f.pdf).
mine the channel through which human capital con- 44. See http://www.iso.org.
tributes to growth. 45. There is a slightly inverted U shape to the dis-
34. In some countries, the limited rise in public ex- tribution of improvements in technological absorptive
penditures on education may have been balanced by in- capacity, with high-income countries recording a
creases in private expenditures. 9.1 percent improvement, compared with 9.4 percent
35. Ayyagari, Demirgüç-Kunt, and Maksimovic for upper-middle-income countries, 9.8 percent for
(2007) find a positive correlation between financial lower-middle-income countries, and 8.6 percent
market depth (proxied by credit to the private sector as among those low-income countries for which data are
a percent of GDP) and R&D intensities. available.
36. These requirements are generally imposed to 46. The development of simple, low-cost computers
reduce volatility in these often thin markets and to and the spread of open-source technology has already
bolster investor confidence in the safety of investing enhanced the affordability of new technologies for
in listed firms. While they enable some well- low-income countries.
established firms to access global capital markets by
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