Download Feasibility and impact of a European Institute of Technology

The Technological
Divide
Luc Soete
UNU-MERIT,
University of Maastricht
The Netherlands
SID lecture series on Economic Growth and the Common Good, Amsterdam March 16th, 2009
Outline


The technological divide: “How to reach ‘inclusive growth’, an
economic growth which is also benefiting vulnerable groups and
which prevents undesirable side effects?”
Knowledge on the move: from S&T to innovation




Past: the emergence of “tight” science
Present: ICT and the change in nature of technological progress
Future: Global research, local innovation
(Development) Research on the move
Past: “Research with borders”. The national research policy focus:
technological competitiveness and national dreams of leadership
 Present: “recherche sans frontière”
 Future: A new emerging innovation development paradigm?


Challenges of the financial crisis
1. The technological divide



What remains striking is how the two largest countries in the world: China and India,
saw their population’s share of world population and their share of world GDP fall
over the period 1820 till 1973. In 1973, the imbalance between the world’s
concentration of GDP and the world’s concentration of population was probably the
highest the industrialized world had ever witnessed.
This extreme geographical inequality in world GDP has to some extent formed the
basis of the unilateral focus of both social scientists and policy makers on domestic
competitiveness and in particular on technological competitiveness as essential
feature for a country’s future economic growth.
As Ulrich Beck put it: “The consequences of globalization for sociology have been
spelt out most clearly in the English-speaking countries, but above all Britain, where it
has been forcefully argued that conventional social and political science remains
caught up in a national-territorial concept of society. Critics of ‘methodological
nationalism’ have attacked its explicit or implicit premise that the national state is the
‘container’ of social processes and that the national framework is still the one best
suited to measure and analyse major social, economic and political changes. The
social sciences are thus found guilty of ‘embedded statism’ and thought is given to a
reorganization of the interdisciplinary field”.
Table 1: China India, Brazil and South Africa in the World Economy
Year
CHINA
INDIA
BRAZIL
SOUTH AFRICA
Percentage share of world population
1820
36.6
19.9
0.4
0.1
1870
28.1
17.0
0.8
0.2
1913
24.4
14.2
1.3
0.3
1950
21.7
14.8
2.1
0.5
1973
22.5
14.8
2.6
0.6
2001
20.7
16.5
2.9
0.7
Percentage share of world income
1820
32.9
16.0
0.4
0.1
1870
17.1
12.1
0.6
0.2
1913
8.8
7.5
0.7
0.4
1950
4.5
4.2
1.7
0.6
1973
4.6
3.1
2.5
0.6
2001
12.3
5.4
2.7
0.5
Source: Maddison(2003)
R&D-expenditures
http://www.sasi.group.shef.ac.uk/worldmapper/
Technological revenues
2. S&T research on the move:
a) the past
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Strong focus on industrial R&D a relatively recent phenomenon.
Long before, experimental development work on new or improved products and processes was
carried out in ordinary workshops. Technical progress was rapid but the techniques were such that
experience and mechanical ingenuity enabled many improvements to be made as a result of
direct observation and small-scale experiment. Most of the patents in this period were taken out
by "mechanics" or "engineers", who did their own "development" work alongside production or
privately. This type of inventive work still continues to-day and it is essential to remember that is
hard to capture it in official R&D statistics.”
What became distinctive about modern, industrial R&D was its scale, its scientific content and the
extent of its professional specialisation. Joel Mokyr calls “tight” S&T…
Older arts and crafts technologies continued to exist side by side with the new "technology". But
the way in which more scientific techniques would be used in producing, distributing and
transporting goods led to a gradual shift in the ordering of industries alongside their “technology”
intensity. Thus, typical for most developed and emerging industrial societies of the 20th Century,
there were now high-technology intensive industries, having as major sectoral characteristic the
heavy, own, sector-internal R&D investments and more low-technology intensive, more craft
techniques based industries, with very little own R&D efforts.
Industrial technology policy


In many policy debates, industrial dynamism became associated with the dominance
in a country’s industrial structure of the presence of those high-technology intensive
sectors.
In Europe it led to an obsession with national technological competitiveness.
European integration: a history of success and failure of industrial policy with as
central driver: the elusive pursuit for scale economies


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European problem one of scale (going back to M. Abramowitz in the 50’s, see also Jan
Fagerberg) from the origin of the European Community for Steel and Coal to sun-rise
industries Microelectronics
Focus on sun-rise industries starting with Davignon for political but also economic reasons
The European, so-called Barcelona 3% R&D/GDP target e.g., arose primarily from
concerns that Europe’s industrial R&D appeared to lag far behind that of the other
technologically leading countries such as the US and Japan.
The assumption was that more R&D carried out in Europe would be a crucial factor
behind Europe’s attempt at becoming the most competitive region in the world.
Obvious that R&D as an investment cost target is somewhat of an odd policy target.
More important is the question what the results are…
b) the present: “new”
characteristics of innovation


Shift in the nature of knowledge accumulation: from industrial, “tight”
to more undetermined outcomes, trial and error science and
technology
Traditional industrial R&D based on:




Clearly agreed-upon criteria of progress, and ability to evaluate ex post
Ability to “hold in place” (Nelson), to replicate, to imitate
A strong cumulative process: learn from natural and deliberate
experiments
Still the case in many manufacturing sectors from automobiles, to
consumer electronics, chemicals but even here tightness is
becoming more difficult with the increase in complexity
ICT and the change in nature of
technological progress

“New” technological change appears more based upon:



Flexibility, hence difficulty in establishing replication;
Trial and error elements in research with only “ex post” observed
improvements
Problems of continuously changing external environments: over
time, across sectors, in space; difficulty to evaluate

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E.g. In many IT-intensive sectors (education, health, mobility, safety,
business) efficiency improvements remain complex “stories” only to
be told ex post
Particular role of users in the R&D process itself and much larger
role for entrepreneurial, “creative destruction” based innovation
“Codified” parts of knowledge easy, but difficult to appropriate the
efficiency improvements leak quickly away, tacit parts much
more difficult, imitation never complete
From industrial to innovation policy

Distinction between novelty and routine reflected in essential
features of R&D definition and its policy support:

Professional R&D with professional S&E manpower versus routine
production with routine high/low skilled manpower
 Dominance in-house R&D over outsourcing, licensing, “open” innovation
 STS activities such as design, engineering, etc. outside of R&D

Systemic interactions between various knowledge creation and
users’ components

At innovation side blurring distinction between innovators and users:

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Innovation sometimes outside of R&D system, associated with
entrepreneurs
Innovation as novelty with respect to firm’s market, country’s market, world
market?
Role of knowledge management, organisational innovation, social innovation
University-industry interactions, public-private research collaboration
c) The future: global research,
local innovation

Relevance of innovation (policies) at different levels of development. Three
broad categories of innovation policy challenges (Aghion and Howitt, 2005):

For high income countries, such as Japan or the EU, the policy challenge is one
of the sustainability of Schumpeterian dynamism
 For emerging economies (BRIC), the challenge appears the design of “backing
winners” innovation policies based on new comparative cost advantages
 For least developing countries, the policy challenge focuses on the disarticulated
nature of the local knowledge systems

Growing scope for mutual learning from each others local experiences:
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Relevance of “community of practice” in many areas.
Differences in local university-industry-public research interactions.
Sectoral traditions in e.g. extension schemes as way to diffuse new knowledge
Link with local entrepreneurship and local context conditions
Global sharing of knowledge as
source of innovation
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The global dimensions of “collaborative innovation” can go hand in hand
with a huge concentration of R&D efforts in the US, Japan, the UK and
other EU countries with China and India rapidly catching up…
But such physical concentration will need increasingly to address global
welfare problems and demands:
In this sense the most important long term enabling factor of OECD countries’
over-concentration of R&D will be in enhancing A2K
 Not just access to the required knowledge but also to the tools to replicate and
improve upon knowledge
 Access not as passive consumption but as right and ability of participation: as a
factor enlarging the resource base of potential innovators
 Crucial role of various communities of practice (innovators, local users,
implementers, etc.)
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Role of (local) public sector in setting the fences of the commons in nature
but also in innovation, in “creative commons”
First conclusions
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Knowledge sharing shifts the attention away from the purely technological
aspects of research to the broader organisational, economic and social
aspects which are today in many cases a more important factor behind
innovation.
This is reflected to some extent in the much greater popularity of the term
innovation today than R&D
Innovation is at the same time as relevant to poor countries as it is to rich
countries. This holds a priori for countries with large, young populations
where the potential for innovation, once users/consumers are identified as
source of innovation, can easily be enhanced.
In doing so, innovation is becoming less driven by R&D and at the product
end by the continuous search for quality improvements, typical of the old
mode of technological progress, identified with the high income groups in
society, but by broader user needs across society.
At the same time, such innovation demands might feed back to R&D
departments in new ways, further globalising the impact of research.
3. Research on the move
a) Past: “Research within borders”
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The EU as case in point of research within borders:.the case could be made
that as in the case of trade diversion, a side effect of economic integration
on research activities within the EU has been intra-European knowledge
diversion
Gradual move from national to European borders: the ERA ( in French
l’espace européen de recherche) most easily comparable with a research
single market.
Lisbon fitted within this view: it should be primarily considered as a
correction on the EU institutional set-up.

Competition policy not providing necessarily growth and innovation dynamics, on
the contrary it created a lot of legal uncertainty with respect to MS national
research policies;
 Monetary/fiscal policy with growth and stability pact under the Maastricht Treaty
not providing any fiscal prioritisation with respect to knowledge investments.

Culmination of 50 years of European cocooning…
b) “Recherche sans frontière”
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Research is becoming increasingly globally driven in most applied research
in the developed world, yet many of the most challenging research
questions are often taking place within development contexts.
Broadening of the scope of research activities to include more
systematically users groups, and in particular various communities of
practice. With respect to applied research including design, the possibilities
of such collaborative innovation processes involve stronger collaboration,
interactions, and partnerships with research communities in developing
countries.
Growing role in international research partnerships of NGOs, as initiators of
research for development projects, as organisations with a wealth of user
knowledge, local community expertise and not-for-profit interest which gives
a “voice” to needs at the bottom of the income pyramid where markets are
invisible.
It is expensive to be poor; it is expensive to service the poor
c) An emerging innovation
development paradigm
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Traditionally consumer product innovation has been driven by professional
use demand directed towards the tip of the income pyramid: the long tail of
product quality, professional use improvements.
In a global setting, this has offered growth expansion opportunities to firms
thanks to rising income inequality in developed and emerging economies.
In the long term though this is likely to be an unsustainable process: high
income market penetration offers too little innovation monopoly rents

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Need to strengthen the international implementation of IPR
But with major problems of transfer pricing, parallel imports will remain in crucial
areas for welfare (health, education, nutrition)
Search on the part of the business community in the absence of Keynesian
global redistribution policies for long tails elsewhere (remember Ford’s Tmodel):


At middle income levels, youngsters, elderly, etc.
Low income, bottom of the pyramid (BoP) innovations (Prahalad), local
grassroots innovation (Anil Gupta).
Global research challenges:
insights from the South

Developing markets appear to raise some of the most motivating research/innovation
challenges
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Autonomy, unwired to high quality infrastructure (energy, water, roads, terrestrial
communication);
Low education hence necessity of simplicity in use;
Less maintenance/repair facilities, so an intrinsic need for long term sustainability;
Extreme income inequalities with strong needs in urban slums and poor rural villages, but
little current purchasing power and high living risks, hence low willingness to invest or borrow
money in the long term.
All these features appear also and increasingly of particular value to consumers in
developed countries:
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Autonomy of high quality infrastructure as “freedom of movement”;
Shift in the democratization of innovation: from the needs of sophisticated, bèta users to the
needs of (digital) illiterates;
Need for zero maintenance and ecological sustainable: cradle to cradle
Relevance of new financial products such as micro-credit and micro-insurance in poor urban
areas
Innovation for development
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Role of local communities as professionalized non-governmental grass roots
organizations becomes crucial. New strategic alliances emerging between NGO’s
and multinational firms in the development of BoP laboratories embedded in such
environments, not part of traditional high tech R&D centres.
Innovation process is now likely to be reversed, starting with the design phase which
will be confronted most directly with the attempt to find functional solutions to the BoP
users framework conditions.
This involves not just the need to bring the product on the market at a substantially
lower price than existing goods, as Prahalad noticed, but also adaptation to poor local
infrastructure facilities: e.g. with respect to energy delivery systems, water access,
transport infrastructure or digital access.
Feedback from BoP users and from design developers upstream towards applied,
even fundamental research is interesting new example of reverse transfer of
technology (from South to North), re-invigorating and motivating the research
community in the highly developed world “in search of relevance.”
Pro-poor innovation challenges

Private BoP innovation initiatives (BOP learning labs):

Top down (Prahalad) from large Western foreign companies: difficult to
implement, insufficient top management support, CSR burden…
 Bottom up emerging from grassroots innovation (Gupta) in alliance with firms
from emerging economies: Indigenous innovation: difficulties in up-scaling and
reaping scale economies;
 Need for close link with development of purchasing power (micro-finance and
micro-insurance): addresses in general above poverty line households.


Focus at the moment on BoP innovations in health and nutrition area, a
sector where applied medical research is dominated by access to new
technologically sophisticated equipment (e.g. combined PET - positron
emission tomography ct-scanners), and less by down to earth research
questions about, and the list is non-exhaustive: anti-biotic resistance,
infectious diseases or resistant tuberculosis.
An example: toilet in India (Financial INclusion In Health and Sanitation
FINISH project)
Toilets in India
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The all India coverage of sanitation, according to the National Family Health Survey 3 is 44.6% in
2005-06. Initial indications of an evaluation by the Government of India and UNICEF show that
significant numbers of people, especially in below and just above poverty line households (< 3$ a
day) are not using their latrines.
A number of studies correlate diarrhoeal disease and morbidity rates to water, sanitation and
hygiene components. Open grounds in India receive an estimated 100,000 tons of human faeces
everyday. Only one in three Indians has access to any form of a functioning toilet. Less than half
of the 738,150 government primary schools are equipped with toilet facilities and out of 5000
towns in India, only parts of 232 towns are connected to a central sewage system.
Sanitation is more than providing toilets; the associated excreta treatment and/or reuse system
are the areas where sanitation makes the real impact. But neither really contributes to main
motivators for people to buy a toilet, i.e. convenience and privacy.
“The “market” for toilets for the poor is very sluggish as it is considered to correspond to a “merit
good” that must be provided by the government or charitable NGOs, as there is a strong
preference in the bottom of the income pyramid group to use the scarce revenue for other
essential goods or entertainment goods that provide temporary relief.”
(Ramani, 2008)
Research objectives of FINISH
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Integrating sanitation (water, sanitation and hygiene) into the main activities of microfinance institutions, including enhanced livelihood opportunities arising from sanitation
interventions (soap manufacturing, composting, fertiliser usage, construction activities
etc).
Increase scope of financial services offered to rural and peri-urban poor through
linking micro-insurance (life and health) with micro–credit expanded to include
sanitation. This is part of the financial inclusiveness of micro-finance service as
offered to the rural poor.
Could there be spin off of the demand for health insurance in rural areas that could
be leveraged for enhancing demand for sanitation and water?. The underlying
assumption is that health insurance does have a demand which is based on studies
indicating that health costs are one the largest unplanned perils that low income
households encounter.
By having the MFI distribute micro-insurance as well as sanitation loans their grass
root relationships can be maximised. The project will demonstrate to the community
the relationship between lowered health costs and sanitation creating awareness for
the latter and stimulating a demand for it which the MFI community can then satisfy
through innovative funding mechanisms.
Rural Life Markets – Products and Distribution
Products
Whole life
ULIP
Distribution
Conventional Channels
Rich (6%)
(Landlords)
Endowments
Whole life
Mid-Income(14%)
(Average Landholdings /
Small Businesses)
Household Income< $6
TROP/Endowment
MI Individual/TROP
MI Individual
Term life
Social
Sector
GTL/Credit
Life
Agency/ Banks/
Alternate Channels
Rural and Social Channels
Rural /Tied Agents
Above Poverty Line (60%)
(APL)
MFI/NGO
Rural Org
(Very Marginal / No Landholding)
Household Income < $3/day
Community
Enterprises
Below Poverty Line (20%)
(BPL)
(Landless)
Household Income < $ 1/day
8
GMD/Rural Team
Direct
8
4. The financial crisis





A double squeeze: a financial crisis having affected the real economy with a
mutual reinforcing double squeeze on the economy.
With practically all large international operating banks technically bankrupt,
an economic recession which can not be addressed using traditional
financial tools, banks no longer being in a position to carry out that function.
The large financial banks have become “dead bodies”: black holes in our
economy, absorbing public money but no longer emitting any economic
dynamism.
As a result a declining financial sector in most (small) countries with
domestic repatriation of financial services, a reduction in their profitability
and a rapid reduction in employment despite heavy state involvement.
From positive to negatively self-reinforcing externality effects (Stiglitz et al.)
Mutually reinforcing effects
Banks try
to restore
solvency
 Sell assets

 Over the past 8 years, leverage has
reached unprecedented levels
to restore
capital ratio
Asset
Price Rise

Financial
 Cheap Innovation
Credit

Commercial
paper markets
collapse

Further asset
write-downs



Lowers
asset prices

US Subprime
crisis
Lehman Failure
Commercial paper
collapses (counter-party
risk)

Adverse selection fu
rther depresses
market
 Companies who can
turn to bank credit
lines

Economic
contraction

Economy
contracts

Banks further
tighten lending
standards

Markets are trying to adjust to
the changed conditions, but it is
unclear what the end-state will be
and how long it will take to get
there

Increase in nonperforming loans

25
Source: Morgan Stanley; Federal Reserve; BEA; The Economist; McKinsey analysis
The crisis and need for knowledge
investments

Surprising how current financial/economic crisis is being discussed purely in
national terms...




Five Dutch economists’ proposals in NRC on economic recovery: purely national;
Nothing on global imbalances to which the Dutch economy contributes;
Nothing on environmental unsustainbaility nature of current growth path.
Global access to knowledge central in current crisis.

HIgher growth in emerging and developing countries dependent on technology
transfer and access to knowledge;
 Global access to markets raises return to knowledge investments in The
Netherlands;
 Global and local environmentally sustainable growth is crucially dependent on
fast diifusion of technologies and eco-innovation.

Challenge to technology and innovation policy: from national obsession with
technological competitiveness to a new global view.
The global knowledge challenge
Crisis scenarios
Battered,
Early
Recovery
Capital
Markets
Crisis
Continued
Slowdown
but resilient
Regeneration
of old
globalization patterns
Recession 2-5 years, then
strong growth
Recession 3-4 quarters, then
strong growth
 New,
effective regulatory regime
 Recovery led by regions (eg. US,
China)
 Credit Markets recover, safe leverage
ratios, cost of capital to historic norms
 Slow recovery of global trade
 New,
Disruption
Stalled
Recession > 10 years (“Japanstyle”)
Recession 1-2 years
 Major
 Recovery
disruptions bringing about new
national regulatory policy experiments
 Credit markets rely on government
input, cost of capital and energy high
 Global trade drops, knowledge as well
highly skilled labour mobility increase
effective regulatory regime
 Recovery is broad-based
 Credit markets recover, safe leverage
ratios, cost of capital to historic norms
 Global trade recovers rapidly
is based on national markets
and national industrial policies.
 Financial and credit markets
renationalize and downsize.
 Recovery growth quickly runs into
foreign energy dependence so that
global trade recovers only slowly
Severe
Moderate
Economic Global Recession
Source: McKinsey Global Institute
Gobalization
28
Global developments
Balanced
Early
Recovery
Capital
Markets
Crisis
growth
 Redirection
of global financial flows in
a more balanced way
 Growth in US and UK savings,
reduction in reserves in China and S-E
Asia – new role for IMF
 Stronger representation of emerging
countries in international financial
organizations
 Growing international trade conflicts
Knowledge
Continued
Slowdown
change
 At
first rapid recovery
 Limits to unsustainable growth (oil
price, raw materials, agriculture
increases) expressed in re-occurrence
of crises in new areas (water, health,
environmentally induced migration, …)
 Rising inequality and exclusive growth,
resulting in unsustainable social
exclusion, increased security costs
Financial
globalization
 Dramatic
No
slowdown in trade of goods,
with severe structural unemployment &
new specialization patterns emerging
 New priority on global implementation
of environmental technologies
 High skill labour and knowledge
mobility
 Focus
on protecting national savings,
going for national and international
“trust” investments (local banks and
global “community” banks)
 Regional disparities with growing
labour migration pressures
 Financial global imbalances limit
national growth opportunities
Severe
Moderate
Economic Global Recession
Source: McKinsey Global Institute
nationalism
29
Conclusions



Knowledge sharing shifts the attention away from the purely technological aspects of
research to the broader organisational, economic and social aspects which are today
in many cases a more important factor behind innovation. This is reflected to some
extent in the much greater popularity of the term innovation today than R&D
Innovation is at the same time as relevant to poor countries as it is to rich countries.
This holds a priori for countries with large, young populations where the potential for
innovation, once users/consumers are identified as source of innovation, can easily
be enhanced.
In a growing number of areas the over-concentration of research expenditures in the
Northern world leads to a too slow spreading of knowledge



In case of Energy saving technologies policy issue is fast “proiferation” of knowledge
Need for multi-disciplinary research programmes on “appropriate innovation”: Local food
production, local energy efficiency, water management, transport, logistics, urban mobility,
migration, etc.
Need for adjustment of our financial system to focus more on local knowledge impact.