Dev Nathan
Institute for Human Development, New Delhi and
Duke University, USA

• The advanced economies (The West/North) as the producers of knowledge and technology
• The developing economies (The East/South) as the users of this technology, modified only to the extent of being ‘pared down’ versions of the original
• Is this division of knowledge changed by the existence of GPNs?

1. Is there more to out-sourcing than labour arbitrage?
2. Does the division of labour in GVCs create an unchanging knowledge structure?
3. Specialization and the middle income trap
4. GPNs and innovation
5. Income, location and frugal engineering

• Commodity trade – wheat vs. wine or cloth
– Knowledge in production of one commodity may not have much in common knowledge of the other
– Arms-length transactions
• GPN – trade in tasks
– Interaction between suppliers and buyers
– Learning and upgrading possibilities

Labour arbtrage: or, why does Airtel outsource to IBM?
• Out-sourcing and the gains from specialization
– Economies of scale
– Economies of scope
– Specialization and knowledge gain

GVC – GPN Distribution of Tasks and
Profits/Wages
Competitive Profits
(P1)
Monopoly Profits
(P2)
Wages above
Market Rates (W2)
D
Monopoly lost, legacy high wages
P 1, W 2
Wages at Market
Rates (W1)
C
Cut-make-trim,
Lewis-type wages
P 1, W 1
A
Monopoly: Design and marketing, high wages
P 2, W 2
B
Full package supply, legacy low wages
P 2, W 1

• The extremes (A and C) are end points of a continuum
• The necessary interaction between different GVC segments (e.g. CMT with design; software coding with installation and then design) make for learning in the lower segments
• Development of ‘full package supply’ as partly the result of GVC interaction

• Possibilities of and pre-requisites for moving up the value chain
• Changing the division of labour between ‘Inhouse’ and ‘Out-source’
• GVCs are not static – learning plus skill augmentation make for functional upgrading up to ‘full package’

• Are knowledge-intensive activities more prone to agglomeration effects and thus resistant to geographical dispersion?
• But manufacture needs cross-functional, knowledge-intensive support – which migrates with production
• E.g. electronics and auto components, software

Role of GPNs in changing knowledge geography
• For higher value services, a greater degree of interaction is required between the two: relational vs hierarchical (Startiz and Gereffi,
2011)
• Knowledge migrates with production nodes
• Shift from ‘knowledge using’ to ‘knowledge changing’ capabilities

• But mere access to knowledge through the
GVC is not enough
• The economy must have the scientific, engineering and managerial capacity to absorb and utilize the knowledge - a national scientific and engineering system
• And a firm-level business model that requires functional upgrading

• These processes of functional upgrading work well in an industry where basic technology is relatively stable
• They enable developing country firms to reach the technological frontier
• Reverse engineering
• They also entail a low-level of task specialization – full package supply
• This is also the ‘middle income’ trap

Specialization in Knowledge-intensive and High-end Segments
• Moving out of middle income trap – from competitive to monopoly profits
• Specialize in knowledge-intensive segments which enable a capture of monopoly profits – through proprietary technology
• Design and marketing also enable a capture of monopoly profits – e.g. Apple or Nike

• Separation of manufacture from design, enables the lead firm to not have to invest in manufacturing
• This makes the lead firm much more innovative – does not have to take account of amortization of fixed costs

• Set of actually existing technologies – B
• Set of all possible technologies with existing knowledge – A
• B is a sub- set of A
• [A-B] = [C] is analogous to what Kaufmann called ‘the adjacent possible’
• The area into which evolution would take place

• Firms in high income countries develop high value products
• These products adapted, pared down for lowincome markets
• Linear relationship between products and base of scientific knowledge

• Role of ‘lead users’ in innovation
• Technology pushed and demand pulled innovation

• Rising economies – high volume, but low unit value
• Require frugal engineering to meet demand
• Frugal engineering as reverse innovation
• New processes, not products, developed in and for low-income markets, then go back to highincome markets

• Are firms in rising/developing economies better located for frugal engineering?
• Is knowledge of frugal engineering requirements local and ‘sticky’?
• It may be done by local firms or by local branches of developed economy firms
• E.g. Tata’s Nano; GEC’s low-cost, hand-held ECG machine and ultra-sound

• Can work in ‘well-defined products’, e.g. cars
• Less likely in products that are in early stage of product cycle

• GPN knowledge structures are not spatially fixed for all time – or, until revolution comes
• Involving interaction there is an evolution involved
• The firm-level knowledge gained through interaction has to be induced by a business model that requires knowledge upgrading
• This has to be backed up by a national scientific and engineering system