Discussion Paper Series
#9510
Technological Change and Dual Economies
Charles Cooper
December 1995
UNU/INTECH Discussion Papers intend to disseminate preliminary results of the research carried out at the
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Technological Change and Dual Economics
by
Charles Cooper1
The idea of dual economy is venerable. It was essential to a great deal of nineteenth
century classical economics. It was revived as one of the main pillars of post-war
development economics, by Arthur Lewis's influential reversion to Classicism in
"Economic Development with Unlimited Supplies of Labour" (Lewis, 1954). This was a
point of departure for a great deal of the economic debate on development after the
1950's. After Lewis the dual economy framework became inescapable, whether one
agreed or disagreed with his particular formulation. Lewis's ideas could be attacked, (
Frank, 1959), or supported and developed (Ranis and Fei, 1964), but they could not be
ignored. The central economic characteristics of the dual economy concept were largely
accepted as the basis for much of development economics. The assumption of 9
an infinitely elastic supply of labour at a more or less fixed wage rate recurred, for
example, in the economic models which were mobilised in the early Indian debates on
economic planning (Mahalanobis, 1955, and Raj and Sen, 1961 are good examples). It
also recurred in a vast literature on project evaluation in which the shadow price of
labour is set at our near to zero. And in a world which is still importantly characterised
by national economies with a large excess supply of labour and a dominant rural
subsistence economy, the dual economy framework remains central. Its predominance in
the development economics literature is maintained.
This paper has two purposes. First, in Part II it will explore the way technological
change has been treated in the analysis of labour surplus dual economies. This is
straightforwardly accomplished, since for interesting and important reasons, which
mainly relate to the economic historic context in which the post war discussion of dual
economy came into being, technological change was seldom treated as a central issue.
Even so the way it was approached is illuminating, if only in contrast to the observable
circumstances of the present day.
Second, in Part III it will explore how thinking about technological change in the
context of dual economy might have to be adapted when these circumstances of the
present day are taken into account. The immediately relevant circumstances are:
1
Charles Cooper is currently Director of the United Nations University Institute for New
Technologies, (UNUIINTECH), at Maastricht, Netherlands.
1
liberalisation in the world economy, along with the emergence of patterns of generic2
technological change. We will discuss how generic technological change requires
changes in the mainly implicit assumptions about technology and technological change
usually associated with dual economy models.
Beyond this there have been some important conceptual changes in the way innovation
and technological change is approached, especially in what might be called the
Schumpeterian tradition. This paper focuses on two of these changes. The first is the
new importance attached to concepts of path-dependence in economic development -or
at least in certain aspects of economic development3.
Put simply, path dependence in technological matters, implies that the choices and
options that are open t . o us today in any particular economic context, depend
importantly on past technological decisions and accomplishments. It is a very simple
idea, a kind of belated discovery that 'history matters', but it has important practical
implications, especially as far as the time needed to develop technological capabilities
is concerned.
The second change in the approach to technological change is closely related to the idea
of path dependence, and concerns the idea of endogenous technological change.
Some economic aspects of path dependence and endogeneity will be discussed in Part
III of the paper, together with some considerations about learning in the various
institutions which together form part of 'national innovation systems'.
Path dependence and the endogeneity of technological change have implications for
technology policy during the labour surplus, dualistic phase of economic development,
which arguably have been overlooked in the literature. In a final part of the paper we
will draw some conclusions.
2
By generic technological change most writers refer to technologies which are applied across a number of
sectors. The information technologies, which are applied in many control systems in many different
industries are a good example of this phenomenon, but there are many others
3
For a recent and exceptionally clear argument on this apparently simple idea, which explains why its simplicity
hides some radical implications for economic thought, see Paul David (1988).
2
II. Technological Change in Dual Economy Models of Development.
The literature on dual economy systems is very large and it is neither practicable nor
necessary to attempt a review. This paper is concerned with a particular aspect only:
namely the treatment of technology questions in the dual economy tradition. There are
in essence two aspects to the discussion of technology questions. First there is a
relatively limited concern with the question of technological change. Second, there is a
much extensive concern with issues of optimal choice of technology - ie. with the
'choice of techniques'- much of which is characteristically concerned with the structural
characteristics of the dual economy, notably with the implications of an excess supply of
labour. It is legitimate, of course, to see this as a major contribution of dual economy
theory to technology policy questions. This paper will however, be concerned primarily
with the first less developed part of the discussion- that is to say with the treatment of
issues of technological change. It will make only limited and passing reference to the
debates on choice of techniques.
As far as technological change questions are concerned, it is probably sufficient to base
discussion on Arthur Lewis's seminal paper, and to reflect on some of its implications
(Lewis, 1954). That will be the starting point. Then, because Lewis's discussion is at
least implicitly imbued with closed economy assumptions, the next step will be to
examine an early and influential open economy formulation of the Lewis model, by Fei
and Ranis (1974).
The outlines and basic assumptions of the Lewis model are extremely well known and
do not need much discussion. The key points are as follows. The economy consists of a
modem sector (industry in this discussion) and a subsistence sector. Institutional
arrangements in the subsistence sector are not very clearly delineated and are certainly
more appropriate to the times in which Lewis was writing to the rural circumstances in
today's developing countries4. There is a labour surplus in the rural sector, in the sense
that the migration of workers to the modern sector will not cause a fall in output
(Lewis's assumptions on work-leisure preferences in the rural sector, which account for
this, are not very clear). It is assumed that arrangements in the subsistence sector are
such that all persons working there enjoy access to the average product of labour in the
sector - and this average product of labour is what determines the minimum real wage in
the modern industrial sector. This is one of the more debateable and debated
assumptions of the model, but we will not enter into that here5. The level of output in
industry is determined by the prevailing modern sector technology and this minimum
real wage: production is expanded to the point where the marginal product of labour is
equal to the real wage.
4
One obvious inappropriateness to today's conditions is that Lewis's rural sector is barely affected at all by capitalist
forms of organisation or indeed by monetisation - though his recognition of the problems in the determination of the
institutional real wage that arise from the existence of rent in the subsistence sector is a nod in the direction of
monetisation.
5
One problem is that, to be practical at all, Lewis's argument requires that the surplus of food produced in the rural
sector after migration of workers to the modern sector, has to be transferred through some form of market. There is
no discussion of this, nor of the implications which the incursion of intersectoral trade in food will have for the
economic organisation of the rural sector - a matter which in the end, must influence the way the institutional real
wage is actually formed.
3
At this point the surplus value-added in production above the wage bill accrues as profit
to the owners of capital. It is this surplus, properly reinvested, which provides for
reinvestment and expansion, and which therefore drives the economy. Reinvestment of
surplus and the accumulation of capital stock will expand the modem sector so that
eventually rural surplus labour will be fully absorbed. Given the assumptions of the
system, the economy will then fit the requirements of the neoclassical growth model
(Fei and Ranis, 1964).
This structure of assumptions has, as might been expected, been the subject of extensive
debate and refinement, which need not be discussed here. The relevant question for
present purposes is simply: what arguments are made about the effects of technological
change. There are, in fact, two such arguments in Lewis's 'Unlimited Supplies' paper,
both of w- hich are rather strange in a present day perspective.
The first argument relates to Lewis's concern with conditions which might bring the
accumulation process to a halt. It depends importantly on two points: on the mechanism
which determine the real wage; and on the economic relation between the two sectors.
Assume that the industrial real wage is determined as above, by the average product of
labour in the subsistence sector, and that the supply of wage goods is set by marketed
surpluses which it provides. In this situation Lewis points out that expansion of the
modern sector can endanger the process of accumulation in two ways: by driving up the
average product of labour in subsistence production as more and more people leave for
the modern sector and thus increasing the minimum real wage. and by turning the terms
of trade against the industrial sector as increasing demand for food meets an inelastic
supply from the subsistence sector6. Hence, says Lewis, the need for agricultural
revolution to accompany industrial accumulation.
However, agricultural revolution - in so far as it takes the form of increasing factor
productivities in the subsistence sector may not do the trick. In a famous image, Lewis
points out that technological change in the subsistence sector will escape the '.'Scylla" of
adverse terms of trade as food prices fall relative to prices of industrial Output. There is
still however, the "Charybdis" of the real wage effect: the institutionally determined
minimum real wage will rise as the average real product of labour in the subsistence
sector rises. This leads to the conclusion that technological change in the subsistence
sector can slow down accumulation in the modern sector unless the elasticity of demand
for food is less than unity7. However, since Lewis agrees that this condition is likely to
be met (low income demand for wage goods is in general price inelastic), it is a little
puzzling that he should be so concerned about a deceleration of modern sector
accumulation.
6
Lewis points out that if the two sectors do not trade, only the first of these mechanisms - ic the labour market mechanism which
determines the real wage - will operate, but that this would by itself - and ceteris paribus - ensure that the money wage measured in
terms of industrial output, would have to rise.
7
This has the implication that in order to support accumulation, technological change in the subsistence sector must reduce the
average value product of labour there. through the demand elasticity effect. This is a curious result which, of course, depends
entirely on Lewis's assumptions about the formation of the real wage in the modern sector.
4
What can one say about this part of Lewis's dual economy analysis in terms of the
experience of technological change and development in the developing countries? Three
points suggest themselves.
First and on the face of it, these are rather strange reflections on the likely outcome of
technological change in the rural sector. In most historic situations in developing
countries in the years since "Unlimited Supplies" was published, the inelasticity of
supply of wage goods from the rural sector has been a problem, and in most cases it has
been a problem for modern sector wage workers, rather than a threat to capitalist
surpluses. In short the burden has been mainly borne by reductions in urban real wages
as food prices rise, suggesting strongly that Lewis's wage formation assumptions are
unrealistic at least in modern terms. Furthermore, the terms of trade effect of such price
rises were offset historically, by increases in industrial tariffs under protectionist
policies, which mainly preserved capitalists surpluses (whether or not they were used for
accumulation).
Second, injustice to Lewis, it must be recalled that he was writing in a period prior to
decolonisation in Africa and coincident with it in the West Indies. At the time,
economic structures similar to that which he describes existed in many African
economies. And it was (and is) argued that an important concomitant to colonial wage
policy was precisely to avoid increases in factor productivities in the peasant sectors
because it was presumed that these would have what we might call the 'Lewis effect' of
driving up the minimum wage at which rural people would be willing to work in the
modern sector8. That has all changed of course, in part because of massive population
pressures in rural areas which drove down living standards. This has been the basis of
some well-known pieces of economic analysis (Harris and Todaro, 1970). In this light it
is not altogether clear that Lewis's real wage mechanim can be rejected without
examination - at least for the case of African. It is plausible to argue that it has simply
operated in a different direction from that which he anticipated because of the pressures
of population growth9, which of course would tend to drive down the average product
per person in the rural economy, or at least slow down its growth.
A third observation is that whatever conclusions one might reach regarding the
plausibility the wage determination system, or the outcomes of rural technological
change for accumulation, or the broader merits or demerits of the analysis as a whole,
there is an element in Lewis which we would do well to keep in mind. It is simply the
Classical insight that the real wage is made up of goods, and that technological factors
determine the real costs of making them.
8
To quote : "… capitalists (in colonial economy) have a direct interest in holding down the productivity of subsistence workers… ”.
And later: "… owners of plantations have no interest in seeing knowledge of new techniques or new seeds conveyed to the
peasants... and they will not be found using their influence to expand the facilities for agricultural extension… ”. Unfortunately
these responses are not necessarily confined to a colonial capitalist class.
9
In this regard it is an interesting reflection that the first part of 'Unlimited Supplies' takes a good deal of space to justify the
possibility of their being surplus labour and especially in Africa argues that it is not present everywhere. Times - and populations have changed.
5
Surplus generation, capital accumulation and the real wage itself are importantly
influenced by the possibilities of improved efficiencies in the production of wage goods
Oust as in a parallel way, the capital intensity of production can be much reduced by
reducing the costs of making machines, even without changing their designs). These are
dimensions of technological change which are rather easily forgotten, and about which
Classical thinking contains useful reminders. And as far as this goes, it is worth bearing
in mind that not all wage goods are final outputs of the rural sector, many come from the
industrial sector itself.
There is a second set of observations about technological change in 'Unlimited
Supplies'. This is much briefer and treated in a perfunctory way by Lewis. This concerns
the issue which is much more central to most present day discussions of technological
change: namely technological advance in the industrial sector itself How does Lewis
treat this matter?
The answer must be: very lightly. There is the following remark:
“...for the purposes of this analysis, it is unnecessary to distinguish between capital
formation and the growth of knowledge within the capitalist sector. Growth of
technical knowledge outside the capitalist sector would be fundamentally important,
since it would raise the level of wages, and so reduce the capitalist surplus. But
inside the capitalist sector knowledge and capital work in the same direction, to
raise the surplus and to increase employment… ” (Lewis, 1954; my italics)
The emphasis on the 'problems' that flow from rural technological advance is there once
again. More interesting are two other aspects. The first is the assertion that new
technology - like accumulating capital stock - will help to increase employment. This
sounds a bit odd to present day ears. The reasoning is, however, quite clear:
technological advance will increase factor productivities at all levels of employment;
therefore, for any given level of the real wage (and so of the wage measured in terms of
industrial goods), the point of equality between the level of wages and the marginal
product of labour which determines the optimal level of employment, will be reached at
higher levels of employment than before. Nowadays we are more accustomed to
thinking of the rise in factor productivity associated with technological change as
threatening employment, rather than increasing it. Lewis's conclusion comes from a
purely supply side argument and flows simply from the fact that there is no explicit
'demand side' in the model. If effective demand is given and markets cannot be much
expanded, it is not at all clear that technological change will have the same effect in
increasing employment as the quantitative accumulation of capital. In fact one of the
major concerns of the present time, is precisely that it will not and that there are grave
dangers of technological unemployment. Lewis has been criticised for this by many
authors, though it is seldom recognised that there was probably a stronger rationale for
abstracting from demand constraints than merely that it leads to a simpler kind of
analysis. In 1954, early in the post-War Keynesian period, economists were quite
generally 'bullish' about the prospects of expanding demand to meet technological
unemployment.
A second point about the treatment of technological change is that Lewis does not
discuss at all what policies might lead to its generation. Technological advance is
6
simply an nice addition enhancing the effects of capital accumulation in the process of
labour absorption and the eventual emergence of full employment. It need not be sought.
On the face of it this is curious. Elsewhere, especially in discussing the problems for
accumulation in the modem sector which can arise from technological change outside of
it, Lewis spends considerable time worrying about conditions which might undermine
the capitalist's surplus. Technological advance, of course, would offset these conditions
directly - and since there is no demand constraint to worry about, it would be an
unambiguous gain to the society. Furthermore, although a section of the paper discusses
the implications of open economy, in which one might have expected some reflections
on the implications of international technological change10 there are none, despite its
potential importance in determining the implication of trade for domestic accumulation.
If therefore, Lewis had believed that technological change could be facilitated in various
ways within the dual economy structure, one might have expected him to discuss them.
That he does not do so, presumably reflects the dominant assumptions of the times: that
technological advances are exogenous and more or less costlessly available over the
whole world economy and so would be taken up pretty well automatically by enterprises
everywhere. Furthermore, Lewis may also be influenced by the fact that at the time he
wrote 'Unlimited supplies' most modern sector industries likely to be set up in
developing countries were by and large technologically stagnant.
The Lewis model had, as has been observed, an extraordinary influence. There have
been relatively few major changes to the form in which the model has been described
here. Most of the developments took the form of modifications and developments of key
assumptions - such as those concerning the mechanisms of wage determination and the
formation of markets for wage goods. These, in general, rested importantly on empirical
research. An important line of conceptual development came a decade after the original
article, in the so-called Fei and Ranis model (1964). This was a largely successful effort
to link the Lewis structure to the dominant neo-classical growth model. The focus was
on the change from the labour surplus condition to a fully employed state in which the
more conventional assumptions of neo-classicism could be expected to apply. From the
point of view of this paper this first Fei-Ranis extension adds little to the conclusions
already sketched out regarding the 'Unlimited Supplies' paper itself The main additional
'technology' point is that at the point where a switch to full employment occurs, there
will also occur a shift from an originally highly labour intensive form of technology in
the modern sector, to increasing capital intensity.
A further important expansion of the dual economy framework also came from Fei and
Ranis twenty years after the Lewis paper (Fei and Ranis, 1974). This was an extension
of their earlier analysis to an open economy form and an descriptive empirical analysis
of the process of accumulation in Korea and Taiwan, both economies in which export
expansion had played a large part in the growth process.
10
With a given wage rate in terms of industrial outputs and a fixed technology, technological change in the international economy
would also threaten the generation of surplus - unless one assumes that the internationally best practice technology would not only
be immediately available to the dual economy, but would also be taken up immediately.
7
To conclude Part 11 it will be helpful to examine some of the implications of the FeiRanis effort to incorporate open economy assumptions into the model.
A central focus of the Fei-Ranis analysis is on 'turning points' through which the
economy progresses on its way from the labour surplus dual economy structure to the
fully employed situation - in which it is assumed that the neo-classical rules of the game
will apply. Fei and Ranis discuss three main turning points. They are discussed below in
a slightly different order to that followed in the Fei-Ranis paper.
First, there is the 'export substitution point'. This is described as the point at which a
switch occurs from 'land-based' exports to the export of labour intensive manufactures.
In Taiwan for example it is the point at which rice and sugar were 'substituted' as the
main exports, by textiles. The substitution process is essentially seen as the culmination
of a successful 'infant industry' period of traditional import substitution. Export
substitution is regarded as especially important:
"… for a small labour surplus economy with a colonial heritage of primary product
production, the emergence of the export substitution phase, replacing the import
substitution phase is a highly significant phenomenon..." (Fei and Ranis, 1974).
It is significant precisely because it offers an effective escape from the demand
limitations of the 'import substitution' phase which precedes it. It therefore holds out the
prospect of a solution to the problem of unemployment, which was not attainable under
import substitution. It resolves the issue of the putative conflict between 'growth and
employment'. It is easy to agree to all this - the more especially in the light of two
considerations: first, the subsequent history of Korea and Taiwan, in which vigorous
export growth certainly accounted for the successful resolution of the employment
problem; and, second, in view of the fact that the export promoting economies, are by
and large the only ones which have resolved the dual economy structure (at least
amongst the developing countries). What is not discussed, and not at all clear, is how
Korea and Taiwan were so successful in emerging from the import substituting phase on
these terms, when so many other import substituting economies failed so signally to do
so.
Successful export substitution and rapid export growth leads to the second important
turning point. This is the 'commercialisation point'. This is the crucial point at which
surplus labour is finally 'mopped up' by increasing employment in the modern sector.
Fei and Ranis characterise it as the point at which the rural wage rate starts to be
equated to the marginal value product of labour in the rural sector11. The institutional
real wage of the Classical dual economy phase no longer rules in the modern sector and
the wage is expected to rise. This has obvious importance for the present discussion
because the new economic context determined by this new wage formation process
implies that there are new technological requirements in production.
11
In fact this implies a rather more profound structural change, rather than just a quantitative increase of modern sector
employment. The more or less pre-capitalist subsistence sector of Arthur Lewis's analysis, must be transformed into a fully
marketised economy with a rural working class working for wages.
8
This is especially important in connection with export development. It is discussed at
various point in the rest of the paper12.
The third Fei and Ranis turning point is the 'reversal point' at which an absolute decline
in rural population sets in. This is not of great importance to the discussion in this paper
and, therefore, will not be explored further.
Fei and Ranis treat technological factors in much the same way as did Lewis before
them. For example:
“...The increase in real wages (after the commercialisation point) is expected to be
accompanied by .... a shift towards more capital and skill intensive technology and
output mix ... (and) an increased concern with the provision of an adequate supply
of highly talented manpower (Fei and Ranis, op. cit.; our parentheses).
It is a matter of well attested history that such a shift took place in Korea, but there is no
discussion in Fei and Ranis of how the structural changes which accompanied it are
likely to come about. With the advantages of hind sight we know that an important
factor was a shift of resources to less labour intensive industries which had had grown
up behind import substituting protective tariffs, and which, in due course, entered
international markets. This shift followed along much the same lines as Fei and Ranis
describe for the initial shift at the 'export substitution point'.
************
It is reasonable to conclude this part of the paper with the observation that, despite the
relative neglect of technological factors in the literature on the dual economy,
technological change actually 'matters' quite considerably in the labour surplus phase of
development. There are at least three reasons for this.
First, depending to some extent on the way the real wage is determined in practice -and
there seem to be a number of possibilities - there is usually a 'real wage drift' (to borrow
a term from Fei and Ranis) even under conditions of labour surplus, ie. well before the
Fei-Ranis 'commercialisation point'. Lewis was quick to see this possibility, which he
ascribed to increases in the average product per person in the subsistence sector as
migration to the modern sector gets under way. Both in Korea and in Taiwan, despite
the absence of labour organisations and despite the undisputed fact of surplus labour
during the period in question, real wages rose. In Taiwan by a factor of 1.7 (between
1952-54 and 1967-69); and in Korea by the same factor (between 1955-57 and
1968-70)13. In each case this was in fact a higher proportionate rate of growth of real
wages than during the period after the putative 'commercialisation point' had been
reached.
12
An interesting question is: when did Korea and Taiwan arrive at the 'commercialisation point”. This has been a fruitful field for
disagreement. Fei and Ranis suggest that excess labour had been absorb by the second half of the 60's. Some Korean economists
on the other hand, argue that there was substantial labour surplus, unemployment and underemployment right through the 70's.
13
These are ratios based on the data given by Fei and Ranis (1964).
9
It amounts to about 10 per cent per annum - a high rate by any measure and quite
remarkable for conditions of labour surplus. By comparison the rate of growth of the
real wage after the Fei-Ranis 'commercialisation point' was about 6-7 per cent per
annum. In short, whatever the economic reason, the growth of the real wage during the
labour surplus period in these economies was a major potential pressure on capitalist
profits14 and accumulation. Probably the only way this can be contained is by increasing
factor productivities in the modern sector by way of technological advance.
Second, under conditions of liberalisation, foreign competition - on domestic markets
just as much as in export markets - will also threaten modern sector accumulation,
unless local firms can keep up technologically. In Korea, and to some extent in Taiwan
too, during the early period of industrialisation, foreign competition on domestic
markets was contained by protection, which many scholars have seen as being important
in allowing learning processes15. However, in most of today's developing countries
liberalisation has been comprehensive and immediate. The need for rapid technological
change is therefore all the greater.
Third, successful export development, even in the labour intensive industries, and even
in early stages, requires some important technological capabilities. Success in export
markets depends importantly on the development of new products and the adaptation of
old. In the labour surplus phase, during the period of 'export substitution' Korea was
able greatly to expand the product base of its exports16. The rapid growth of labour
intensive exports from Korea and Taiwan in the early phase was not just a matter of low
wage cost advantages. It also depended on the development of a widening range of more
sophisticated, if labour intensive, products. That was in some degree, a technological
achievement.
Fourth, once the labour intensive phase is over - or conceivably even before - the focus
of export activity shifts to more skill intensive lines of production. In both Korea and
Taiwan, this shift was successfully accomplished - but it involved new sectors of
production, which had been building up their technological capabilities in relatively
protected domestic market during the labour surplus period. This pattern of
development speaks of 'path dependence' - one of the questions to be taken up in Part III
which follows.
14
Fei and Ranis are initially inclined to ascribe this real wage growth to an "...upward revision of the institutional real wage in
agriculture as productivity change occurs… " - in other words, essentially to the Lewis model of real wage determination in the
subsistence sector. However, they (Fei and Ranis) hedge their bets somewhat in a footnote (Fei and Ranis, 1974, fn 18) in which
they say : "...and/or once the more realistic possibility of a wage gap (between agriculture and industrial workers) is admitted, due
to a change in the size of that gap. This, of course, evades the issue of what causes the rise in real wages during a period of labour
surplus, since we have no accepted - or acceptable theory to explain the wage gap - though there is no doubt it exists.
15
See for example Kim Linsu (1993), p. 362.
16
Prof Joungil Lim of the Institute of Advanced Engineering, Seoul, in a recent seminar at UNU/INTECH showed the remarkable
rate of new product development which accompanied the early export push.
10
III Some Technological Factors
Part II shows that the technological requirements of industrialisation, even during the
early dual economy phase, are likely to be considerably more demanding than early (and
later) writing on the labour surplus economy suggested - thought this was more a sin of
omission than of commission. In Part III this theme is further pursued. It will deal with
two extensions to the preceding arguments. First it will explore the implications of
generic technological change for the early industrialisation; second it will consider the
notion that there are path dependencies in technological development and discuss some
of its implications. This second part of the discussion will be related to the idea of
'endogenous technological change'.
Generic Technologies
As a first step, it will be helpful to return briefly to some Schumpeterian ideas about
inter-firm competition.
In Schumpeterian competition, technological change in the form of new products and
processes, is one of the main bases of the competitive struggle. This is in contrast to the
text book picture of competition which has come down from Marshall and Jevons and
which has played an central role in modern economic analysis. In the Marshall - Jevons
world, competition is a process which results in minimisation of the costs of production
at a given technology. New technologies essentially produce new equilibrium
conditions, and competition will result in the establishment of the implied new
equilibrium. The economy is portrayed as moving from one equilibrium condition to the
next, each equilibrium being determined by a particular set of technological conditions.
In the Schumpeterian world, technological competition is happens more or less
continually and the economy is characterised by a sequence of disequilibrium
conditions. To put the matter in a somewhat extreme form: competition in the
Schumpeter system generates disequilibrium.
Schumpeter himself recognised the importance of this contrast between competition as
conventionally conceived and his own concept of 'entrepeneurial competition' whereby
firms seek to steal a march on their competitors by establishing temporary preferential
access to new technologies - and benefit from the rents which result17.
Associated with the idea of innovative competition, is the idea of the innovative industry
as a particular form of economic organisation. Innovative industries are oligopolistic
structures in which competition is importantly conducted by technological means - new
products and process in particular. These industries are made of a small number of
innovator firms and a much larger number of imitators - firms which use various
strategies of imitation (which often include licensing of the innovative technology) in
order to survive.
17
Schumpeter would not have accepted that preferential access to a technology generated rents. He saw the exceptional surplus
from a technological monopoly, as 'entrepreneurial profit' - a return to what he regarded as true entrepreneurship (Schumpeter,
1939).
11
There are a variety of other strategies which firms may use to deal with the problems of
innovation by the leading enterprises in the industry. For example, these might include
cost cutting through exploitation of particular advantages - such as low real wages which the follower firm might enjoy. (Freeman. 1982). Cost minimisation is, of course,
an important competitive response in innovative industries as well as in competitive
ones.
Not all industries are innovative in this sense. An important idea first put forward in
connection with the role of technological factors in international trade, is that it is
possible to think of industrial sectors as a forming a spectrum. At one end are the highly
innovative industries - such as the industry making personal computers for example where innovative competition is dominant and survival depends on being able to
emulate innovative products as they appear. At the other end, are industries -like
garments production - in which conventional cost minimisation at more or less constant
or slowly changing technologies is the dominant mode of competition. (Dosi, Pavitt,
Soete, 1989). Other industries are in intermediate positions. Furthermore, the prevalence
of innovative competition in any particular industry changes with time. These are useful
ideas to keep in mind in discussing generic technological change.
It is a common assumption in the literature on the economics of innovation, that
technological change has accelerated in the international economy, on the one hand -and
that it has become much more multi-sectoral in its impacts. This multi-sectorality is
what people have in mind when they talk of generic technological change. The idea is
that certain key technologies - in the information field for example, or biotechnologies find applications in a large number of sectors as well as in their sectors of origin.
The defining characteristic of generic technological changes is that they may find
applications in many industrial sectors. For example, the computerised control systems
for production processes are used across many sectors, some highly sophisticated
technologically - like the manufacture of fine chemicals and pharmaceuticals - and some
quite simple - like textile weaving. This means that certain important types of new
technology have an influence on the nature of competition in sectors which up till quite
recently were thought to have reached a type of stagnation as far as production
technology is concerned. For example new methods of control along with new types of
equipment have changed the technologies of textiles production.
This technological reinvigoration of sectors which were supposed to have become
stagnant, is often important for developing countries, for many of these sectors have
played an important part in the initial stages of industrialisation. Precisely because they
were slow moving technologically, they were of special interest in countries which have
a limited endowment of technological capabilities. These were amongst the sectors
where cost minimisation remained the key element of competition and which therefore
were especially favoured in countries with abundant labour and low real wage rates.
They were the archetypal technologies in the early stages of the dual economy structure.
The incursion of generic technologies tends to change the situation -sometimes quite
sharply - With the result that the maintenance of these industries, especially under
conditions of market liberalisation, requires more considerable technological
capabilities than before.
12
Generic technological change implies that the innovative competition has become more
important in a wider range of industries. And liberalisation has meant that industrialisation
has come to require entry into internationally oligopolistic industries in which such forms
of competition prevail - or at least are more prevalent than they used to be.
The process of generic technological change should not be exaggerated. It underlies a
movement away from the traditional cost minimising/constant technology sort of
competition in labour intensive sectors which has been important in the dual economy
phase. It does not however, mean that these traditional patterns of competition have
disappeared. On the one hand there are sectors in which technologies are relatively
stagnant, or where the new technologies do not have such an advantage that they supplant
low wage, labour intensive production. On the other, even in sectors where there is growing
innovative competition (in some branches of textiles for example) there often remain
possibilities of competitive survival by reducing the costs of production for older products
or on older processes. So the conventional sources of comparative advantage remain
important. The main conclusion to be drawn is that they are less adequate to survival in an
open world economy undergoing generic technological change than they were in earlier
years.
Path Dependence and Endogenous Technological Change
The basic idea that there are path dependencies in the accumulation of technological
capabilities within firms is well established and need not be discussed in detail here18. Paul
David (1974) made one of the earlier approaches to the idea. In a discussion of the
determinants of actual technological choices made by manufacturing firms, David argued
that the range of technical options over which a firm will be able to exercise a choice at any
point in the future, will be importantly influenced ~ and conceivably constrained - by the
technical choices it makes today. Today's choices will determine what the firm learns in the
immediate future - both about production activities and about the technology itself, and the
knowledge it accumulates will determine the choices open to it, the next time it faces a
technological decision.
This approach, along with some contemporaneous but independent writing and case
material on technological learning processes in Latin American firms by Jorge Katz and his
colleagues (Katz, 1974)were early recognitions of the significance of the accumulation of
technological capabilities in determining both production performance and technological
choices open to firms. Katz and his associates, in particular underlined the costly nature of
learning processes (Katz, op. cit.) and so placed it amongst the key investment activities of
the firm.
The path dependent nature of the process of accumulation of technological capabilities
leads naturally to the idea that firms within an industry will be differentiated from one
another by the level and types of technological capability - and that this will influence their
performance in production as well as their competitive strategies in face of innovative
competition. It follows that different firms will meet future competitive technological
challenges with varying degrees of success. A firm's history matters19. Furthermore, it
requires time for a firm to build up the capabilities needed to cope with competition based
on technological change and to make efficient use of technologies in production; it also
requires investment.
These ideas, together with a much older set of ideas on the imperfect excludability of
knowledge, including particularly technological knowledge, and the associated notion that
there are important . externalities associated with the generation of technological
knowledge, are incorporated in the recent literature on growth models incorporating
endogenous technological change. This literature, which had its origins in the Romer's work
on endogenous technological change (Inter alia, Romer 1986, 1990), has recently been
succinctly and lucidly explored from the standpoint of its relevance for developing
countries (Barros, 1994), so it can be dealt with in a summary way.
In their simplest form growth models with endogenous technological change appeal to a
straightforward idea: firms invest in the development of technology (by building up human
capital), as well as making use of the more conventional factors of production, capital and
undifferentiated labour. These technological investments generate technological knowledge
which is partly internalised by the firm and has the effect of increasing its efficiency.
Human capital has the properties of a factor of production and can be included within a
conventional constant returns production function. However, the technological knowledge
created by the firm cannot be perfectly excluded. In parts it spills over and becomes
available to other firms as an externality. This is presumed to increase total factor
productivity in the aggregate production function. The individual firms can be assumed to
face a constant returns production function, but in the economy as a whole, technological
externalities generated by the spill-over of knowledge from the human capital investments
of each individual firm create increasing returns to scale. More sophisticated formulations
of the concept deal with investments in R and D and different patterns of innovation. These
will not be dealt with here.
The endogenous growth concept helps to formalise a number of ideas regarding technology
policy in developing countries, some of which - like the case for state intervention to deal
with the sub-optimalities associated with externalities - have been around for a long time.
Others however are rather newer and raise some interesting possibilities, especially
regarding comparative advantage and competitiveness Barros (op.cit.) suggests:
“...if the competition from abroad is too large for a country with limited innovation
capacity, the adverse effect on domestically generated innovations may be significant.
In this case the country tends to concentrate its resources on the production of simpler
products which demand less technological capability… this specialisation will have a
negative effect on its productivity increase… ” (Barros, op. cit. pp.545).
This is a strong argument about path dependence. It 'fits' intuitively with a number of casual
observations:
• When technologically more sophisticated producers enter traditional labour intensive
industries, the old products are to some extent substituted and at the same time the original
less technologically advance firms get confined to a narrower lower value added and more
traditional part of the market. Something of this kind happens in garments and textiles
industries, where high value added firms following marketing and information techniques
of the Benneton kind, confine older competitors to lower income segments of the market.
• At a more aggregative level, the dismantling of protection in the Latin American economies
has resulted in a marked reversal of industrial structure - with a strong reliance on natural
resource based industries where skill requirements are less exacting than they were in the
heavily protected industries of the past, and where value-added per worker and the real
wage are lower and grow more slowly20.
• And at a still more aggregative level, it seems possible to divide export promoting
developing countries into distinct categories - some achieve a high growth exports and also
of real wages, by virtue of high value-added growth rates. Korea, Taiwan, and the 'first tier
NIC's' fit this description. Others maintain export growth by holding wages down and have
a much more modest productivity performance. Cases in point are Chile and Sri Lanka. The
cases where growth of value added per worker has been especially high - like Korea and
Taiwan - have also achieved major structural shifts in the export pattern, towards more
sophisticated products, whereas the low growth category show little change in the pattern of
exports.
***********
When the influence of generic patterns of technological change are brought into the picture
the arguments of Part II about the technological requirements during the labour surplus
phase of dual economy development are considerably strengthened. If generic technologies
penetrate the older once technologically stagnant sectors which were the implicit basis for
'modern sector' accumulation in the Lewis and Fei-Ranis worlds, the need for building
technological capabilities becomes pressing - even in early stages of
industrialisation. This is especially the case in liberalised economies where survival on
domestic markets in the face of import competition, as well as success in export markets,
require increasing technological sophistication. Reverting to the Fei-Ranis framework, it
seems that the attainment of the export-substitution turning point, which in their view is a
signally important step on the road towards the absorbtion of surplus labour, is more
difficult in a liberalised world economy in which generic technological change is at work in
a widening range of industrial sectors.
Path dependency and endogeneity of technological change raise some further problems.
They bring in a crucial time dimension. The process of developing industrial export
capability needs time, especially in order for local firms to build up their technological
capabilities in production of more sophisticated products.
IV. Concluding Notes
The notion that technological considerations are important during the dual economy part
of economic development, is not particularly surprising new or revolutionary. In
countries like India and China, governments have long since acted on the need for forms
of social organisation to deal with it - though the degree of success with which their
efforts have been met is open to debate. It is nevertheless worth exploring the
technology question against the background of dual economy thinking - especially in
relation to open economy forms of industrial development. Arguably it helps to organise
thought on the matter. And it is worth doing for another reason too. This is that in a
number of smaller economies - especially in Africa and Latin America - the old notion
that there in the labour surplus phase, there is little need for concern about technology
matters beyond ensuring a proper choice of labour intensive techniques, is more or less
taken for granted. Thinking in and about this group of countries echoes the early
Fei-Ranis type of assumption.
The points raised in this paper are intended to put in question the adequacy of these
early arguments and to suggest how they need to be modified. The main conclusions can
be summarised as follows.
First, in the open world economy, the exigencies of generic technological change mean
that technological dynamism is essential to industrialisation even in the earliest stages of
industrialisation and even in the labour intensive lines of production which will and
should predominate. Industrialisation increasingly involves the capacity for successful
entry into innovative oligopolies at world level.
Second, as an extension of the argument in the paper, this emphasis on the technological
change as a sine qua non of industrialisation is likely to lead to a slowing down in the
rate at which surplus labour is absorbed in the modern sector. The Fei-Ranis 'solution' to
the growth versus employment trade off depended on countries crossing the 'export
substitution' turning point and then experiencing very rapid export growth. As far as the
unemployment problem is concerned, the acceleration of technological change in
traditional industries means that we need fast export growth a fortiori. The high export
demand route - as followed by Taiwan and Korea - is still an important option for many
countries, but it is not clear that it can work for the large economies like India and
China.
Third, the requirements in terms of technological capabilities, of the export substitution
turning point in the Fei-Ranis model are more exacting than is made to appear. As
technological sophistication in the production of even labour intensive goods increases,
so does the need for an accumulation of technological capabilities at the level of the
firm. And the lessons of path dependence teach us that this is a process which takes time
and probably has to be started early in the process of industrialisation.
Fourth, as well as the export substitution point of Fei and Ranis - at which labour
intensive manufactured exports displace primary exports - there is further turning point,
when a process of upgrading exports to higher value added goods begins. In the
17
Fei-Ranis schedule this is supposed to happen after the full absorbtion of surplus labour
when real wages begin to rise steeply. In practice, in the successful cases of export-led
growth, upgrading appears to start in advance of this. This is partly because real wages
may start rising quite rapidly well before the full absorbtion of surplus labour and partly
because the need for product changes in demanding export markets may demand a shift
to more sophisticated technologies regardless of the condition in labour markets. In
Korea as we have seen, the real wage rose fast even during the labour surplus phase, and
value-added per worker rose too at about the same rate21. The extraordinary rate of
export growth was at least in part due to the structural change in the export pattern
towards higher value added goods in demand in developed country markets. This is a
quite significant departure from the expectations we normally associate with the dual
economy system. This of course means that the argument of point (3) above applies a
fortiori.
Fifth, the idea of endogenous growth and the concept of path dependence suggest that
export led economies may get established on higher or lower income growth paths
depending on their technological capabilities in the initial condition. Korea, it is argued,
was able to maintain competitiveness in relatively high productivity industries and so by upgrading the structure of its manufactured exports, has kept on a path of high
income growth. Other countries, like Sri Lanka, with very labour intensive exports may
get caught on a path of low productivity and real wage growth and find it very difficult
to make a switch to competitiveness in the higher wage production. Barros (1993)
argues that the switch in Korea was facilitated by the prior accumulation of
technological capability in protected high value added industries, which subsequently
were able to face international competition successfully. Kim (1993) would agree with
this diagnosis. Many others would disagree, and it Is at least clear that in other
economies the protectionist phase though protracted, did not produce the same kind of
learning process as seems to have happened in Korea. Probably there is more agreement
that Korean policies of 'selective intervention' by the state were important in supporting
subsequent export development. This is an question of very considerable importance in
economies emerging from the labour surplus phase (or, if point (4) is accepted, even in
those which are still stuck with surplus labour).
21
Over the 1970's during which many economists would argue there was still a labour surplus in the Korean economy, value added
per worker grew at a substantial 7 per cent per annum and so did the real wage. Profits share in value added was maintained
constant during this period. It did not increase in the way predicted by most dual economy models.
18
References
Barros, A. R. "Some implications of the New Growth Theory for Economic
Development" Journal of International Development, Vol 5, No 5, 1993.
Cooper, C.M., (editor). Technology and Innovation in the International Economy,
Edward Elgar, London, 1994.
David, Paul. "Path-Dependence: Putting the past into the future of Economics."
Technical Report No. 533, Institute for Mathematical Studies in the Social Sciences,
Stanford University, November 1988.
Dosi, G., Pavitt, K., Soete L., Technological Change and International Trade,
Wheatsheaf, Brighton, 1988.
Fei, J.C.H. and Ranis,G. Development of the Labour Surplus Economy: Theory and
Policy, Homewood, Ill; Richard D. Irwin, 1964.
Fei, J.C.H. and Ranis, G. "A Model of Growth and Employment in the Open Dualistic
Economy: the Cases of Korea and Taiwan' Journal of Development Studies, May 1976.
Freeman, C. The Economics of Industrial Innovation, London, Pinter Publishers, 1982.
Harris, JR. and Todaro, M.P. "Migration, Employment and Development: a Two Sector
Analysis", American Economic Review, 1970.
Katz, J. Importacion de Technologia, Aprendizaje e Industrializacion dependiente.
Fondo de Cultura Economica, Mexico, 1974.
Kim Linsu, "National System of Industrial Innovation: Dynamics of Capability Building
in Korea', in Nelson (1993)
Lewis, W. Arthur, "Economic Development with Unlimited Supplies of Labour", The
Manchester School of Economic and Social Studies, May 1954.
Mahalanobis, P.C. "The Approach of Operations Research to Planning in India",
Sankhya, December 1955.
Nelson, R.R. (editor) National Innovation Systems: A Comparative Analysis, Oxford,
Oxford University Press, 1993.
Raj, K.N. and Sen, A.K. "Alternative Patterns of Growth under Conditions of Stagnant
Export Earnings", Oxford Economic Papers, February 196 1.
Romer, Paul M. "Increasing Returns and Long Run Growth" Journal of Political
Economy, Vol. 94, 1986.
19
Romer, Paul M. "Endogenous Technological Change" Journal of Political Economy ,
Vol 98, No, 5, 1990.
Schumpeter, J. A. The theory of Economic Development, Harvard University Press,
Cambridge, Mass. 1939 (translation from the German language text of 1929).
#9903
Implications of National Innovation
Systems for Developing Countries:
Managing Change and Complexity
in Economic Development
Shulin Gu
November 1999
21
United Nations University, Institute for New Technologies,
Keizer Karelplein 19, 6211 TC Maastricht,
The Netherlands
Tel: (31) (43) 350 6300, Fax: (31) (43) 350 6399, e-mail: postmaster@intech.unu.edu,
Implications of National Innovation Systems for Developing
Countries
--Managing Change and Complexity in Economic
Development **
Shulin Gu
UNU/INTECH Discussion Papers
ISSN 1564-8370
Copyright © 1999 The United Nations University, Institute for
New Technologies, UNU/INTECH
UNU/INTECH discussion papers intend to disseminate preliminary
results of the research carried out at the institute to attract
comments
**
This manuscript reports outcomes from the study of the INTECH project Characteristics of National
Innovation Systems in Developing Countries. It is a substantially revised version based upon two previous
versions: the paper ‘Concepts and Methods of NIS Approach in the Context of Less-developed
Economies’, submitted to the DRUID Summer Conference National Innovation Systems, Industrial
Dynamics and Innovation Policy, Rebild, Denmark, June 9-12, 1999; and the draft paper prepared for the
UNU/INTECH NIS Workshop held in Maastricht, October, 1998. The author wishes to express her
gratitude to Bengt-Åke Lundvall, Esben S. Andersen, Bjørn Johnson, Ed. Steinmueller, Charles Cooper,
Swasti Mitter for their useful comments. Working discussions were conducted especially during June to
September 1998, with Ph. D. candidates Noi Kwanjai, Norman Dytianquin, Djono Subagio, John Adeoti,
and Juana Kuramoto, with whom I share interesting exchange. I am also grateful for institutional support
and working conditions provided by UNU/INTECH. The conventional disclaimer holds.
Abstract
This paper develops implications of National Innovation Systems (NIS) from the perspective of
developing countries. A review of the development of NIS in the OECD context reveals that the
notion of national innovation systems is a synthesis made at the national and other societal
levels, of the insights about technological innovation and institutional change. Its strong policy
orientation came from the need to manage change and complexity for economic growth and
development. It should be adapted as one of the most relevant policy instruments for knowledge
based development in developing countries. The paper identifies gaps which may impede
possible applications of the innovative policy approach of NIS, mainly in the preparation of
people for change, and in the development of a knowledge basis for the learning intensive
policy approach of NIS. The paper also illustrates how to make efforts to narrow the gaps.
Table Of contents
1. INTRODUCTION
29
2. NIS IN THE CONTEXT OF OECD COUNTRIES: INTELLECTUAL SOURCES AND THE
NEED FOR MANAGING CHANGE AND COMPLEXITY
35
TWO LINES OF MODELING OF ECONOMIC PHENOMENA AND THE CONCEPT OF NIS
EMERGING SOCIAL NEEDS AND THE POLICY ORIENTATION OF NIS
AN EVOLUTIONARY THEORETICAL DEPARTURE OF NIS AND ITS ENLIGHTENMENT
3. METHODOLOGICAL SPECIFICS OF NIS
36
40
43
47
SURVEYING MICRO-FOUNDATIONS FOR EXPLAINING AGGREGATE SYSTEMS
DYNAMIC DELINEATION OF ANALYTIC BOUNDARIES
47
50
4. ECONOMIC CATCHING-UP: HISTORICAL TRANSITION AND NATIONAL INNOVATION
SYSTEMS
54
VARIOUS THOUGHTS ABOUT ECONOMIC DEVELOPMENT: CONTROVERSIES BETWEEN THEORY AND
PRACTICE
55
HISTORICAL TRANSITION AND NIS IN DEVELOPING COUNTRIES
60
5. LEARNING, INNOVATION, AND CO-EVOLUTION BETWEEN TECHNOLOGY AND
INSTITUTIONS IN DEVELOPING COUNTRIES--AN ILLUSTRATIVE RESEARCH
FRAMEWORK
KNOWLEDGE GLOBALIZATION AND TECHNOLOGICAL OPPORTUNITIES
LATECOMER FIRMS AND ENHANCED LEARNING
CO-EVOLUTION BETWEEN TECHNOLOGY AND INSTITUTIONS--A COMPARATIVE REVIEW OF NIS IN
SOUTH KOREA AND TAIWAN
ADAPTIVE POLICY PROCESS AND THE MANAGEMENT OF HISTORICAL TRANSITION
69
70
73
75
79
REFERENCES
85
THE UNU/INTECH DISCUSSION PAPER SERIES
94
27
1. Introduction
This paper concerns possible applications of national innovation systems (NIS) approach into
the circumstances of developing economies. ‘Developing economies’ is a vague and disputable
term, for every economy is in development, including those that are advanced economies. In
addition, great diversity and disparities exist in the group of developing economies so
categorized in World Bank publications. Nevertheless, as a group, the developing economies do
share some commonalties specifically associated with their backward situations in economic
development, such as low level of quality of life and systematically different features in
institutions (Sen 1991). They are, up to present, commonly attempting to catch up as well. It is
special problems, rather than development in general, that the paper takes into consideration as
of economic development in developing economies. This paper attempts to interpret where
there are gaps for possible applications of NIS there, and how the gaps can be alleviated.
The notion of national innovation systems is developed relatively recently from the
backgrounds of advanced economies. A succinct definition can be found in the recently
published OECD report on NIS project (OECD 1999b: 24) as follows.
National Innovation systems are defined as the “...set of distinct institutions which jointly and
individually contribute to the development and diffusion of new technologies and which provide
the framework which governments form and implement policies to influence the innovation
process. As such it is a system of interconnected institutions to create, store and transfer the
knowledge, skills and artifacts which define new technologies. (Metrcalfe 1995)
From this perspective, the innovative performance of an economy depends not only on how the
individual institutions (e.g. firms, research institutes, universities) perform in isolation, but on
“how they interact with each other as elements of collective system of knowledge creation and
use, and on their interplay with social institutions (such as values, norms, legal frameworks)”.
(Smith 1996)
The Science and Technology Policy Committee of OECD (OECD 1999b: 3), and many
participating scholars and policy makers of OECD countries believe that the systemic approach
opened by NIS has profound policy implications which would bring OECD countries into a
new generation of science, technology and innovation policy making. An enthusiasm is also
growing in researchers from developing countries. For example, there are sub-sessions in the
DRUID 1999 Summer Conference on National Innovation Systems, Industrial Dynamics and
Innovation Policy, a number of good work have been emerging. But in general study on
developing countries has not fully started, while difficulties and confusions appear. What is the
NIS approach all about? What are the policy implications of NIS for developing countries? We
approach these questions first of all by a quick review of the achievements reported in OECD
(1999b) under three distinctive but related titles: policy themes, analytic tools, and policy
institutions.
29
Firstly with respect to policy themes, a number of areas are highlighted as important under the
NIS perspective, which were before either less emphasized, or separately studied but not dealt
with as important systems components collectively responsible for the innovation performance
of an economy. They are (OECD 1999b: various chapters): a) innovative firms--the internal
competence of the firm in bringing in technological and organizational change and the network
patterns and conditions of the firm in which it is operating; b) clusters--the identification of
industrial clusters (namely a number of firms, universities and other research institutes,
bridging institutions and customers, which are linked in a production chain creating added
value); and the ways of interactions among different parts of a cluster; and c) characteristics of
national innovation systems--the institutional profile of national innovation systems; linkages
within and among innovation systems; the specialization patterns of national innovation
systems in scientific basis, technological innovation, and international trade; and the patterns of
these systems in development and growth, notably productivity growth.
Apparently policy focus of OECD countries is re-shaping. Higher attention is given to address
areas such as functional mismatches, incentive conflicts, and barriers, weaknesses and
asymmetries existing in the system that reduce the efficiency in producing, disseminating, and
using knowledge for innovation. ‘Innovation infrastructure’ is taken as one of the most
important attributes of the systems which is acknowledged critical for long term innovative
opportunities (OECD 1999b: 63-68). In short, ‘systems failure’ and weaknesses, rather than
merely market failure--the latter was the rationale for policy measures under conventional view
of technological change--provides guidance for policy making.
Secondly, analytical tools are considerably renewed (OECD 1999b: various chapters),
developed first of all for the need for exploring the various themes mentioned. Institutional
mapping and functional analysis, cluster analysis (also OECD 1999c), labor mobility analysis,
the analysis of embodied knowledge flows, and policy practice analysis are among the most
important developments. Combining quantitative and qualitative methods together to
accommodate special analytic requirements of the systems approach is one of the prominent
characters, provided that institutional factors are less quantifiable. Impressive is the intensity of
data use and the sophistication of data processing, such as the adoption of input-output table
upon which clusters are identified, and ‘embodied’ or ‘indirect’ R&D input calculated.
Certainly these analytical methods are not only useful for NIS survey, but also will be, and have
been, supportive to policy implementation and policy evaluation following the NIS approach.
Thirdly and very interestingly, the OECD NIS project has included a survey of policy
institutions (OECD 1999b: 38). It has identified that the policy institutions of OECD countries
are significantly country-specific and path-dependent (OECD 1999b: 68), typical features
30
which have been discovered from studies on technological change and institutional evolution. It
is recognized that policy priorities and policy means differ among OECD countries, influenced
by size and level of development, industrial, scientific, and technological specialization,
institutional structure, and domestic patterns of knowledge interaction. Policy hence is seen as
outcomes from the interaction between country specific policy institutions and country specific
innovation systems. In response to the learning-intensive policy process of NIS as such, a wave
is prevailing in the establishment of new policy research institutes in a number of OECD
countries (see e.g. OECD 1999b: 71-76; 1998a). They investigate, study, and disseminate
relevant information systematically and timely, to improve a knowledge basis for the policy
process in which broad participation is involved by academics, government agents, and
business companies
Put together policy themes, analytical tools, and policy institutions as reviewed, the recent
progress in OECD countries is substantial. Science and technology policy tends to be managed
in OECD countries more effectively with the guidance of a systems’ perspective, and more
consciously in combining short and long term innovation potentials. The separation problem of
science and technology policy from economic policy and economic performance seems to be
mitigated there, although its full consequence has not been uncovered yet.
We admire the progress, and believe that to manage change and complexity more efficiently in
developing countries is at least no less critical than in OECD countries. However, as a firm can
not innovate in isolation, and a new product can not be transferred to somewhere else without
adaptation and complementary inputs, the policy innovation brought about by the NIS approach
can not be understood and applied appropriately without checking the contexts in which the
idea is intrigued and developed on the one hand, and in which it is expected to be an intellectual
instrument for science and technology policy for economic development, on the other. This
paper reports a primitive outcome from an effort of this kind, it is taken by the author, a student
who comes from the non-OECD South, and works for the South on science and technology
policy.
Section 2 explores the background from which the idea of NIS emerged. The intellectual
sources are reviewed which were from the tradition of technological innovation economics
among others. The challenges are discussed which the OECD societies perceived from
international competition and from the advances of new technologies since the 1980s. In
response to the challenges, the concept of NIS developed out of the research tradition, in order
to improve policy capacity for national economic performance. The NIS approach represents a
policy innovation, and now a social-wide shift of attitude towards the acceptance of change is
31
widespread in OECD countries. The evolutionary theoretical departure in policy process by the
NIS approach is elaborated.
Section 3 reviews methodological specifics involved in NIS studies, with a special attention
given to possible confusions encountered by the researchers who were not experienced in
studying dynamic changes. Methods used for a NIS study are specific in that micro-foundations
constantly constitute a large part of the work, which are assumed containing reasons and rules
for explaining changes observed at aggregate systems level. Besides, each survey has to be in
principle specifically designed. The purpose is to be especially set up, the analytical framework
to be developed and the analytical boundaries to be delineated. There is no survey plan
immediately and universally applicable. This methodological specifics of NIS approach is
determined by the underpinning dynamic complex systems conception of NIS, uniquely
distinctive from conventional approaches.
Section 4 discusses some particular characteristics of national innovation systems in developing
countries. Although nobody would state literally that science and technology play no role, and
change and technological innovation has no relation with economic development in developing
countries, the experiences with science and technology have been very diverse there. Presently,
just in the opposite of OECD countries where the moods of politicians and academics are
moving towards change, the trends in developing countries is towards balance. A quick review
indicates that there is an urgent need for theoretical innovation of development economics, and
that there are progresses emerging in this direction. The recent work by Fei and Ranis in their
‘an evolutionary framework’ of economic development represents one of the progresses, can be
a theoretical foundation, for NIS survey being communicated with development economists.
Drawing upon both the Fei and Rains’ evolutionary framework of economic development, and
the OECD framework of national innovation systems, we develop some characteristics of NIS
in developing countries.
Section 5 illustrates NIS survey themes. They are in correspondence to that in the OECD NIS
project, but put in the context of developing countries. A review of the widely accepted
technology life cycle theory finds that late entry of an industrial follower can not be
satisfactorily explained. Institutions supporting for cross-boarder knowledge flows deserve a
special attention. Firms are the major actors of technological innovation. But with
inexperienced latecomer firms in developing countries, research focus needs to be given to the
accumulation process of firm-specific knowledge. This is a process that should transform an
inexperienced imitative latecomer firm into an experienced innovative firm, if it learns
extraordinarily intensively with imported technology. This section goes on to allude specific
patterns of innovation systems, based on a very brief comparison between South Korea and
32
Taiwan Province of China (thereafter simply Taiwan): interaction with international knowledge
inflows; network development; the role of FDI in cluster promotion; selected strengths in
technology; and the institutional patterns of technological infrastructure. It shows that the two
systems of South Korea and Taiwan, though rather comparable in macroeconomic terms, are
quite different in institutional structures and development paths, to which we had been rather
blind. This section also interprets the adaptive policy process of the NIS approach in the
context of developing countries. It contends that a shift of the way of policy making into an
adaptive learning process is decisive. Extraordinarily intensive policy learning is necessary if
policies are to play a role in the strategic management of historical transition of their innovation
systems in developing countries.
33
2. NIS in the Context of OECD Countries: Intellectual Sources and the Need for Managing Change and
Complexity
We begin our exercise with a quick journey to the developed world where the idea of NIS
emerged and is becoming socially accepted. We would like to learn the intellectual sources that
not only support the notion of NIS, but also serve a reasonably well-developed knowledge basis
for the NIS approach operational once it comes. We are also interested in policy concerns
behind the development of the idea of NIS, which, if any, might give an allusion to why NIS is
linked with policy purpose and how. The two themes, i.e., the intellectual sources of NIS and
the policy orientation of NIS are organized under the first and second parts of the section,
respectively, with the headings: Two Lines of Modeling of Economic Phenomena and the
Concept of NIS, and Emerging Social Needs and the Policy Orientation of NIS.
Although policy practice is often a matter different from policy theory, one can not
appropriately understand NIS without consulting its theoretical basis, which is the evolutionary
view of technological innovation and economic development, from the tradition of
technological innovation economics among others. In this perspective, research focus is put on
change and reasons for change. In response to the challenges raised from international
competition and from new technologies, the concept of NIS emerged out of the research
tradition, in order to improve policy capacity for national economic performance. With the
development of NIS, policy making and the relationship of policy with publics are in change.
As mentioned in the introduction section, intensive knowledge input, specifically tailored
policies in addressing country-specific and problem-specific issues, adaptiveness and flexibility
to feedbacks, are among the changes spreading OECD countries. A social-wide shift of attitude
towards the acceptance of change and innovation is taking place. The evolutionary theoretical
departure in policy process of the NIS approach is elaborated in the final part, titled An
Evolutionary Theoretical Departure of NIS and its Enlightenment.
The journey reported in this section is made for readers from the South. We believe, as we
ourselves learned enormously from this, that it is necessary. It helps to recognize where the
gaps are and to fill the gaps if we wish the innovative NIS approach of policy to be introduced
into the South. One of the gaps is in the qualitatively or orderly lower levels of innovative
ability which developing countries run incomparable with their advanced counterparts. A
tentative identification and explanation on this is reported in Section 4. Another gap is in the
accumulation of knowledge necessary for a productive survey on NIS, provided that researchers
from developing countries were not much involved in the tradition of technological innovation
studies. We try to interpret, which is reported in Section 5, several surveying themes included
in the OECD NIS project, into the context of industrial latecomers, for calling the attention of
local researchers to develop relevant knowledge basis for the application. The journey to the
35
OECD origin of the NIS also highlights that methods used for NIS survey is rather different
from conventional approaches, because the way it conceptualizes the subject of innovation
systems is novel. We are instructed to devote an effort on the methodological specifics of NIS
study, reported in Section 3. In short, this section gives indications why we do that which are
presented in following sections. Those who are familiar with the development in technological
innovation studies and with the NIS approach may escape this section entirely.
Two Lines of Modeling of Economic Phenomena and the Concept of NIS
Theories are conceptual models of the world made by observers. Theories work as mediator
instruments assisting our cognitive capacity development to comprehend the world in
observation; distinctive theories devise differentiated focuses. Having the division of
intellectual labour greatly developed, theories are generated in the developed world
propitiously, they debate, compete, and adapt to each other. Generally speaking, there are two
lines of theories with respect to economic phenomena, the neo-classic view, and the
evolutionary view. They serve as focusing devices not only for observations, but also for policy
making for, in our focus, science and technology, in order to promote technological innovation
and improve economic growth and development.22
The neo-classic view conceptualizes, in its very core, firms and consumers independent or
‘atomistic’ economic agents. They are fully informed about prices at the market place, and
produce, sell, and buy in the way in which they maximize the utility of the resource they are
endowed. The market meanwhile achieves the state of perfectly competitive equilibrium that
also maximizes the welfare of the society as a whole. Where an ideal state of perfectly
competitive equilibrium does not achieve, the deviation is called market failure, additional
action to correct it is then necessary. This serves the rationale for policy intervention in this line
of conception. Examples are environmental policy which deals with negative externalities
discharged from individual producers that deteriorate environmental quality, and anti-trust
policy which addresses the distortion of the market where only one or few sellers dominate the
market of a certain product or service. Directly related to science and technology policy is the
notion of public goods of knowledge. A piece of knowledge can be used many times by many
users with little decrease in its value, that gives inadequate incentives to private firms to invest
in knowledge generation. Patent laws, subsidies to private (company) R&D, and public
investment in basic science, are therefore solutions for a remedy.
22
The following paragraphs are only for introductory purpose to bring in the discussions below. It is
impossible here to systematically describe the two lines of theoretical perspectives. Metcalfe (1995)
provides a thorough review on this topic, also Metcalfe (1998), Metcalfe and Georghiou (1998), Lipsey
and Carlaw (1998). All of them focus on policy implications of these views.
36
One of the major shortcomings of this line of rationale rests on the assumption of symmetric
firms, homogenous technology and knowledge. Structural and institutional differences are in
the absence of interest. Policy goals and measures are postulated either too general, or ad hoc. It
is weak in linking science and technology with economic development of long run, for the
theoretical focuses are intrinsically insensible to change and the mechanisms of change. With
respect to technological change, the notion of information asymmetries is developed in this line
to explain why difficulties occur, which however is too feeble to increase our knowledge or to
improve policy making. Suppose there is a potential innovation. Although the innovative
entrepreneur has a rough idea though as what the innovation could be, though, his user and
supplier do not. Knowledge is in such case distributed unevenly, which is called information
asymmetries. Moral hazards thereby occur which prevent related agents from acting in the
maximizing way, and the market functions deviated from perfect allocation of resources for the
innovation. Such an explanation does not grasp the nature of technological innovation at all.
As has been observed plentifully from studies on technological innovation, a potential market
for an innovation, if it might eventually emerge, will be created only through complicated
interactions between its producer, supplier, user, and competitor. Each partner may change the
route in which he takes action throughout the process, in response to gradually revealed
information about the technology and its market. What will come out from a radical innovation
is largely not known beforehand. Moreover, the information asymmetries explained as market
failures for technological innovation are virtually sources for change in the market place. In the
real course, information is distributed unevenly. Entrepreneurs perceive innovation possibilities
differently as well, depending on their personal experiences and knowing capacities. If
everyone knows everything perfectly, there will not be any innovation to be developed in the
first place. The notion of information asymmetries is actually saying that the concept of a
perfect equilibrium market is incompatible to explaining innovation and change (Metcalfe
1995:412-413).
Instead of organizing analysis around equilibrium and maximization, the evolutionary approach
focuses on change and adaptation, in order to investigate why technological change proceeds
endogenously and how technological competition serves as a driving force to structural change
and economic development. This is the approach taken in the Schumpeterian tradition,
developed in the post war time known as technological innovation economics. Firms are central
as well in this tradition, they are the major actors in realizing economic value of knowledge in
the marketplace. However, with analytical focus placed on change, the assumption of firms
being atomistic players with perfect information no longer holds. Firms are instead assumed
adaptive agents, or learning agents. They behave as adaptive experimenter with imperfect
37
information, adjust over time in face of a complex and changing world in which choices are
vague, problems are ill defined, and outcomes of action are uncertain. Deductive decision
making becomes impossible in such a world, and is replaced by inductively experimental
behavior (Metcalfe 1995: 450; Herbert Simon’s ‘bounded rationality’ 1976). And relations with
other agents become indispensable sources of information with which firms define and adjust
themselves as part of a dynamic process in a whole system.
A broad range of inquiries are thereby opened as crucial for understanding how firms innovate
and why do their innovative performances differ. These inquiries concern the process of
decision making and adaptation, and factors which influence decision making and adaptation,
such as firms competence in bringing in organizational and technological change; their network
patterns and conditions in which resources for innovation are allocated, incentives to
innovation are imposed, and characteristic co-operational and competitive relations are defined.
Network effect, and the impact of firms structure on innovative performance become topics of
increasing interest in light of the evolutionary view, as demonstrated in the OECD survey plan
(see Section 1). It seems that with the widespread availability of information technology which
lowers communication and coordination costs, network based small and medium firms structure
in discrete manufacturing sectors gains additional advantage compared with more centralized
firms structure. The former may possess a higher level of flexibility to adaptation. And
innovation activities may be more widely dispersed in many centers in the former structure, so
that it is likely more favorable to the development of specialization, which in turn deepens the
overall innovative ability of the network.
In modern society, an important part of institutions specialized in knowledge generation and
dissemination embraces universities, public R&D laboratories, technological consultant and
extension institutions, and so on, or shortly, scientific and technological infrastructure and
supporting institutions. The evolutionary perspective gives special attention to institutional
structure of these knowledge generation and dissemination agents as well as the relationship of
them with technological innovation at firms. It is found that science and technology are in
complicated interactions, here science is meant the knowledge generation activities carried out
in universities and professional research institutes with academic excellence as the major
objectives, and technology the knowledge generation activities conducted at firms with the
creation of uitilitian novelty being the purpose. The relationship between science and
technology is inter-dependent, boundaries between them are blurred. On the other hand, science
and technology are in principle necessarily developed in different institutional contexts, under
respectively appropriate motivations, competition rules, and reward criteria. This proposes a
38
balanced development of science and technology, rather than an over-emphasis of one at the
expense of the other.
In advanced economies, innovative firms have been growing and science and its institutions
have been evolving rather naturally for a long time. The role of science for technological
innovation has been also rather naturally mediated through various channels including labor
mobility and informal relations between persons. However, the 1980s and 1990s see an
emerging tendency in which purposeful coordination is perceived necessary to improve
innovative performance of an national economy as a whole. The notion of national innovation
systems is developed in response to the perceived need which we will discuss below. Insights
developed from the evolutionary tradition provide much more relevant guidance for this
purpose.
For example, insights about fundamental science and engineering science, about
generic technology and specific technology, and about codified and tacit forms of knowledge,
are instrumental for policies in relation to knowledge generation and distribution efficiency,
provided that knowledge is regarded one of the most important factors for modern economic
growth.
Altogether, the evolutionary perspective investigates change and its mechanisms from two core
elements: a) adaptive individual institutions that engage in various ways in the development and
diffusion of knowledge for innovation; b) interactions between the adaptive individual
institutions. The former embraces firms and supporting institutions, as well as education system
and research and development system. The latter concerns inter-relations, or ‘co-evolution’
between institutions and technology at various levels of organizational structure. These two
elements are the inclusion of the definition for national innovation systems used by the OECD
NIS project, cited in the beginning of the paper. Pioneer authors on the topic of national
innovation systems (Freeman 1987; Lundvall (ed.) 1992; Nelson (ed.) 1993; Edquist (ed.)
1997) also similarly use them.23 With a great discretion given to behavioral, structural, and
dynamic details involved in technological change, the evolutionary approach has been a school
of multi-disciplinary efforts (OECD 1999b: 21). Centered on technological innovation, many
research traditions have made contributions, including technological innovation economics and
industrial economics, business management and firm theorems, institutional economics and
23
In their design by Nelson and Rosenberg (Nelson 1993: 4) which is for the country studies on national
innovation systems published in the book, a national innovation systems is as “of a set of institutions whose
interactions determine the innovative performance, of national firms.” And innovative performance
encompasses anything new to economic actors (mainly firms) in the system. Freeman (1987) has
apparently focused his analysis of Japan on institutional dimensions. Edquist and his colleagues provide a
comprehensive summary about their genesis and anatomy of various systems of innovation approaches,
see Edquist ((ed.) 1997). Lundvall puts learning especially literally central in his two assumptions for the
concept of NIS.
39
organizational theories among others. Correspondingly, many of the contributing disciplines
have absorbed the idea of innovation as a part of their research focus.
One may feel that the cited OECD definition reads too simple. It is in a way taken for
operational purpose. The above interpretation may serve a footnote as how rich is the
concern underneath the simple definition, and how the two elements combined make up
a departure in directing research focuses from the conventional ways. In this regard, the
two assumptions for the idea of national innovation systems made by Lundvall is worth
being repeated here for an additional support. He literally emphasizes the links of
knowledge and learning with modern economic development, and that learning is
undertaken in an institutional context. The role of policy for accelerating learning is also
emphasized upon the experiences of Nordic countries that were in catching up in the last
century.
"First it (the concept of NIS) is assumed that the most fundamental resource in the modern economy
is knowledge and, accordingly, that the most important process is learning. The fact that knowledge
differs in crucial respects from other resources in the economy makes standard economics less
relevant..." (Lundvall, in Lundvall (ed.) 1992: 1)
"Second, it is assumed that learning is predominantly an interactive and, therefore, a socially
embedded process which cannot be understood without taking into consideration its institutional and
cultural context. Specifically, it is assumed that the historical establishment and development of the
modern nation state was a necessary prerequisite for the acceleration of the process of learning
which propelled the process of industrialization, in the last centuries." (Lundvall, in Lundvall (ed.)
1992: 1)
Emerging Social Needs and The Policy Orientation of NIS
To better understand the NIS approach, it is necessary to see not only intellectual sources but
also pragmatic problems that have an impact on the rise of the NIS concern. Originally there
was no close link between technological innovation studies and policy making. Since the 1980s,
the need for managing change and complexity of a national innovation system has become
pragmatically vital. The idea of NIS therefore emerged with a strong policy orientation.
It was a shock to the advanced economies that Japan became a super power in the international
market since the late 1970s, which was followed by so-called Asian Newly Industrializing
Economies (NIEs). This stirred enormous studies on the Japanese system, and unique
institutional characteristics in the Japanese system impressed researchers who did this. A
consciousness about the importance of national institutional patterns grew, which is thought
critical in bearing on innovation performance of a nation, more evidently reflected in Freeman
(1987) and Nelson ((ed.) 1993). The rapid development and dissemination of information and
communications technology (ICT) created another challenge. Firms in OECD countries began,
40
around the turn from the 1970s to the 1980s, investing vastly in new technologies, while
productivity did not follow to increase comparatively. The lagged growth of productivity
behind the pace of investment in new technologies, known as ‘productivity paradox’, required
explanation (e.g. OECD 1991). Once again, studies in response to the productivity paradox
show the importance of institutional change in order to harvest benefits from innovation
opportunities opened by the advances in ICT and other new technologies, reflected perhaps
more in Lundvall ((ed.) 1992). In the course, attention is indicated to interaction, or, coevolution, between technology and institutions repeatedly. In addition, the development of new
growth theories in the second half of the 1980s may have turned the majority mainstream
economists to be participating or at least sympathized with the unorthodox approach of
technological innovation studies and the search on NIS.
The notion of national innovation systems is not simply a summing-up of accumulated
achievements in the direction of technological change. More than that, it is a synthesis reached
at the aggregate national level, in response to the challenges as mentioned to the capacity of
national policy making. Researchers have searched hard not only from Schumpeter, but also
widely from classic and neo-classic schools (Lundvall (ed.) 1992; Nelson 1994, Freeman 1995,
1998; OECD 1998a; 1999b; 1999c), in order to interpret technological innovation and
institutional change in linking with economic growth, and to develop necessary analytical
methods. Apparently, to meet with pragmatic challenges was a critical drive for the NIS
approach to come. It is hoped that the NIS approach provides a new way for science and
technology policy making (Andersson 1998), which would be more integrated with economic
policies, and more effective by various novel means in the promotion of innovative
performance of a national economy. In short, the development of NIS is very policy oriented. It
represents the effort in the introduction of policy innovation to the sphere of science,
technology and innovation.
It is too early to conceive what will be eventually brought about by the NIS approach to policy
making. We instead comment on some positive signals demonstrated in the OECD NIS project
(OECD 1999b). Among the most remarkable is that networks and clusters have received high
attention. This may well indicate the opening of an important policy area, for traditionally firms
are seen operating separately. Besides, the recent decline in R&D investment in OECD
countries may be alleviated to an extent. Some OECD countries, such as Finland, have
developed means to increase public support to R&D. Because the NIS perspective proposes that
maintaining a certain level of R&D is necessary for generating sufficient opportunities for
innovation and selection. Furthermore, policy institutions and policy practices have, for the first
41
time, been surveyed systematically (OECD 1999b; OECD 1998b). This represents an effort to
turn policy making towards a systemic and adaptive track.
From the evolutionary perspective, only an adaptive process carries effectiveness for a policy
initiative. A policy initiative is aimed to introduce a social innovation, for which information is
imperfect and choices are vague, just like a firm’s initiator of technological innovation faces.
The policy maker has to accept a considerable deal of indeterminacy and uncertainty in the
consequence of the initiative. He must adjust the policy by learning about the working of the
system over time. This flexible, adaptive policy mechanism devised by the NIS approach is in
sharp contrast to conventional understanding of policy making: a policy maker conceived in the
equilibrium view is obliged to correct the system deterministically upon his accurate
maximizing calculation (Metcalfe and Georghiou 1998: 80). Knowledge about policy
institutions and policy practice hence becomes an important input to assist the policy learning
process. So does widespread participation by publics in the policy process, which accelerates
information flows between policy maker and the agents of the system in coordination. The
adaptive learning policy process is therefore to be understood as an indispensable part of the
NIS approach, owing to the complexity of the system and uncertainty that involves in a policy
process.
In the introduction section, we have used the terms of policy themes, analytical tools, and
policy institutions to describe the coverage of the OECD NIS survey. The three areas actually
constitute a harmonious set of building blocks in order to put a new policy approach--the
adaptive and systemic NIS approach on a solid knowledge basis. In the above paragraphs we
also indicated that the development of the NIS idea was driven by emerging social needs for the
improvement of adaptive capacity at national level in cope with accelerated technological
innovation and international competition. With the impressive progress in all the three areas,
we see that OECD countries are taking substantial steps to manage more effectively changes at
the level of national innovation systems, steps that are necessary for the knowledge-based
economic development, and hence have far-reaching implications.
OECD countries enjoy at least two kinds of advantages in the direction. A great deal of
knowledge about technological innovation and institutional change has been accumulated there,
together with richly developed expertise in a number of relevant research areas. The knowledge
and expertise has quickly joined together to make contribution to the development of the NIS
approach. The politicians and publics in OECD countries are also better prepared for
participation in change. Having well educated population who are more apt at adaptation, the
attitude towards change has been proliferated there and entrenched to ordinary citizens in the
past decades. We hence do see a widespread acceptance of new theories and new approaches
42
about technological innovation and social change prevailing in OECD countries (Andersson
1998; Caracostas 1998) 24. This will serve an important social basis for further development in
the NIS policy approach there, although turning to a new policy path will definitely have many
difficulties to overcome.
An Evolutionary Theoretical Departure of NIS and its Enlightenment
Now a further review of the evolutionary perspective is necessary, provided that the NIS
approach not only has its research tradition in line with the evolutionary perspective, but also
requires broad social involvement in policy process to manage change. What should we prepare
to see from the viewpoint of national innovation systems? And how should we work with the
policy approach that the notion of national innovation systems devises?
First and foremost, a simply message is that by assuming a) that a system is composed by
adaptive individual institutions and b) that these institutions are operating in interactions, the
perspective of NIS has made a conceptualization of the systems in observation very differently
from the way we used to take in thinking about the subject which we study. The perspective of
national innovation systems conceptualizes complex dynamic systems, while the conventional
perspective conceptualizes simple and mechanical systems, in which individual components of
a system operate in isolation. Unlike simple mechanical systems where the state of a system can
be deducted from the sum of individual components, complex dynamic systems evolve much
more complicated.
Researchers in the fields of technological innovation and institutional change have for a long
time observed ‘peculiar’ behaviours. Among the most distinct is selectiveness of change.
Change occurs in a selective direction, but not randomly in all directions, because only that
which is fitted to the particular interactive circumstances survives. Change, once selected, is
often further enforced by adaptive learning in response to feedback loops which involves
additional investment. Scholars have documented widely in relation to the selectiveness and
self-organizing process of change, although in different contexts, and use distinctive terms (e.g.
Nelson and Winter 1982; Rosenberg 1976, 1982; Dosi 1982). Path-dependency is a term
24
Caracostas comments it as follows: “In recent years, policy experts and policy advisors have been
travelling around the world to spread the message (the linear model of innovation is dead). New theories
and approaches about innovation and its social and economic embeddedness are challenging the wellknown arguments that justify public intervention in research, development and demonstration activities.
Based on evolutionary theory, systems of innovation approach and new knowledge about the social
shaping of technology, these new ideas are progressively diffusing outside academic circles into the wider
research and policy-making community” (Caracostas 1998: 308) Indeed, in an occasion which was for the
inauguration of the Eindhoven Center for Innovation Studies in 1999 July, about one hundred people were
discussing to each other on these new ideas. They were from academic disciplines, business companies,
consultant agencies and government bureaus. There were debates of course.
43
(David 1978, 1985; North 1990) which now receives broad acceptance. It emphasizes that a
small historical event may matter if it has influenced the selection of a change that will be
‘remembered’ for a long time. Unpredictability or uncertainty (Kline and Rosenberg 1986) is
also broadly observed. It may be better linked with radical changes, in which an expectation of
the further state of a change is largely impossible to be made by referring to the past state of the
matter. Please note that here we are inclined to merely make one point that evolutionary
behavior of complex dynamic systems is peculiar in the sense that it seldom appears in
textbooks, up to now.
With the introduction of the NIS approach, similar features of evolution are being discovered at
the national systems level extensively. As mentioned in the introduction section, national
innovation systems are found as country specific in terms of institutional structures, and
measured in their specialization patterns in the areas of scientific basis, technological strength,
and international trade. In addition, policy institutions, as well as policy portfolios and policy
means differ among OECD countries. Viewed in a conventional point of view, these are all unothodox. The evolution of national innovation systems is characteristically indeterminant rather
than determinant, specific rather than homogenous as with respect to technology, firm, and
country, and path-dependent rather than time-free and ahistoric. Confusion may occur in
various ways if one’s mind has not turned to be ready for the new approach of NIS. This may
make the situation severer for scholars who were trained with traditional development
economics. How to organize a survey on NIS in face of a system with many individual and
interlinked institutions? What can be drawn from findings developed in a survey for other
innovation systems, provided that innovation systems are country specific and path dependent?
How to make policy recommendations upon a survey in the circumstance where nothing is
regarded to be determined? In the following sections we will develop our argument in relation
to these questions. Shortly speaking, policy analysis and policy recommendations become
specific and dynamic as well, in correspondence to the conceptualization of complex and
dynamic national innovation systems. An informative NIS survey has to be individually
organized with clearly shaped inquiry and well-developed working hypothesis (Section 3).
There is no universally applicable survey plan for different policy concerns. Cross-country
comparison may offer references more in analytical methods and mechanisms about
technological innovation and institutional change, than in concrete policy means (Sections 3
and 5). Policy recommendations have to be made upon detailed analysis for a specific purpose
and in a certain context, and are subject to modifications over time (Sections 3, 4 and 5). Here,
44
however, the single emphasis is to take into account the evolutionary theoretical departure of
the NIS approach is a prerequisite for successful application of the approach.
Theoretically, the conceptualization of complex dynamic systems can be expressed as real,25
and pragmatically, the conceptualization is essentially closer to reality as far as societal change
is centrally considered. In the most basic sense, the conception of complex dynamic systems is
developed to distinguish them from simple mechanical systems. Nelson does so.
Nelson
suggests ‘a general evolutionary theory’in which “[t]he focus of attention is on a variable or set
of them that is changing over time and the theoretical quest is for an understanding of the
dynamic process behind the observed change” (Nelson 1995, italic added), as a substitute for
mechanically composed systems operating at equilibrium. Dynamic process is the key in his
general evolutionary theory, which is causes by interactions between variables. Later on he
(Nelson 1998) uses the succinct term of ‘co-evolution’ between technology and institutions to
specify the interactions between variables. He thinks that an evolutionary theory as defined can
be generally satisfactory to a number of themes related to technological change and economic
growth, and that is in effect used for the definition of NIS.
Necessary theoretical concern about the systems which are composed by a number of
interrelated units, has been noticed rather broadly. For example, Ludwig von Bertalanffy
developed the notion of ‘general systems theory’for those systems: ‘systems as sets of elements
standing in interrelation’, and ‘systems of elements in mutual interaction.’ (von Bertalanffy
1979: 38, 45, also chapters 1, 2, 3, and 8). Laszlo (1973, 1987) terms his idea as ‘a ground
evolutionary synthesis’ (Laszlo 1987: chapters 1, 2, and appendix) under a similar definition.26
25
The notion of dynamic complex systems is important and real. In a way, a dynamic complex system can
be conceptually expressed as follows (ref. von Bertalanffy 1979: Chapter 3, and combined the treatment
for catching up analysis taken by Fagerberg 1987). Here S is the measure of system’s state, Q1, Q2, ...Qn
are system’s elements. The expression means that change of measure of any Qi is a function of all Q1,
Q2,...Qn, and of the system’s state as well. And conversely, change of Qi entails change of measure of all
other elements together with the system as a whole. Note that, if in the system novel elements are
generated over time, and changes in the patterns of relations take place, n and f then should also be
considered as functions of time. Moreover, suppose that changes of Q1,...Qi come not only in response to
external shocks, but also from intentional action upon internal dynamics to make change, and so on, the
picture goes even beyond the expression of the set of conceptual equations below. Nevertheless, the
expression is in sharp contrast to those built on isolated elements with weak relations.
S={Qi}
dQi/dt=fi (S, Q1, Q2, ...Qn)
i=1-n
26
It is also interesting to see how Laszlo describes evolutionary behaviour by the systems under his
‘ground evolutionary synthesis’. We cite it as follows.
“The laws conceptualized in the evolutionary context are not deterministic and prescriptive: they do not
uniquely determine the course of evolution. Rather, they state ensembles of possibilities within which
evolutionary processes can unfold. They are rules of the game, to be exploited in each individual instances
45
That such systems should deserve a theoretical attention is above all for the sake of the most
distinct laws which govern their evolution. Hence for the evolution of national innovation
systems is the properties of the laws such as selectiveness, path-dependency and countryspecific. The evolutionary synthesis of NIS is indispensable to recapitulate the real world that
moves to rapid change in unprecedented pace, and that meanwhile undermines indispensably
the conventional laws of determinism.
To conclude, in this section we have repeatedly explained that the notion of national innovation
systems is in line with evolutionary theoretical approaches to the phenomena of technological
change and economic growth. It emphasizes the dynamic and complex nature of innovation
systems, and diverges fundamentally from conventional ways. The notion of national
innovation systems is developed in response to the needs for social capacity improvement in
cope with change and complexity. Policy innovation is made possible thereby, this however
requires a corresponding change in the ways in which we think and act, towards adaptive and
dynamic as well. People from developing countries are relatively disadvantageous in the
preparation for the change. Without such a change, the notion of national innovation systems is
felt very uncomfortable to deal with, as if it puts various different subjects into an empty box.
This is because the standpoint of traditional modeling is still taken as the reference point in
which the causal relation of a subject is defined in a determined way. We now turn to discuss
methodological specifics of the NIS approach.
according to the skills and predisposition of the players. Dynamic systems--the ‘players’ in the game of
evolution--are not strictly determined. They do not have individual trajectories (evolutionary paths--the
words are original) but bundles of trajectories. If we consider all their trajectories starting from a
particular region, no matter how small, then we find that these trajectories separate after a time into quite
different regions. As Nobel-laureate thermodynamicist Ilya Prigogine points out, dynamic systems have a
basic ‘divergence property’. This property undermines classical determinism, based on the concept of a
single trajectory. Given identical initial conditions, different sequences of events unfold--within the limits
and the possibilities set by the laws. The sequences in turn create fresh sets of limits and possibilities.
Evolution is always possibility and never destiny. Its course is logical and comprehensible, but it is not
predetermined and thus not predictable.” (Laszlo 1987: 20).
46
3. Methodological Specifics of NIS
This section gives a brief review of methodological characters involved in a survey, which
emphasizes on change and its reasons and covers a number of related units, namely innovation
systems. Innovation systems need not be definitely national, regional innovation systems,
technology systems, and clusters are all possible survey subjects, they are more or less subjects
of aggregation, and often involve policy relevance. As has been made clear, the concept for
innovation systems is different from traditional modeling of a subject. The concept of
innovation systems is comprehensive and indecisive. It catches the complexity of systems,
provides important guidance towards component units and their relations, precludes that merely
measuring a system at aggregate level could reveal enough causal links. But, it in itself does not
contain a survey plan in detail. Accustomed to do research in some disciplines for example
mainstream economics, one may feel difficult to handle the comprehensiveness and
indecisiveness. He then tends either to doubt the NIS idea if it is scientific, or deal with it in
other ways.
This section discusses methodological specifics of NIS approach in general, with a special
attention given to problems that have been, or might be, encountered in a study on developing
countries. Methods used for a NIS study are specific in that micro-foundations constantly
constitute a large part of the survey, which are assumed containing reasons and rules for
explaining changes observed at aggregate systems level. Besides, each survey has to be in
principle specifically designed. The purpose (quest) is to be clearly set up, the analytical
framework to be developed, and hence the analytical boundaries delineated. There is no survey
plan immediately and universally applicable. This methodological specifics of NIS approach is
determined by the underpinning dynamic complex systems conception of NIS, uniquely
distinctive from conventional approaches. We devote this section mainly to readers from
developing countries, with the belief that methodological principles are part of the notion of
NIS. A discussion on methodological specifics provides an additional interpretation of the NIS
approach, useful for the application of the NIS approach in different circumstances.
Surveying Micro-foundations for Explaining Aggregate Systems
By the very nature, the definition of complex dynamic NIS is characteristically ‘holistic’
(Edquist 1997: 17-18). A systems (reads ‘evolutionary’) approach invariably develops specific
methods designated to cope with the unconventional and indecisive conception. A basic
principle for the systems approach may, with little disputes, be described as surveying microfoundations for explaining aggregate phenomena. This is an indispensable principle, has been
regularly taken in technological innovation studies, no matter the author has, or has not,
specified a systems approach he adopted (e.g. Carlsson and Jacobsson 1994; Shin 1994). This is
47
also taken in many other professions, among which historians have long been working on it.
The OECD NIS project has been focally developing methods and indicators in this direction.
However, it is a useful starting point for a discussion on methodological specifics of the NIS
approach.
Consider Michael Porter’s The Competitive Advantage of Nations. Interesting is why and how
he developed it. He was, when he took a policy advisory position to the U.S. Government,
stirred by his dissatisfaction with the conventional notion of competitive advantage, which rests
on static, or ‘lower ordered’, input endowments. His puzzle was that ‘[m]erely using the
resources available, or assembling more resources, is not enough for prosperity. Neither is
redistribution of a nation’s wealth between interest groups.’ (Porter 1998: xii). From this he
takes the hypothesis that the competitive advantage (reads as ‘long term’) of a nation rests on
the ability to ‘productively use and upgrade its inputs’, namely, the creation of new and higher
ordered input endowments. His survey strategy then goes to lower levels. He analyses the
elements of a national economy--firms and industrial clusters, and puts them in the context of
interactions between various factors of the ‘diamond’ (system), including firm strategy,
structure and rivalry; factor conditions; demand conditions; and related and supporting
industries. His concern about the importance of micro-foundations is also relevant to
developing countries. He himself has commented that ‘...macroeconomics reform is necessary
but not sufficient. As important...are the microeconomics foundations of development.....What
next? What to do after macroeconomics stabilization and adjustment (?)...’ (Porter 1998: xvi).
We will return to this topic in Section 4 and 5, address it from the perspective of NIS.
Table 1 depicts the composition of the methodological ‘surveying micro-foundations for
explaining aggregate phenomena’, by compiling the NIS approach and the Porter’s. The entries
used are organized by referring to Nelson (1995, italic added): “The focus of attention is on a
variable or set of them that is changing over time and the theoretical quest is for an
understanding of the dynamic process behind the observed change.” Hence, ‘major quest and
hypothesis’, ‘analytical unit’, and ‘dynamic process/cause’ are entries appeared in the left
column of Table 1. The additional entries ‘disciplinary background’ and ‘policy orientation’ are
used for the inclusion of Porter’s work, in order to extend our understanding beyond merely
NIS. From distinctive disciplinary backgrounds (technological innovation and business
management here) and at distinctive policy orientations (science and technology policy for
innovation and trade and business policy respectively), concerned people come to a
commonplace. There is a shared scholarly aspiration here, which regards how to better manage
dynamics and complexity of the subjects, and a shared methodological principle, which gives
48
attention to lower levels of a complex subject for explanation, though both of the two
approaches should be said still in primitive stage of development.
To study on micro-foundations and link it with aggregate phenomena is an essential part of the
holistic conception of NIS. A simple definition of NIS, and an emphasis of its evolutionary
reasoning, by no means implies to downgrade substantial details of individual systems into a
homogenous trunk. Just the opposite occurs. A synthetic conception of NIS, incorporated by the
principal method of analyzing substantial details which are distinctly specific to particular
systems, tends to best differentiate specific attributes between innovation systems, as has
revealed in the OECD NIS survey. Spectacular findings of the OECD NIS project are virtually
in country-specific patterns in every facet of their NIS--in scientific basis, in technological
specialization, in international trade, and in policy institutions. The NIS approach takes large
part in micro-level studies, it can not be understood and applied appropriately without
acknowledging this intrinsic methodological principle. In this connection, it is necessary to
notice that merely pooling out aggregate data is an inappropriate down-play of the NIS
approach. A rejection of the NIS approach because of the comprehensive and indecisive
conception the NIS takes, is pointless.
Table 1: Analytic characteristics: The NIS approach and the Competitive Advantage of Nations
NIS
major quest and
hypothesis
The improvement in learning efficiency is
the source for innovativeness of a nation
analytical unit
--nation
--cluster (industry, region)
--firm
--public knowledge institutions (S&T and
educational infrastructure)
--knowledge network, technology system
Interactions (co-evolution)
between technology and institution:
technological trajectories;
life cycle theory of technology;
path dependency;
learning by doing, using, and
interaction;
knowledge distribution power
Technological innovation
dynamic
process/ cause
discipline
background
policy
orientation
Science and technology policy
The Competitive Advantage of
Nations
The creation of productivity growth
is the source of the prosperity of a
nation
--nation
--cluster (industry, region)
--firm
Interactions
among the elements of the
‘diamond’:
firm strategy, structure and
rivalry; factor conditions;
demand conditions;
related and supporting industries
business management
trade and business policy
Sources: Porter 1998; Lundvall (ed.) 1992; Nelson and Rosenberg 1993; Nelson 1995; OECD 1999b;
Carlsson (ed.) 1997.
49
Dynamic Delineation of Analytic Boundaries
Provided the importance of micro-foundations, analytical difficulties arise concerning how to
define analytical boundaries. A straightforward way is following a geographical space such as a
nation’s territory for a national system, a region for a regional system. This is far from
workable, because of the great complexity of the systems, also because inter-national and interregional relations may be significant. This is called the boundary-delineation problem, much
less seriously encountered in conventional analyses. In the exercise of the OECD NIS project,
the boundary-delineation problem seems more apparent to the Catching-up Group (Mowery
1998).
Instead of stationary delineation, dynamic delineation of analytic boundaries is to be
considered a better approach. Namely, those elements and relations if dynamically significant to
the analytical focus of a survey, should be covered in the study. Here we suggest two dynamic
boundary-delineation approaches: a) following a historical process to take the historical
perspective of boundaries delineation, and b) around a quest to go to a quest-guided
delineation of analytical boundaries. Surely the distinction between the two is only a matter of
degree.
The historical perspective. Following a historical perspective to determine the scope of an
analysis, the element of quest unavoidably involves but its involvement is usually rather general.
With the inquiry ‘how a certain system gets where it is now’, events and factors that have induced
and ruled out changes with which the system moved through a path are the focus. The boundaries
of the survey are dynamically delineated according to the significance of the role the events and
factors have played. Here, consistent with the evolutionary conception, time dimension is central.
The historical perspective gives a reference for boundary definition upon the power of evolution
in such a way that changes unfold themselves with time. Examples of this are Mowery and
Rosenberg (1989) and the country cases in Nelson (1993). Slightly differently organized but in a
similar vein, the study on ‘technological systems’ (Carlsson and Jacobsson 1997; Carlsson (ed.)
1997) can be considered of the historical approach as well. Time dimension is central also, with
an inquiry focusing on a technology, whose development is divided into different stages.
Functional analysis is carried out to examine the relationship between the development of the
technology and the roles played by various actors and supporting institutions, stage by stage.
The scope of analysis is defined by the dynamic importance of actors and institutions in relation
to the development of the technology in real terms. They choose to analysis the technologies of
generic importance such as factory automation and electronics. The scopes of the technological
systems are all rather large, and in change over time.
50
Quests and working hypothesis. Alternatively, a survey may need to be organized more around an
inquiry--a quest, in which time dimension turns to be secondary. How to phrase a quest, or what is
the appearance of a quest, and how to make up a survey with the quest, are appropriate items to
the quest-guided solution for boundary-delineation problem. Up to now, well-documented studies
under the call of national innovation systems are only a few. For getting an allusion, we go to
Edquist (Edquist (ed.) 1997).
There are three cases in the Edquist’s book in which a quest has been setup and an analysis
done upon the quest, we shortly summarize them in Table 2. Some other cases are not included
as they seem to be a proposal, not exercised yet, such as that by Anderson and Lundvall (242265) which is for computer simulation of firmsevolutionary process in an industry in terms of
capital stock, productivity, and concentration.
We find that for each quest a development of a set of working hypothesis must be associated. It
is not a quest alone, but a quest and a set of working hypothesis together that makes a survey
productive. In the meanwhile, an analytical boundary is accordingly reasonably well defined.
Quests, as shown in each case, seem to have to be very specific. Each quest examines one
particular aspect of ‘relations’, between technology and institutions: the relations between firms
characters and trade specialization, the relations between technological ‘regimes’ and countryspecialized allocation of innovation, and the relations between knowledge distributional power
and national institutional characters, respectively in the three cases as listed in Table 2.
Obviously there is no universally applicable quest, just as there is no working hypothesis which
would be widely appropriate to whatever inquiry raised. Working hypotheses are not included
in the table, for otherwise the table would be too complicated to be clear. Some remarkable
facets of working hypotheses however can be summarized including: a) that a working
hypothesis is specific to a certain quest; b) that a working hypothesis should contain a workable
survey plan and analytical framework; and c) that the formation of a working hypothesis entails
enormous knowledge input, knowledge that has been accumulated, and is often multidisciplinary, depending on the focus of an analysis. In each case, a considerable part of their
work reviews about learning process, knowledge flows, technology and technological
innovation, firms and industrial structure, supporting institutions, and so on, to clarify the quest
and to search for and to validate the working hypothesis. Apparently, this demonstrates that the
sophisticated capacity of NIS analysis has to build on the achievements long developed mainly
in the direction of technological innovation as sketched in Section 2, and there is a gulf here in
terms of learning experiences for researchers from developing countries, for we were basically
aside the accumulation process.
51
Table 2: Quest illustration
Author
quest
objective
Guerrieri and Tylecote
(107-129)
the relations between behavioral characters of firm
management, their environment conditions of home
country, and the country’s pattern in technology and
international trade specialization
cross-country
comparison
Breschi and Malerba
(131-156)
the relations between Technological Regimes (indicated
by a number of characteristics of technology) and
geographical distribution of innovations in various
sectors
cross-country
comparison
Foray
(64-85, also David and
Foray 1995)
the relations between distribution power of knowledge
and institutional characters. This has been taken as an
important part of the quest for the OECD NIS project
cross-country
comparison
Source: Edquist (ed.) 1997.
An interesting point is about cross-country comparability. Although analysis of NIS is not
necessarily designed to make cross-country comparison, the proposal by Anderson and
Lundvall is an example, all three cases have the objective of cross-country comparison. A note
is needed as follows and it seems plausible by the fact that all of these authors are among major
contributors to the recent development of NIS as well as to the development of the OECD
project. That is, to an extent the cross-country comparative objective here is a reflection to the
purpose (quest) of the OECD NIS project (OECD 1999b: 3): knowledge distribution power of
national innovation systems (Foray in Edquist (ed.): 64-85, also David and Foray 1995), and
testing it upon cross-country comparison along with the development of a set of indicators,
though the project as a whole embraces additional objectives. Knowledge distribution power
may have seized a critical aspect of policy demands encountered by the majority of OECD
countries, in face of accelerating technological progress (notably ICT) and tightened
international competition. This focus is therefore one of high policy relevance to them. The
focus is however less intimately policy relevant for the Catching-up Group particularly,27 and
for less developed countries in general. For sure an investigation following the design may
generate useful information, and all developing countries, if being able to do this, may benefit,
6
To ask ‘how to transform a large government-run industrial technology R&D system in a radical transition
period of economic regime?’‘what is the impact of the specific international trade and export-manufacturing
regions on domestic innovative activities?’ and ‘why economic miracle occurred and what have been the
reasons of the national innovation system for both past success and current crisis?’ would be quests more
specific than ask what are the national innovation systems in Hungary, Mexico and South Korea, for example.
This was learned by the author in attending the Catching-up Group meeting of the OECD NIS Project,
June 1997, Paris. Also see Mowery 1998. The Catching-up Group is not the major part of the OECD
52
but such information might be more the kind of background information. Much more work is
indispensable if it is to be valued in the context of their country-specific problems.
Another point is that a productive quest captures pressing policy concern in relation to growth
and development. Or in other words, policy relevance is an important element for a quest to
result in productive consequences. Because the study on NIS entails enormous resource input,
policy relevance legitimates the use of necessary resources. More critically, policy relevance
instigates positive loops, hence increasing returns to investment in a NIS study, by widespread
participation and knowledge sharing between academics, policy makers, businessmen, scientists
and technologists, and others. This is actually a scenario presently emerging in many OECD
countries. To explain this by evolutionary theory, a policy relevance of a quest is a necessary
condition for a policy learning process to occur. Moreover, cross-country comparison may
mainly, or perhaps merely, be meaningful under shared policy concerns. Because, highlighted
by the perspective of NIS, innovation systems between countries are not homogeneous, but in
different patterns in terms of specialization and institutional structures. The merit of crosscountry comparison may well be in that it informs where is the limitations rather than it guides
to imitate superficially. Search cost reduces for certain policy initiatives, while the workability
of any important policy initiative will eventually be determined through co-evolution in
particular country-specific circumstances.
We end this section by making a general comment on the relativeness of our knowledge about
innovation systems. The evolutionary perspective of NIS rules out linear-kind deterministic
laws with respect to evolutionary behavior of innovation systems. It also intrinsically declares
that our knowledge about innovation systems will never become perfect. This is simply because
novelties--new technology, new institutions, and new patterns of relations--are being created
ever dynamically in innovation systems. And in front of the great dynamics and complexity, the
capacity of our knowing is limited and bounded. Compared with thirty years ago for example,
multinational companies, an important carrier of international technology flows, have changed
their behavior dramatically. Their objectives of international sourcing have turned to attempting
for ‘global integration’, from merely seeking for low wage labor in earlier times (Ernst 1998).
Our knowledge has to be renewed and working hypothesis to be modified if a study in this
regard is to be instructive. One may wish, following conventional understanding of knowledge
development, that a succinct normative evolutionary theory with elegant formulation and broad
explanatory power might be developed upon rich enough appreciative knowledge from
empirical studies. However, to be sympathized, such an attempting must tell us where it is
Project. For the majority of the participating countries, the focus is around knowledge distribution power
of the systems.
53
going to generalize--it must be towards assisting for better comprehension of diversity,
specificity and relativeness, but not the reverse side. Our review through the section indicates
that in studying NIS, the setting-up of certain quests, the development of certain working
hypotheses and survey frameworks, are all conditioned. Research cases on NIS, however nicely
organized, may only offer useful reference, but should not be taken for granted. This seems to
be remembered as the key for ‘latecomer’ analysts
of NIS, especially from developing
countries. In a similar manner, Lundvall has commented for methodological flexibility and
openness (Lundvall 1993: 13). Indeed, the conception of innovation systems has put a greater
hardship in intellectual labor on its students.
4. Economic Catching-up: Historical Transition and National Innovation Systems
In the previous sections we have attempted to make clear what were the intellectual sources of
NIS approach, how the idea of NIS became socially accepted for policy purpose, and what
underpins the methodological principles. Our purpose is to shed a light on where adaptive
efforts are most necessary if the NIS approach is to be a useful policy instrument for developing
countries.
Although nobody would state literally that science and technology play no role, and change and
technological innovation has no relation with economic development in developing countries,
the experience with science and technology has been very diverse there. The huge investment in
science and technology made in India, Brazil and China for example, did not prove successful
economic development. Presently, the policy attention of developing countries is towards
balance, just in the opposite of OECD countries where the moods of politicians and academics
are moving towards change. This has of course its historical reasons, but clearly there lacks the
sense about change in this part of the world, which the notion of NIS emphasizes.
In this section, we first make a quick, unavoidably partial, review on thoughts about economic
development, titled Various Thoughts about Economic Development: Controversies between
Theory and Practice. In the past half century with the uneasy proceeding in development
practices, theories and ideas were generated, accepted and tried, and replaced, but all were
around capital accumulation. We then, in the second part: Historical Transition and NIS in
Developing Countries, turn to take a review of recent progress in the mainstream development
economics, especially the work by Fei and Ranis (1997). We find that in their ‘an evolutionary
framework’ of economic development an important step has been made, which is sensible to
micro-processes of productivity grains from structural change and technological innovation.
This provides a necessary theoretical foundation upon which an NIS survey is able to be
communicated with development economists. This is followed, in the final part of the section,
by a development of some characteristics of NIS in developing countries in general, by drawing
54
upon both the Fei and Rains evolutionary framework of economic development, and the OECD
framework of national innovation systems.
Various Thoughts about Economic Development: Controversies between Theory and Practice
With respect to economic development of less developed countries, a perception of the status of
‘late industrialisation’ distinguishes the developmentalist view from other traditions which
withhold any principal differentiation in research focus in dealing with development issues. The
developmentalist thoughts have an origin from the experiences of earlier ‘late’ industrialization
(late to England) in Europe and North America. Their major arguments, taken by such as
Veblen (1966) and Gerschenkron (1962), are that there are advantages for economically
backward economies in relation to the possibility of borrowing technology from advanced
countries. But these backward countries are disadvantageous in inherited obstacle institutions
that hinder the process of borrowing and catching up. Government intervention is therefore
necessary in supporting the creation of banks and in protecting infant industries.
Contemporarily (not to mention about early post-WWII time), researchers who stand in the line
are very much relying on the successful experiences in East Asia. Amsden (1989) for example,
contends, by referring to South Korea, that late industrializers in the twentieth century are
positioned even more difficult. Compared with earlier industrializing followers like Germany
and United States which had in the same time of borrowing been able to generate new
technology, the twentieth century latecomers possess only low waged workers possibly together
with education, but not a technological edge. With low wage advantages they start to
industrialize and penetrate into the international market because of strong government
intervention such as to get the prices deliberately ‘wrong’ (in favor of targeted industry),
special structure of firms such as vertical integrated but on fields with less technological links,
and the strong role of managers and engineers in shop-floor, to promote learning from
borrowing. Although no rejection is raised to the fact that learning from borrowing foreign
technology entails special efforts, not much progress has been made systematically as well with
respect to how specific learning efforts are to be made upon borrowed technology, except
individual cases. Alongside have been continuing debates on what the government should do,
and what needs to be left for the market.
55
Conventionally, based on a general production function, physical capital investment has been
regarded the major component for economic development. It, in the simplest form, is expressed
in the Harrod-Domar model28. This model, assuming population growth is stable, indicates the
single factor that determines what level of income a developing economy can reach is the ratio
of capital to labor, and had been used as the instrument of development planning. Policy
recommendations derived have been centrally towards saving, for saving rate determines capital
investment rate and hence growth rate. This over-simplistic conception of course contradicts
the practice of economic development. For example, it predicts that, a developing country saves
about 12 to 15 percent of their income from the previous average of 4 or 5 percent would enjoy
self-sustainable growth. But the domestic saving rates of the low-income countries have since
the 1960s been higher than 15 percent, nobody would agree that a state of ‘self-sustainable’
development has been achieved in these countries (e.g. Behrman and Srinivasan 1995a: 2112).
Enormous modifications have been made later on with the simplistic Harrod-Domar model, and
economic planning of early day’s type ceased, problems remain which come from the basic
conception of production function. Institutions are excluded, technology is expressed on a
general abstract level, and few insights have been able to be developed as regarding how
technology is gained, absorbed and improved in the process of development (Evenson and
Westphal 1995). Technology is not homogenous and general at all. The acquisition of
technology from borrowing is not a smooth process as the production function expressed which
involves heavy investment in absorption and adaptation.
Different perspectives predict the possibilities of catching up differently. Those who take a
developmentalist view of economic development, and those who are concerned with the
importance of technology and institutions, would expect divergent consequences among
economic latecomers. Alternatively, Harrod and Domar, the neo-classic view, would predict
that poor countries, with roughly similar rates of accumulation in factors, will grow faster and
eventually catch up to the economic leaders. The new growth theorists would be rather
pessimistic in contemplation of catching up, because these theories attach the importance of
dynamic economies of scale to growth which is in favour of richer countries where the
investment in physical and human capital has accumulated much higher. Hence richer countries
have been endowed much greater the potential in generating higher growth with similar
additional investment (World Bank 1993: 409-50). This can be called a gap-widening view in
its theoretical logic. Figure 1, cited from Hikino and Amsden (1994),29 illustrates an overall
picture of catching-up, forging ahead and falling behind, since the nineteenth century. Great
28
For latest summaries on Harrod-Domar model and its modifications, and various sources of theoretical
thinking of economic development, see Hayami (1997), Fei and Ranis (1997).
56
Britain is the pioneer of industrial revolution, Group I refers to the innovators in the second
Industrial Revolution particularly the United States, Group II the nineteenth century followers
typically Nordic countries, Group III the nineteenth century cases of ‘stumbling back’ typically
some Latin American countries, Group V the twentieth century followers especially Japan,
South Korea and Taiwan, Group VI the twentieth century cases of ‘stumbling back’, and finally
Group IV, which are those typically in Sub-Sahara, still under-developed.
Figure 1: Later Induatrialization in Historical Perspective
Source: Hikino and Amsden 1994
Apparently catching up does not cease entirely, the new growth theories seemingly hold
inadequate comprehension of the possibility in successful catching up. On the other hand,
converging with the productivity leaders has not yet happened to the majority of the current
developing countries, with only a few exemptions, notably South Korea, Taiwan, and Japan.
This means that the prediction of neo-classic theory is far afield, and the new developmentalists
should be said being nearer to the reality, by their appreciation that there are particular
difficulties associated with the twentieth century’s industrialization, hence extraordinary
measures are necessary to transform a developing economy qualitatively.30 Beyond these, the
29
Maddison (1994) gives a similar depiction while his grouping of countries is slightly different.
30
Baumol (1994) contends for a ‘contagion’ model of convergence in contrast to the ‘common-force’
mechanism. The so-called common force mechanism is the well known neo-classic construction in which
the central common force is that of diminishing returns to capital, and it predicts that all countries move to
a common steady state if all countries have identical technology and saving rates. The contagion model of
convergence on the other hand, heavily draws on empirical observations, gives strong value to local (i.e.
57
behaviour of the dynamic convergent West groups warrant a notice. The West groups31, the
Great Britain, Group I and Group II expressed in Figure 1, have enjoyed convergence to each
other over a long time, through waves of hedging ahead or falling behind. Each wave changed
technology and productivity leadership among the groups, the gross trends of convergence
however have maintained by a strong force which spread an appreciable acceleration in growth
to relative followers (Madisson 1991). Highly developed societal, intellectual and institutional
capacity to cope with change is the major explanation for the dynamic convergence, a capacity
that had, as argued, begun to develop within them not only since the Industrial Revolution, but
over the preceding several centuries of ‘proto-capitalist’ development. The shared tradition
among them from Renaissance and Enlightenment is also remarkable, that awoke the
consciousness of human’s creative capacity and gave birth to modern science, that prepared the
minds and means necessary for taking action to transform the forces of nature through
investigation and experimentation (Maddison 1991: 52-55; Rosenberg and Birdzell 1986). In
short, catching up is not a matter of merely quantitatively expanding production capacity. It is
much more a matter of turning a less innovative economy towards as dynamic and innovative as
the convergent groups. Capital accumulation is not convinced to be the engine of modern
growth, nor is international trade.
But trade liberalization is one of the major policy orientations currently prevailing in
developing countries, with the hallmark being the aggressive World Bank and IMF Structural
Adjustment Programmes (SAP) implemented since the 1980s. The balance-of-payment
problems of international trade were one of the major triggering factors (see Kruger 1995),
which were associated with high inflation in many Latin American countries, and hence the
purpose of SAP was directed heavily to ‘economic stablization’ (Kruger 1995: 2511).
Theoretical reasoning for SAP, although sophisticated, has been centred on the role of market
mechanisms to promote efficient resources allocation and technical progress, or ‘getting the
prices right’. The result of the SAP is diverse however--roughly that: a) trade liberalization has
positively led to the reduction of price-cost margins in import-competing sectors where
previous distorted competition status misled the allocation of benefits hence the (static)
efficiency of resource allocation; b) but the impact of trade reform on structural rationalisation
‘ancillary’ in his term) variables and the presence of relationships and feedbacks between variables during
the process of economic growth. It hence accepts that ‘...each economy will have its own steady state, and
the pertinent variables will never converge completely.’ This model is, through somehow vaguely
expressed and difficult to read, virtually seeing economic growth as the behaviour of dynamic and
complex systems. A short review of convergence growth hypotheses can be find in Sehrman and
Srinivasan (1995: 2491-2493).
31
We take the notion for the ‘west’ or ‘capitalist’ group as that of west and north European countries and
their ‘offshoots’, as Maddison does (1991).
58
has not been so apparent, for change in industrial structure relates to intra-firm restructuring as
well as entry and exit of firms; c) trade reform shows correlation with the growth in TFP of
incumbent firms in many cases which is called technical efficiency (for points a, b, and c, refer
to Rodrik 1995; Behrman and Srinivasan 1995b); and d) investment in R&D has been declined
in all developing countries, most serious is in Sub-Sahara. Especially notable is inadequate and
declining investment in agricultural technology and extension services (Enos 1995). An
acceptable general conclusion goes that ‘getting prices systematically and significantly wrong
that import-substituting countries have done in the past has been a costly mistake. But few
would disagree that getting prices right, in itself and of itself, will be sufficient to make Bolivia
or Ghana grow at Korean rates.’(Rodrik 1995: 2971-2972).
It is useful to have an impression how dramatic policy shifts have been taking place in developing
countries during the past several decades, as depicted in Figure 2 which is for Bolivia (Fairbanks
and Lindsay 1997: 182-185). The horizontal axis represents two aims of national economic
objectives which are growth-focused and equity-focused, showing the growth-equality dilemma
which has long been faced by development governments indeed (Little 1982: 209-217). The
vertical axis represents the actors assumed to play a major role for a certain policy objective,
which include several combinations: the government and public sector under the import
substitution strategy, private sector under the free market strategy, and a mixture of the two under
the open-to-international trade strategy as the authors term them. And the notes above each time
period are names of Bolivian presidents respectively. One may be wondering, beyond and above
all, the dramatic policy shifts seem to evidence that there are missing elements in the conventional
theories of economic development. Partial, simple factors based reasoning for policy making may
have had a contribution.
Figure 2: Bolivian Economic Policies over Time
59
Source: Fairbanks and Lindsay (1997: 182)
Historical Transition and NIS in Developing Countries
A synthesis is called for with respect to economic development in contemporary late
industrializers. Economic development of developing countries can not be effectively
conceptualized mainly with static efficiency, in face of an increasingly rapidly changing world
in which developing countries are a part. More fundamentally as is demonstrated above,
dramatic, historical transition entails profound institutional, structural and technological
changes which must be central of a liable theoretical framework. To develop a synthesis of this
kind, the new growth theories can not contribute much, for these are theories which analyze the
qualities of an one-sector world of the mature modern economies (Fei and Ranis 1997: 44). The
tradition in technological capability building (Pack and Westphal 1986; Ernst, Ganiatsos and
Mytelka 1998) has not yet contributed much also, for although with some influence, it has been
rather alien to the mainstream of development economics. Nevertheless some progress has
emerged and we take the work by Fei and Ranis as our major reference.
Fei and Ranis’Transition Growth: An Evolutionary Framework of Economic Development
Several components make up their ‘an evolutionary perspective’ or ‘an evolutionary
framework’ for analysing growth and development in developing countries (Ranis and Fei
1997).32 Of central importance is the notion of ‘transition growth’, which means that the
development of a developing country has to pass through the transition from a pre-modern
pattern towards a modern pattern of growth. Transition growth therefore differs a developing
economy from an advanced economy in that the latter growth proceeds under relatively united
32
I am grateful to Norman Dytianquin for his reminding about the work by Fei and Ranis timely. We felt
that some progress like Fei and Ranis made should be a necessary precondition, for the NIS study to be
useful for developing countries.
60
and stable rules (ibid.: 6, 372). To be sensible to the complexity associated with the process of
transition growth, a ‘classic’ emphasis is revived, directed to micro-economic analysis of
productivity gains. It is believed that the sources for the productivity gains are combined from
the classic (Adam Smith) division of labour, and the modern (Kuznets, Schumpeter) science
and technology based innovation, though their own case analysis does not touch upon
innovation directly (ibid.: 44, 45, 26). Methodologically, as we argued earlier that methodology
is a part of concept, Fei and Renis go to a sub-phase based ‘holistic’ scheme. Sub-phases in a
transition growth are distinguished, in their exercise it is made upon the experience in Taiwan.
It is believed that distinguishing sub-phases and assuming that rules of operation and forms of
structure change over sub-phases is the logical necessity of an evolutionary perspective.
‘Holistic’ aims to open the treatment in which details from microeconomic analysis is able to
be integrated so as to achieve a comprehensive understanding of the economy as a whole. In
addition, an interesting point is about motivation. Fei and Ranis are encouraged (ibid.: 45) by
the historical experience in Japan and the recently emerging NIEs. The feasibility of successful
historical transition has been demonstrated, and they believe that unlimited potential of science
and technology will ultimately help to ‘lift all the boats’ in the developing world. There is no
reason for being pessimistic but every reason for making efforts, hence their innovation on the
evolutionary perspective.
This is really a celebrated progress, considering the way it takes in thinking and studying on a
complex and changing process of transition growth. As we have learned from the OECD
experience, the multi-disciplinary knowledge based NIS has been developed resulting from a
long period of accumulation of a number of intellectual fields related to the theme of change.
The accumulation has been less difficult, even alongside the neo-classic tradition, because the
modern growth pattern offers a comparable basis. A (small) step forward in modeling growth as
made in the new growth theories may have a big impact, let almost every one feel little
uncomfortable to turn to change. But there is no such a historically constant basis there in the
developing world. Historical transition, in which growth faces historical difficulties and
through which growth paves ways towards historically new forms and rules, characterizes late
industrialization of old times, and more so of the contemporary era. By and large, historians
like Veblen and Gerschenkron, and scholars who take a developmentalist view such as Amsden
and Robert Wade, perceived the historical transition character of late industrialization. The
insights however were not integrated into mainstream development theories. Among
economists, those who analyze economic growth in very long spans of time are better aware of
the transition nature, such as Madisson (1991), Ohkawa and Rosovsky (1973), and Hayami
(1997). The latter three authors are concerned about Japan. In their work, an analogous sense of
transition growth, or historical transition, of the Japanese economy, has been clear.
61
In this connection, the contribution by Fei and Ranis is revolutionary though still in a primitive
stage. Beginning with dualistic structure of developing economies they have been sensible to
the centrality of historical transition, and eventually achieve a synthetic framework which has
the qualities in: a) acknowledging the complexity of economic development which is
qualitatively heterogeneous over time; b) interpreting aggregate performance upon microprocess; c) corresponding with the achievements developed in the mainstream economic
analysis, mainly production function based growth and productivity accounting. Such qualities
which the evolutionary framework of Fei and Ranis’ possesses are gained by means of
dismantling uniformed deterministic causation, and restructuring pieces of insights into a
framework with ‘organized’ complexity. Feasibility in coping with change within and between
sub-phases is thereby open. Intellectually this offers a wonderful case, showing how an
evolutionary and systems perspective is necessarily broken out, to liberalize our cognitive
capacity in front of explosive complication of the subject in study. In terms of NIS analysis, we
need a framework like this in the first place, for collective efforts to be made in a
communicable manner. Otherwise NIS would in the developing world be only a topic of a few
researchers in their ivory tower, its value would shrink rapidly not only in policy terms, but also
academically.
NIS in Developing countries
Accordingly, a NIS in a developing country has to be analyzed as having its roots deeply
embedded in economic and societal structure of the developing country, which, in the Fei and
Ranis framework, is experiencing a historical transition. A major contribution of NIS in
developing countries, like that in OECD countries, may be expected to be interpreting and
hence supporting for policy making, aiming to promote productivity gains from Kutznets or
Schumpeter type which concerns science and technology involved innovation. Increasing
productivity gains from the type are essentially realized in the context of structural and
institutional development, which expands and deepens division of labor in a developing country
through a long and heterogeneous process of catching up. Owing to the profound historical
transition nature of economic development, distinctive characteristics of NIS in developing
countries need to be identified. Following are a primitive sketch in general level, a more
detailed development will be made in the next section.
1, NIS in developing countries are less developed by order, in terms of institutional
composition, the sophistication of scientific and technological activities, and linkages between
organizational units. This is because historically the technological and institutional attributes
required for modern growth were not developed within their systems. Industrialization implies
fundamental transformation of these traditional systems to be innovative and dynamic. For NIS
in developing countries, merely informing the current lower levels of their systems like the
62
OECD project reports (OECD 1999b: 30), gives less information.33 More important is asking
how did innovation related activities start, and how they continued to improve once started, in
linking with their local conditions and changing relationship with international and domestic
sources, namely, asking the institutionalization process of NIS in the context of economic
development. By the same token, a board definition for a NIS survey may be more desired for a
developing country which puts firms in the center with their knowledge links going to both
domestic and international suppliers and supporters. A narrow definition means a focus on
formal and public R&D institutions, which may result in a picture rather partial since formal
R&D has a less direct role during catching up (Fagerberg 1987) as far as industrial innovation
systems are centrally concerned. Agricultural R&D and extension systems are often more
publicly organized and invested, and should not be mixed up with industrial systems.
2, NIS in developing countries are development sub-phase or development-level specific. This
is a natural derivation from the heterogeneous historical transition in which institutional
structure and the ability of an economy in raising productivity gains from modern sources
change over time.
Indicators referring to development level such as per capital income and productivity level have
been conventionally used in the catching up literature (Abramovitz 1986; Maddison 1991;
Fagerberg 1987). These are outcomes from empirical accounting, still meaningful when a
uniformed general equilibrium is conceptually substituted by an evolutionary framework. In
addition to the conventional quantitative indicators, a second kind of indicators are necessarily
to introduce, relating to structural and institutional development in a developing economy (Fei
and Ranis 1997: 371), describing structural and institutional development level, or, level of
‘organized complexity’ in their systems evolution. Sectoral structure, financial institution, and
the relative role of government are applied by Fei and Ranis. In relation to technological
innovation which compound the sources for Kutznets or Schumpeter type productivity gains,
educational, scientific and technological institutions, knowledge links of firms, clusters,
networks, science and technology policy institution are important factors, the OECD NIS
project has provided excellent illustration. For developing countries, perhaps important is to
link NIS development level with economic structural and institutional development level.
NIS are not only development level specific, but also country-specific, meaning that two
developing countries with similar initial conditions and development performances, the patterns
of their NIS differ in terms of institutional structure, scientific strength and technological and
trade specialization, as has been highlighted in the OECD NIS survey, but not acknowledged in
33
But note again that the Catching-up Group is not the major part of the project reported in (OECD
1999b).
63
the Fei and Ranis framework. Country specific patterns imply that a development path is unique
to a particular national innovation system. We will return to this issue in Section 5.
Having had these indicators as above mentioned, how to define sub-phases of a development
process is still not clear. Fei and Ranis attempt to find a generally applicable definition for subphases by analyzing Taiwan. But it is better to keep this issue open, subject to more empirical
evidence. Fei and Ranis also suggest to develop a basic ‘uniqueness typology’ in order to
generalize lessons from individual studies, along with the terms of ‘economic-geographical
variety’ and the ‘historical-cultural variety’ (Fei and Ranis 1997: 375, 380). This suggestion is
useful, but needs to be added the note that it is an open-end schedule, preserving enough space
for ever richer evidence in typological terms and in country specific details. There is always a
nice desire that the ‘best’ practice (or a good practice) in development policy can be transferred
quickly to the remainders. However the county-specific nature of NIS warns us to be very
careful with straightforward borrowing.
3, Would a transition growth--suppose most of developing countries have entered in the track of
a transition growth--automatically bring about successful catching up to every developing
country? The divergent and frustrated experience of catching up deny the possibility. Studies on
the ‘exceptional’ success in South Korea and Taiwan show that rapid learning and
technological innovation through imitation that increased the marginal productivity have served
a driving force there. These latecomers climbed the learning ladder fast, mastering increasingly
sophisticated technological and managerial skills, and thereby narrowed the gaps significantly
with the world’s industrial leaders in the space of thirty to forty years. (Nelson and Pack 1995;
Dahlman and Nelson 1993; Hobday 1995; Kim 1997; Stiglitz 1996, among others).
Extraordinary ‘enhanced learning’is the key for a successful catching up which requires and is
supported by a rapid development of their NIS. Fei and Ranis might have been over optimistic
by commenting that ‘the contemporary Third World is indeed engaged in a successful transition
effort’ (Fei and Ranis 1997: 44-45) without indicating the necessary condition of purposeful
and intensive learning involved in a success. We need to remember historical lessons. There
have been various kinds of ‘low equilibrium’ traps associated with low learning, such as the
centrally planned economies (Kornai 1980), and the merely trade pushed regimes (Lewis 1978,
for the last century’s Latin America). None of them has led to a successful transition.
Enhanced learning is a result of actively adaptive strategy at both national and firm levels. The
role of governmental policy is better analyzed in the strategic management of transformation of
a national economy, and therein, a national innovation system (e.g. Mathews 1999), with the
expectation to achieve ever higher performance towards that demonstrated by advanced
economies (demonstration effect). The NIS perspective acknowledges the importance of
64
adaptive behavior of both firms and policy makers in general. While in analyzing a developing
NIS, purposeful strategic management for catching up is a factor of higher importance,
compared with OECD countries.
4, The role of market in promoting learning and generating change needs to receive special
attention.
A systemic view of NIS has been complementary for rather than contradictionary to the roles of
both government and market, which has released an analyst from an awkward dichotomy of
either market or government. It would be wrong if suppose that NIS overlooks the role of
market. Earlier we explained that the NIS perspective focuses on change in contrast to the
general equilibrium view of market. But the perfectly competitive market at general equilibrium
is more a matter of theoretical abstraction. As Metcalfe points out (1998:10), ‘A theory (about
market) which is designed to illuminate the allocation of given resources to given ends will be
thoroughly different in character from one which is designed to explore the nature of economic
development and the creation of resources and opportunities (upon market) over time’ (words
in parentheses added). Market economic regimes are the most effective among practiced
economic regimes of the modern time in generating change and achieving high performance of
development. Market regimes equip decentralized decision-making structure, embody more
efficient information gathering and distributing channels, and offer higher incentive and
selection mechanisms. Policy recommendations advised for OECD countries (OECD 1999b),
many of which are related to public and collective actions, may offer inadequate reference on
the role of market for developing countries, where market mechanisms are still underdeveloped. Surely promoting the development of market mechanisms should be an important
part of government policy in developing countries. It is also worth noting to avoid a
misinterpretation of these OECD policy recommendations, by someone if he still takes an old
fashioned interventionist bias of pre-market reform time in developing countries.
5, For developing countries, learning to innovate is more closely related to capital investment.
The importance of knowledge and learning which is centrally concerned by NIS, is rather selfevident for developed economies where the contribution of ‘technical progress’ to growth has
been overwhelmingly large according to the results of growth accounting. The role of
knowledge and learning is not that straightforward for developing countries. Accounted in the
same way, capital investment instead assumes the most important source for growth (e.g. Lau
1996, for Asian NIEs). Krugman (1994) therefore warned that the Asian Miracle economies
might come to a halt. On the other hand Hayami (1997) finds that, by comparing Japan (18881990) with the U.S. (1800-1989) (also Abramowitz 1993), the basic growth trends of Japan
experienced a fundamental change, from that in which capital accumulation contributed the
65
major part like the current developing countries, to that in which Total Factor Productivity
(TFP, a proxy to productivity gain after derived the contribution by increased capital to labor
ratio) acquires increasing importance, like other modern economies. While it seems that there
was such a transformation for the U.S economy too, the transformation in Japan was coming
out much slower, some feature of the earlier pattern has been apparently mixed with the latter
pattern well into the post-W.W.II time. This may be linked with the fact that capital investment
is the necessary means by which a late industrializer acquires technology embodied in capital
goods from abroad. The key question then turns to be how effectively a developing economy
learns to be innovative with capital accumulation, in order to gradually transform itself towards
relying on a modern pattern growth in which ‘intangible’ human capital compared with
physical capital creates the major part of wealth.
Growth accounting may provide useful indication to the basic trends and character of growth at
aggregate levels, though it does not logically offer the explanation why structural change
happens (Pasinetti 1993), or whether capital accumulation results in technical progress or the
reverse (Abramowitz 1993). But the indication does give guidance as to where we need to
concentrate our attention for detailed microeconomic analysis of learning and intangible assets
accumulation, and link it with capital investment and structural change. Fei and Ranis call their
framework a combination of classic and neo-classic approaches (Fei and Ranis 1997: 44). In
fact, it is a revival and renewal of classic theoretic growth view together with neo-classic
production function based growth accounting. The latter is applied mainly as analytic tools.
Our focus is on industrial productivity gains from technology and innovation. For developing
countries, a short note regarding agricultural productivity has to be added. For a long time
industrial development has conventionally overwhelmingly been emphasized, with agriculture
receiving much less attention, this is a wrong interpretation of industrialization. Partly because
the agricultural problem was not that serious in the dynamically convergent groups where
agricultural productivity growth has been able to proceed hand in hand with industrial
development, even in some cases like in England, agricultural revolution pioneered industrial
revolution. The problem has been that agricultural sectors in developing countries have to
experience a transformation from traditional techniques based to modern science and
technology based, for lifting the pressure of explosive population growth, improving living
standard of farmers, and providing food crops and industrial inputs in pace with industrial
development. Compared with industrial sectors, the transformation of agriculture may be
relying less on imported technology because agricultural technology is rather local conditionspecific, and because agricultural institutions are deeply inherited from local traditions. In
many developing countries, a stagnation of agricultural productivity growth has caused farming
66
and environmental devastation, industrial development is therefore set back sooner or later.
This is a big issue related to science and technology policy in all developing countries. The
experience in Japan is also useful to draw on, Hayami and Ruttan (1985) among others have
made an instructive analysis.
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5. Learning, Innovation, and Co-evolution Between Technology and Institutions in Developing Countries-An Illustrative Research Framework
Now we are better prepared to look at the substantial issues a NIS survey needs to cover in the
context of developing countries, regarding learning and innovation, and the co-evolutionary
development of institutions and technology. A proposition has been reached that NIS in
developing countries are less developed by order, they are in historical transition, hence NIS
there are to be analyzed in a way which is sensible to development level, also sensible to
specific backgrounds of individual countries. The institutional development and the role of
policy in strategic management of catching up are recognized requiring particular attention. We
have also identified a linking point of S&T policy with economic development, that is
productivity gains from intangible human capital and modern scientific and technological
knowledge that should play an increasing role if a historical transition proceeds successfully.
We searched eagerly for and are excited with progresses in the mainstream development
economics, where the general equilibrium deadlock is possibly broken up. We are therefore
inspired to expect that communication and accumulation on NIS studies will be extended
broadly in developing countries as well.
Roughly in correspondence to the OECD NIS survey schedule (see Section 1), we now turn to
develop an illustrative framework for NIS survey in the context of developing countries. It is
organized under four titles. The first concerns Knowledge Globalization and Technological
Opportunities, because developing countries have to rely heavily on foreign technology as the
source of learning in a long period of catching up. A review of the widely accepted theory of
technology life cycle finds that late entry of an industrial follower into mature technology can
not be satisfactorily explained. Recent progress indicates that institutions for cross-boarder
knowledge diffusion, including international engineering specialists and various forms of
international knowledge flows deserve a special attention. The second title concerns Latecomer
Firms and Enhanced Learning. As the major actor of technological innovation, the NIS
approach sees firms the most important part of micro-foundations for the innovation
performance of an economy. But firms in developing countries have been very little studied. In
a way, firms in developing countries may be analyzed as in the accumulation process of firmspecific knowledge through imitating imported technology. That process should transform an
inexperienced latecomer firm into an experienced innovative firm, if it learns extremely
intensively.
The third title is Co-evolution between Technology and Institutions, under which we only touch
upon a few selective aspects and restrict it to a comparative review between Korea and Taiwan.
The following aspects are selected: interplay of an innovation system with international
knowledge inflows, network effects, FDI and the cluster promotion impact, selected
69
technological strengths, and the role of technological infrastructure. As discussed earlier, coevolution drives systems moving in specific patterns. The two systems of South Korea and
Taiwan, though rather comparable in macroeconomic terms, are quite different in institutional
structure, technological strength, and development path, to which we were rather blind before.
The fourth Adaptive Policy Process and the Management of Historical Transition deals with
policy learning and policy innovation, rather than policy measures per se, in the context of
developing countries. It is believed that the NIS approach and its underpinning evolutionary
perspective should be first and foremost serving as an instrument for our thinking about policy.
Policy is, by so doing, released from being as a deterministic factor. Any piece of policy should
not be regarded as fixed and universally applicable. In contrast, policy is country-specific. A
workable policy runs an adaptive process in interactions with the system to which it aims to
introduce a change. Adjustment over time with the operation of the system gives the possibility
to the policy process to get system-fitness, that is definitely needed in the management of
historical transition in economic development.
The framework and the issues embraced are only illustrative. But the orientation of dealing
with the issues is for sure in line with the NIS approach. As one may see, many issues touched
upon here have been scantily studied in the contexts of individual developing countries, which
however are indisputably needed for a NIS policy to have a knowledge basis. We hope, and this
is the purpose of the section, that this tentative and partial effort may invite the attention of
researchers from developing countries, to work hard in the development of necessary basic
understanding of their particular systems, for effectively applying the innovative approach of
NIS into the contexts.
Knowledge Globalization and Technological Opportunities
Knowledge globalization. Although low wage and well-educated labour force are only sources
for late industrialization, opportunities for late industrializer to acquire foreign technology are
evolved abundant, more plural in the forms in which knowledge is codified or expressed, and
more accessible through trade and non-traded channels. Knowledge globalization (Ostry and
Nelson 1995) has a lot to do with the fact that knowledge becomes more ‘migratory’
(Badaracco 1991) because of codification. This means that technological knowledge which is
initially possessed by its innovator, gets separated from its origin to be movable, taking the
forms (Schnaars 1994) such as ‘embodied’ in physical outputs, documented in technical
writings (patents, blueprints, standards, production instructions, user manuals, and
advertisements), and generalized in engineering science publications and textbooks. The
widespread adoption of engineering education across national boundaries that teaches
engineering knowledge to young graduates in developing economies, the trade expansion and
70
the international reallocation of production that facilitates the wide accessibility of
technological knowledge of various forms, all have contributed to so called knowledge
globalization. However, such an over-optimistic picture needs qualification. What part of
technological knowledge is codified better and more readily for dissemination and what is not?
What barriers might have developed with the codification of knowledge that tend to impede
entry by a late industrializer?
The late entry puzzle and institutions for knowledge diffusion. It is useful in this regard to have
a close review of the theory of technology (or industry that the technology in question
underpins) life cycle, a theory that has received broad acceptance, applied as a theoretical
foundation in a number of related disciplines. In the language of knowledge codification, a
technology is ‘fluid’--greatly uncertain and least codified--in the early stages, and becomes
fairly well codified as it passes on to the ‘mature’ stages of development. But in the late stages
as the theory points out, capital is highly intensively amassed, and related organization of firm
which has survived with the rivalry at earlier stages, becomes very large and specialized. The
large, complex and specialized firm organization may also be seen as a codification of
organizational and managerial knowledge which developed during the life cycle, to better fit
the technology in question. With all the capital intensity and organizational complexity, entry
barriers to a latecomer rise enormously. The theory therefore predicts that a late entry leads to a
less possibility in success, and prefers to recommend for firms to compete in the frontier of
technological innovation, namely, taking the advantages of ‘first mover’. Late entry, the only
way possible for latecomer firms and which has led to successful catching up, is a puzzle from
the viewpoint of the theory (Utterback 1996).34 Although Vernon (1966), by applying a similar
notion of product life cycle to analyze the international reallocation of production, had
observed that the production of mature products tends to be moved to low wage abroad, his
analysis however was made in regard to the decision by multinational companies, i.e., by the
original innovators themselves.
Recent empirical observations (e.g. Klepper 1997; Framsman 1998 ) on firms structure
(industrial ecology) show that there are many industrial branches that do not fill the theory
well, though many others do. In the former cases, ‘shakeout’, a process that is predicted by the
theory to be appearing in the late stages of a cycle and results in a fewer incumbents of a
mature industry, does not happen. Late entrants in these cases tend to be the survivors, or, the
first mover’s advantages have disappeared considerably there. It is explained that market
structure (i.e., niche market of a technology which contains many diversified products), the
existence of equipment specialists, engineering specialists and software specialists, or simply,
34
He is puzzled about the successful late entry of Japanese firms (Utterback 1996: 47-48).
71
engineering specialists, helped the lowering of entry barriers, and facilitated the international
diffusion of technology. The pattern of entry, and the configuration of firms structure hence
changed as well.
These findings are an important complement to the theory of technology life cycle. We assume
that they should have even more significant implications for entry, firms structure, learning and
innovation through imitation in the context of catching up by developing countries. More
generally, it indicates the importance to study on institutions that support cross-boarder
knowledge diffusion. Following we exemplify two themes that warrant further study.
a)
The structure of international knowledge flows and the role of multinational company
(MNCs). Conventional research agenda has overwhelmingly focused on foreign direct
investment (FDI), assumed MNCs the major vehicle of international transfer of
knowledge. This focus is too partial to yield useful insights regarding the process in
which an industrial latecomer acquires technology effectively. ‘Informal’ channels
such as specialist engineering services, the recruitment of foreign experts, and the great
efforts which have been taken by South Korea and Taiwan involving massive inputs of
abroad educated national scientific and engineering personnel, must be included and
reviewed in relation to formal channels such as FDI and technological licensing. Firms
strategy, supporting institutions and government policy are also important. The relative
ignorance of many non-FDI factors in this research seems to have been heavily
influenced by the standpoint of multinational companies.
b) The importance of engineering specialists and small high-tech entry. Conventional
research gives no discretion to the role of international engineering specialists, which
however should be one of the critical components, supportive to late entry, especially
small high-tech entry. The presence of international engineering specialists as well as a
well developed domestic technological infrastructure may have been critical for
successful small high-tech entry in Taiwan (see below). Wong (1999) observes the
growth of small ‘process’ specialist firms in Singapore. They are co-existing with
MNCs, providing increasingly sophisticated parts and components manufacturing,
engineering and marketing services, backed by active policy promotion. Both ‘old’
(e.g. Gerschenkron 1962) and ‘new’ (e.g. Amsden1989) developmentalists tended to
prefer for large-scale entry with heavy involvement of public funding. Successful small
high-tech entry may offer strong evidence to redress some aspects of the issue of
strategic management of late entry. Relevant is also to ask how international
engineering specialists work in an interactive way with domestic engineering
capabilities for the deepening of the NIS in a developing country. Because in advanced
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economies, various engineering specialists, including the machinery and information
and communication industries which are well known as engineering industries,
function as important centers for the creation and dissemination of innovation. It is
reasonable to assume that a late industrializing economy would never reach the place
where it is able to fully economize its investment upon local endowments for local
needs if it does not develop such engineering capability and institutions.
Latecomer Firms and Enhanced Learning
Knowledge structure of latecomer firms. There are different perspectives to look at a firm: a
production function, a structure of governance and internal contracts, and a house of knowledge
creation. In traditional development studies, firms are treated as passive producers of material
outputs with a technology determined by capital to labor ratio. In NIS analysis, firms are
analyzed dynamically, learning and innovation at firms are assumed to constitute the most
important part of the micro-foundations of growth performance of the economy. To the
question what characterizes a latecomer firm in learning and innovation, the perspective of
firm’s knowledge structure is pertinent. Following Pavitt (1998), the knowledge a firm
possesses can be distinguished into several types: a) the general understanding of technological
knowledge; b) firm specific knowledge, which includes technical knowledge and organizational
knowledge. Firm-specific technical knowledge refers to the knowledge that provides the means
assisting the development and production of new products and services. Firm-specific
organizational knowledge refers to the knowledge that is used for supporting decision making
and the management of organizational transformation, to fit the firm better with the
development of firm-specific products and services; and c) artifacts, or the products and
services as the physical outcome from firm-specific knowledge. Apparently, the strengths of a
firm rest on firm-specific knowledge, that is a result of purposed efforts in creating competitive
‘artifacts’ by applying general and specific technical and organizational knowledge. A
developing firm, because of its inexperience in innovation, differs itself from an innovative
firm most prominently in the lack of firm specific knowledge. How does a developing firm
improve itself? The general understanding of knowledge, among the three types, can
presumably be introduced quicker through the recruitment of engineering graduates, but their
experience has to be developed and integrated in firm-specific knowledge creation activities.
Besides, artifacts can be borrowed and produced locally, but do not serve as a substitute of the
ability in generating firm-specific competitive strengths. Enhanced learning is indispensable in
order to turn an inexperienced firm into innovative.
Enhanced learning at latecomer firms. A major difficulty in studying learning process is a
serious lack of analytical framework. Individual learning, which can be studied by drawing
largely on insights developed in the discipline of cognitive psychology, is useful but
73
inadequate. Learning in the economic sense is essentially a social process, to be analyzed from
an organizational and collective viewpoint. We turn to organizational science seeking for
useful, though scattered, insights. Nonaka and his colleague’s work (Nonaka and Takeuchi
1995) among recent developments is interesting. Kim (1997) goes a similar direction,
empirically relying on the experience in South Korea. Drawing on their and others work,
several elements can be outlined for further development:
a)
Inputs. Well-educated engineers and managers though inexperienced initially, are the
internal principal player of the learning firm. In-house R&D is necessary later on.
Mature technology is the major source from outside assisted by many other knowledge
flows. The combination between internal and external sources is crucial, and changing
over time.
b) Outputs. End material products are not enough for measuring learning results. The way
in which a latecomer firm makes use of technology to produce end products is more
relevant. Hobday (1995) takes an OEM (original equipment manufacturing) to ODM
(own design manufacturing) to OBM (own brand manufacturing) sequence, to
approximately indicate the upward moving of technology mastery by a latecomer firm
in the context of export-oriented production. Probably the ability of product or process
diversification offers an indication (Scherer 1992), shows that the firm has
accumulated considerably a firm-specific knowledge basis. With this basis the firm
becomes able to enjoy a Schumpeterian innovation rent upon innovative product or
process diversification.
c)
Learning mechanisms. The notion of interactions between tacit and codified forms of
knowledge (Nonaka and Takeuchi 1995) is instructive. Analysis on such interactions
needs detailed information at the firm level that is seriously little documented. The
strategy taken by the firm seems central to the setup of an ‘ontological’ context for
organizational learning that links up learning and capital investment. The portfolios of
capital investment determine the intensity of learning and its subject. Analysis on
learning mechanisms may also inform details about the nature and role played by
human capital inputs. Active firm strategy seems to be a necessary condition to
transform the firm towards more capable. Economic environment is critical to induce
actively learning firms to emerge.
d) Organization and management of firm. There must be unique features in the
organization and management of a developing firm to cope with enhanced learning,
which is least available in literature. Thinner layers of hierarchical structure and task
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team organization which offers a feasibility for frequent entry and upgrading are two
aspects, mentioned in the context of Japanese and Korean systems.
e)
Discontinuity in the acquisition of technology. An upward sequence in the acquisition
of technology is widely observed, such as the move from OEM to OBM as just
mentioned, and from implementation (of borrowed technology) to improvement (of the
technology) to creation (of own technology) (Kim 1997; Kim and Dahlman 1992). A
close review of learning activities involved in such sequence reveals that they require
different kinds of key competence. Competence acquired at lower imitative stages is
insufficient for moving up to higher stages. This discontinuity is different from what
Anderson and Tushman (1990) described discontinuity, which concerns a discontinuity
in the configuration of end product and fixed capital, appearing in the context of
competing at the frontier of technology. Presumably, frequent and formidable
fluctuations and disruptions associated with late industrialization have a root in the
discontinuous nature of imitative learning. Starting to assemble mature products is not
a difficult job in the time of knowledge globalization. Assembling mature products
however does not automatically improve the competence necessary for the
development of firm-specific design. The essay of static comparative advantage offers
nothing but misleading in this regard.
Co-evolution Between Technology and Institutions--A Comparative Review of NIS in South Korea and
Taiwan
Interplay with international knowledge inflows. With international knowledge being the most
important external resources for late industrialization, interplay between knowledge inflows
and a national innovation system can be fairly a focusing point of analysis. The institutional
characteristics of national innovation systems help to highlight how the ‘social adaptive ability’
(Abramovitz 1986, 1989) or ‘national absorptive capacity’ (Mowery and Oxley 1995) are
institutionalized and functioned differently in different national systems.
A preliminary review shows that there are considerable distinctions between Korea and
Taiwan, although statistical data from different sources are not well comparable. In terms of
knowledge inflows, licensing has been the most important channel for Korea, while for Taiwan,
FDI and licensing have been equally important, played roles in a complementary way. For
example, FDI composed between 0.6 % and 2.3 % of gross capital formation in Korea during
1962 to 1990, with 1972-1976 being the peak years (Sakong 1993: 117). In Taiwan, the
percentage of FDI invested in manufacturing was on average 7.9 % for 1973-1979 (Clark 1989:
184).
75
On the other hand, firms structures differ significantly between the two systems in Korea and
Taiwan. Measured by the concentration degree of firms, the Korean system has developed
remarkably more centralized firms structure than Taiwan does. Statistics demonstrate that
except intermediate product sectors in which the two systems are similarly high in
concentration levels, all other sectors with only few exceptions see Taiwan having much more
decentralized structure. A comparison of firms structure in ‘engineering’ sectors shows as
follows. In the industrial machinery sector, 50 largest Cheabols make up 34.9 % of total sales in
Korea, in comparison, 96 largest business groups account for 9.8 % of total sale in Taiwan.
Other several pairs of the percentage are: 50.9 % for Korea to 22.7 % for Taiwan in the
electronic products sector, 79 % for Korea to 39 % for Taiwan in the transportation equipment
sector, and 14% for Korea to nil for Taiwan in the precision instruments sector.35 Presumably,
causal relations between the structure of knowledge inflows and firms structure is high, given
that other conditions are roughly equal for the two systems, including a strategically active
government, a strong out-looking development approach, and certain degree of pre-war
development.
Network effects. The distinctions between Korea and Taiwan suggest the relevance to give an
emphasis on the effects of networks. For our purpose, networks may be simply and
fundamentally understood as the attributes of market, from the proposition (Johanson and
Mattsson 1987) that ‘industrial markets are characterized by lasting relationships among firms.
Networks are the bearing of various kinds of lasting relationships among producers, users,
suppliers, and competitors at the marketplace. Firms operate upon networks to cope with
technological inter-relatedness, develop specialization, and innovate at lower cost and with
higher flexibility. Enhanced learning is reviewed in the above within the territories of
individual firms, that is approximately the case of the Korean system. Enhanced learning is also
possible to take place in small firms under strong network support. Knowledge about network
effects is pertinent for policies with the aim at ‘market augmenting’ (Amsden 1989; Teubal
1998) as well as late entry, these are goals intrinsically associated with economic development
in developing countries.
Evidence in Taiwan and Korea comparison shows that various kinds of networks are developed
including trading networks (Egan and Mody 1992; Levy 1991), parts and components supplieruser networks which are usually described as sub-contracting networks (Ernst 1998; Levy and
Kuo 1991; Schive 1978), classmate and professional ‘peer’ networks (Ernst 1998), and
networks between academics, technological infrastructure and their industrial users (Hobday
35
Juana Kuramoto, INTECH mimeo 1998, reproduced from the data in Working Paper No. 5887,
National Bureau of Economic Research, Washington D.C.
76
1995; Ernst 1998; Chiang 1990). Networks are penetrating, some are internationally penetrating
such as trading networks, subcontracting networks and ‘peer’ networks, serving as channels for
flowing technological knowledge and marketing information across national boarders. In the
circumstances of active catching up, these networks seem to be in rapid expansion and
improvement. They are themselves knowledge-intensive and entrepreneurship-intensive. Such
networks are part of the invaluable assets of a national innovation system for successful
catching up.
FDI and the cluster promotion impact. It is useful, following Dunning (1993: 102-127) and
Porter (1990), to identify ‘cluster promoting’ FDI, in order to explore systems impact on
interplay with international knowledge inflows. It seems that to which extent a promoting role
FDI can play is largely a function of the host system, less that of foreign investors, though there
are behavioral variation observed among different sources of FDI.
The FDI-friendly environment in Taiwan embraces, according to our tentative survey, at least
three elements: a) industry policies that are neutral, i.e., non-discriminative to small entry; b)
policies that encourage FDI while keeping discretionary guidance towards the ‘linkage effects’
with a clear target to integrate FDI with local economic development; and c) the existence and
expansion of small manufactures. These three elements reinforce each other dynamically. The
existence of specialized local suppliers of components, systems, and engineering services is a
necessary condition (Teece 1996) for attracting higher technology-involved FDI with the
potential in greater economies of scope contained in the local market. However, local parts
producers were not so specialized and experienced initially. Training, standardization and other
technical and managerial supports then have been massively provided and promoted by local
government in which efforts by FDI are often incorporated, driven by their own interest, as well
as by local policy co-ordination. Continuous entry, opened by relatively neutral policy, expands
and improves the pool of local suppliers and producers, of whom remarkably are small scale
high-tech entrants, spun from various infrastructure units (Hou and Gee 1993; Hobday 1995).
They have been playing an important role in the upgrading of the industrial structure, and the
extension and deepening of the market networks of the system. In summary, each arrival of
foreign technology sponsors learning to take place simultaneously in many loci of the networks,
forward and backward, and the accumulations of previous learning is attainable for further
waves of such learning under the strong network effects. FDI in Taiwan, being closer integrated
in the local system, is not only cluster-promoting, but also a learning-catalyst spreading
knowledge and learning around networks, a role which is less observed in the Korean system
played by either FDI or local Cheabols.
77
Selected technological strengths. It seems that in industrial leaders, especially in the United
States, firms structure and technological strengths are largely an outcome of a natural process
which emerge, grow, mature, and extinguish following life cycles of technology, latecomer
firms are positioned very differently. In late industrializing economies incumbent firms (Nelson
1998) make the choice of technology. Technologies chosen tend to be conditioned heavily by
firms size and their external network linkages where the kinds of resources to meet with the
chosen technology are accommodated. This leads to the necessary distinction between mass
production technology and niche and flexible technology. South Korea, in correspondence to its
concentrated firms structure, developed mass products such as cars and general purpose ICs
(e.g. DRAM), typically competitive in the international market. Taiwan in contrast
characteristically developed niche products such as simpler CNC machine tools and computer
peripheries as internationally comparative. Because the accumulation of technological strength
is path-dependent, an important choice of technology earlier gives the way to which the
consequent choices have to follow. Any radical shift of the trajectory would be costly. With the
lock-in effect of established trajectories, Korean firms for instance have become accustomed in
choosing technology involving higher economies of scale realized through mass production
(e.g., Suh 1997). Questions that follow to deserve an attention include: what strengths and
weaknesses are involved in mass production technology? And what are involved in niche and
flexible technology? And, in order to learn lessons, what factors caused the different firms
structures in the two cases of South Korea and Taiwan?
The role of technological infrastructure. The fact that industrial latecomers have to borrow
foreign technology heavily has flustered the understanding with respect to what role the
domestic scientific and technological infrastructure plays in catching up. In industrially
developed countries, a two-way relationship between science and technology has evolved out of
centuries’ development, with science growing on its own logic, and in the meanwhile largely
being induced by newly emerged technological problems of industry which often have little
scientific understanding at the beginning. The two-way relationship has hence put a scientific
ground for industrial development in the developed world for a long time (Rosenberg 1982;
Nelson and Rosenberg 1993). There is a large range of institutions developed to support the
two-way relationship, on the top and the most visible are universities, public R&D laboratories,
academies, and technological extension stations, together with many less formal but equally
important links and associations. Formal R&D are the major subject of conventional S&T
policy (ref. to the policy recommendations by UNESCO), and standard R&D statistics.
Standard statistics on R&D may serve an approximation to the intensity of innovation
possibility generation where linkage mechanisms have been well created. But the standard
R&D statistics have very different implications to developing countries where the role of
78
science for innovative activities is in support of borrowing foreign technology. With a
simplistic view of R&D, two kinds of biases exist simultaneously in the spheres of science and
technology policy in developing countries: that which is proponent for higher R&D, and that
which is opponent and underestimates the importance of science and R&D. Pragmatically, the
opinion which dominates the policy-making agenda tends to switch from one end to the other,
and the development of a healthy scientific and technological infrastructure has been inflicted
in many cases. Indeed, the role of science and R&D for catching up has long been in
controversy upon segmented evidence and partial conceptions.
Illustrated by the recent trends in OECD countries, the perspective of NIS may be useful to
redress the old dilemma. Putting the issue in the context of historical transition, the
development of a scientific and technological infrastructure is to be managed by combining
short term economic returns from serving for technological borrowing, and long term health of
a scientific and technological basis needed for a modern society. As far as supporting firms
acquisition of technology is concerned, the perspective of NIS tends to ask questions regarding
institutions and linkages with firms. The systems in Korea and Taiwan developed differentiated
institutions and linkages with firms, although both have since the 1980s turned to rapidly
increasing investment in science and R&D. In terms of government financing of R&D, Korea
has the lowest record of 19% (for 1995, OECD 1999b: 31) even compared with advanced
OECD economies. In contrast, this figure for Taiwan is slightly lower than 50%. In Korea,
R&D have been greatly incorporated into a small number of big firms, the role of R&D is also
internalized, which appeared in statistics is of ‘private’ or ‘business’ R&D. While having the
majority of business firms small and medium sized, the public efforts on R&D and other
technological supports have to be carefully developed outside firms in Taiwan. Hence training,
standardization service, technological consultation, as well as spin-offs from the public
infrastructure which have been important sources for the Taiwan’s entry into high-tech ICT,
visibly characterize the Taiwan system (e.g. Schive 1978; Hou and Gee 1993). We expect that
more will be revealed from the research focus proposed by the NIS approach, as well as that
with respect to whether and how a two-way relationship between science and technology is
developed in an industrial latecomer system. This should be an indication to the extent in which
a developing NIS becomes mature.
Adaptive Policy Process and the Management of Historical Transition
The NIS approach is developed for policy innovation in dealing with change and complexity. It
has emphasized country specific patterns of NIS and unique paths in which NIS develop in
different contexts. Specific patterns are driven by complicated interactions between technology
and institutions taking place in individual systems, in which elementary actors create change
and adapt to change to mitigate tension and disorder accompanied with change. Adaptive
79
systems remember their past, meaning that experiences with change in one interval of time are
embodied in the system and thereby the way the system moves on in the next interval of time
changes as well. The notion of path-dependency captures the implications that historical event
matter, as explained earlier (North 1990; David 1975). Recent work by Aoki and his colleagues
(Aoki 1988; Aoki, Kim, and Okuno-Fujiwara (eds.) 1996) contends for the pluralist paths of
development even stronger. They insist, based on game theory, that plural states for systems are
the norm because various institutional, political, cultural and historical factors differ greatly
among economic systems.
The NIS approach also positions a policy maker to be a part of the system, he stands in close
interactions with the system which he takes a responsibility to coordinate. Accordingly, the way
in which a policy maker plays a role has been explained very differently from conventions. A
policy maker is assumed not much freer than a firm manager in making decision. The policy
institutions and the status of the system restrict him. He is also not much more competent than a
firm innovator. A policy initiative may incur unperceived response just like a firm innovator
has to deal with uncertain outcome from his innovative action. With limited ability in knowing
and with various restrictions in making decision, a successful policy maker must be adaptive,
adjusting a policy with the operation of the system to which the policy is aimed to introduced a
social innovation. Following we review the NIS policy approach above described in the context
of developing countries.
Country-specific S&T policy. With paths and patterns being country specific, science and
technology policy is country specific as well. It is unavoidably bound to a particular NIS (and
to specific goals too). It is observed that whilst Korea and Taiwan share similarities in basic
orientations in their S&T policy, the emphasis and the major means of their technology policies
differ distinctly. In Korea, the priority of technology policy has been given to so-called
‘strategic industries’ (automobile, shipbuilding, machinery, and microelectronics). Financial,
taxation and fiscal measures are intensively used to rather directly promote large Cheabols in
the procurement of foreign capital goods, paying for licensing fees, and investing in in-house
R&D activities (Kim 1988; Kim, Lee and Lee 1987). In Taiwan, a dual or more balanced
priority is set up for technology policy. It gives direct intervention and financial support to
large-scale, technologically complex upstream sectors, typically intermediate goods sectors. In
other sectors the major focus of technology policy has been in securing infrastructure services.
Subtle measures are developed to offer technical supports to small and medium firms, and to
boost knowledge-spillovers and small high-tech spin-offs, as has mentioned.
With greatly differentiated institutional structures among developing countries, policy measures
that fit in one system can not be simply moved to the other. A simplistic comparison in concrete
80
terms of technology policy makes little sense, such as that a higher proportion of industrial
R&D is performed in private firms in Korea does not mean that government intervention is less
heavier there. The NIS approach, with the view of development path pluralism, rejects that any
a single policy package can be universally applicable to different circumstances. It instead
advocates for a policy process which keeps the most basic principles, such as promoting
knowledge inflows and enhanced learning, creating innovative dynamics, facilitating the
development of knowledge networking. Detailed policy measures may be better made only
based on intimate analysis of local situations in technology, institution, human capital, and
other aspects. And as a process an initiated policy must be open to timely adjustment.
The management of systems transition. The notion of path-dependence also predicts the very
difficulties in changing a system. Indeed many authors have noticed the inertia of institutions
(North 1990; Johnson 1992), which are essentially reasons for the difficulties involved in
systems change. However, the most pressing challenges that industrial followers face are
fundamental systems change. To embark on the process of industrialization implies a start of
dramatic transformation of conventional institutions. And the process of industrialization is,
once started, by no means of linear type, more fundamental changes will follow. For the sake of
policy process being able to cope with radical transformations which is more often associated
with economic development, knowledge concerning ‘path-shifting’ under the impact of pathdependence is imperative.
As we have seen in Sections 1 and 2, adaptive policy making has been taken by the NIS
approach necessary for managing systems change. Aoki and his associates (Aoki, Kim, and
Okuno-Fujiwara (eds.) 1996) drawing similarly on the concept of co-evolution, reason a
positive, learning policy process for radical systems transformations involved in economic
development. Co-evolution between policy initiatives and reactions made by economic agents,
according to them, is indispensable because interrelationship between parts and components of
a system is complex and complementary. After a major reform initiative, various institutional
components must make adjustments to cope with the initiated disturbance and to re-build
complementary relations with each other as well. Such institutional adjustment process takes its
own way, with outcomes often not expected initially (‘unexpected fit’). It is impossible for a
reform programme to be decided perfectly, or even roughly properly in advance. Hence it is an
adaptive, learning process that grants the possibility in which a profound change of a system is
able to proceed successfully. My own work (Gu 1999) on the transformation of the industrial
R&D system in China during the 1980s to 1990s market reform, precisely confirms the critical
importance of social-wide mutual learning. Interactions between policy maker and lower levels
of economic performers have been the major sources of information, which is continuously fed
81
back into the policy process for adjustment. In the meanwhile complex fitting and refitting
between institutions in terms of their structures, functions and technological activities have
been taking place widely that makes the reform initiative adapted and consolidated into the
system. Intensive policy learning, institutional learning, and technological learning have been
one of the major resources invested into the relatively smooth transition from a centrally
planned regime into a market-oriented system. In short, changing the path of a system is not
impossible, adaptive policy process with extraordinarily intensive policy learning is an answer
from the point of view of NIS.
But questions remain, as with respect to how a reform initiative can be started, and how to keep
a policy initiative in a positive learning process. These are open questions, they require much
more research effort. It seems that the inertia of institutions tends to deter necessary reform
initiatives until a big shock comes to press for change. A development government is inclined
to respond to shocks positively, but not always so. Internally, a consensus reached in a society
is a necessary condition. Externally, help from international organizations and advanced
countries is needed, to play a role of ‘a third agent’, in assisting an initiative to change (Teubal
1998). This however raises a further question to an external helper as what is best to do and
what has to be refrained not to do, provided that reform is intrinsically an internal process. Only
through internal co-evolution can a national system pave its way towards tomorrow. The coevolutionary nature of transformation of a system may have to place local policy makers to be
decisive in the international policy arena. Following the instruction of adaptive policy process,
the burden of policy making in producing perfect reform projects at once may be reduced. But
the requirement for adaptive capacity of local policy making is extremely tightened. To a larger
extent, it is the responsive capacity of policy making that is among the most critical factors for
the fate of historical transition of a NIS as well as of a developing economy.
82
***
***
***
This paper reviews the concept about national innovation systems, and the policy approach
devised by the idea of national innovation systems. The message from the review is simple. The
notion of national innovation systems is a synthesis made at the national and other societal
levels, of the insights about technological innovation and institutional change. Its strong policy
orientation came from the need to manage change and complexity for economic growth and
development. People in OECD countries are indeed experimenting with the new approach to
social innovation seriously. It, without doubt, should be adapted as one of the most relevant
policy instruments to developing countries for knowledge based economic development (World
Bank 1999).
The new approach to social innovation requires two conditions: the moods of change, and the
capacity in generating knowledge for change. It is in the preparation for the conditions that
developing countries are lagged far behind. There is no reason for being pessimistic, but every
reason for taking action to fill the gaps, provided that the new way has broken through in our
advanced neighbors, if we learn hard and smart.
83
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The UNU/intech Discussion Paper Series
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The Determinants of Firm-level Technological Performances - A Study on
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# 9903
Implications of National Innovation Systems for Developing Countries-Managing Change and Complexity in Economic Development by Gu Shulin, November
1999.
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Literature and Some European Evidence by Rhys Jenkins, January 1998.
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The North-South Dimension of the Environment and Cleaner Technology
Industries. by Jonathan R. Barton, January 1998.
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The Experience of Technological Collaborations by Mercosur Companies by
Ludovico Alcorta, Guilherme Ary Plonski and Celso Augusto Rimoli, January 1998.
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Foreign Firms and Technology Transfer Knowledge Spillovers to Indian
Manufacturing Firms by Vinish Kathuria, January 1998.
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1997.
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Indian Automobile Industry. by Krishnan. Narayanan, September 1997.
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95