Industrial policy:
history, theory and empirical evidence
Michele Di Maio
University of Naples Parthenope
December 12, 2014
HDFS Master, University of Roma Tre
Outline
1. The importance of manufacturing for
economic development
2. The return of Industrial Policy (IP)
3. What is IP?
4. Theoretical justification(s) for IP
5. Historical experiences
6. Empirical evidence (international trade)
7. A special case: innovation policy
Outline
1. The importance of manufacturing for
economic development
2. The return of Industrial Policy (IP)
3. What is IP?
4. Theoretical justification(s) for IP
5. Historical experiences
6. Empirical evidence (trade)
7. A special case: innovation policy
The importance of manufacturing for
economic development
Two stylized facts:
1. Economic development requires structural change
from low to high productivity activities
2. Virtually all cases of high, rapid and sustained
economic growth in modern economic
development have been associated with
industrialization, particularly growth in
manufacturing production
The importance of manufacturing for
economic development
The strategic role of manufacturing in the development process can be
ascribed to a variety of factors.
1. manufacturing has historically been the main source of innovation
in modern economies
2. strong (forward and backward) linkages and spill-over effects
associated with manufacturing activities.
3. the share of manufactures in total household expenditure
increases as per capita income rises while the share of agriculture
decreases (Engel’s law).
4. manufacturing has a higher potential for employment creation
relative to agriculture and traditional services.
–
diminishing returns to scale in agriculture (due to fixed factors such as land)
implies that the opportunities for employment growth in the sector are limited.
The manufacturing sectors has no this limitation and, as a country's population
grows and urbanization takes place, can absorb labour displaced from agriculture
Outline
1. The importance of manufacturing for economic
development
2. The return of Industrial Policy (IP)
3. What is IP?
4. Theoretical justification(s) for IP
5. Historical experiences
6. Empirical evidence (trade)
– evidence on infant-industry protection
– cross-country evidence on tariffs, trade, and growth
– “soft” versus “hard” IP
7. A special case: innovation policy
The return of Industrial Policy
• A prominent feature of developing countries economies
(especially African ones) is the significant process of
deindustrialization
– Africa's gross domestic product (GDP) fell from 15 per cent in
1990 to 10 per cent in 2008. The most significant decline was
observed in Western Africa, where it fell from 13 per cent to 5
per cent over the same period.
• As a reaction to this state of affair, there has been an
increasing commitment of governments to support
industrialization as part of a broader agenda to diversify
the economy through industrial policy.
The return of Industrial Policy: examples
•
•
•
•
•
South African government (2007) adopted the National Industrial Policy Framework
(NIPF). Objetives: diversifying the production and export structure and promoting
labour absorbing industrialization.
Industrialization is a component also of recent national development programmes of
Egypt, Ethiopia, Kenya, Namibia, Nigeria and Uganda
2001 - The New Partnership for Africa's Development (NEPAD) identified economic
transformation through industrialization as a critical vehicle for growth and poverty
reduction in the region
2008 - Adoption of Plan of Action for the Accelerated Industrial Development of
Africa (AIDA)
2010 - ECOWAS adopted the West African Common Industrial Policy (WACIP).
–
The objectives of WACIP are as follows: to diversify and broaden the region's industrial production by
progressively raising the processing of export products by an average of 30% by 2030; to progressively
increase the manufacturing industry's contribution to regional GDP to an average of over 20% in 2030,
from its current average of 6%; to improve intra-community trade from the present 13% to 40% by
2030; to expand the volume of exports of manufactured goods from the current 0.1% to 1% by 2030.
The return of Industrial Policy
• This policy change has been accompanied by an increasing
agreement among scholars on the fact that - beside the
creation of a competitive market environment - governments
of developing countries should also play a proactive role in
facilitating structural transformation and industrial upgrading
• While it is now clear that industrial policy (IP) is back in both
the political and economic discourse, it is not all clear how to
design an effective IP.
• In fact, there are several factors that may make IP worse than
the problems it aims to solve.
• The first step is to understand what is the meaning of IP
Outline
1. The importance of manufacturing for
economic development
2. The return of Industrial Policy (IP)
3. What is IP?
4. Theoretical justification(s) for IP
5. Historical experiences
6. Empirical evidence (trade)
7. A special case: innovation policy
What is Industrial Policy? (1)
• There are several different possible definitions for IP.
• All refer to the role of government in influencing the
economic structure.
• Pack (2000) defines IP as: government actions designed to
target specific sectors to increase their productivity and their
relative importance within the manufacturing sector.
• Harrison and Rodigues-Clare (2010): any government
intervention which shifts incentives away from policy
neutrality.
What is Industrial Policy? (2)
• In other definitions, IP has an even more ample set of
objectives, usually to enhance productivity, competitiveness,
and overall economic growth.
– IP comprises any government measure to promote or prevent
structural change (Curzon Price , 1981)
• One important cause of structural change is international
trade. This is why IP is sometimes referred to as the set of
policies aiming at ’defy’ the country comparative advantage
and to develop its ’latent’ comparative advantage (Amsden,
2001; Chang, 2002).
• Some sources give IP even more ambitious objectives:
– to promote growth trying to shape structural change in ways that are
socially inclusive and environmentally sustainable (UNIDO, 2011)
What is Industrial Policy? (3)
• The more general the objectives, the larger the set of
measures which can be considered as part of IP.
• According to Cimoli et al (2009), IP includes: i) innovation and
technology policies; ii) education and skill formation policies;
iii) trade policies; iv) targeted industrial support measures; v)
sectoral (competitiveness) policies; vi) competition regulation
policies.
• Somehow different is the approach of Rodrik (2007) who
defines IP as a process involving a ’dialogue’ between the
state and the private sector to generate information for
identifying and removing the binding constraints to
development
Industrial Policy: our definition
• We define IP as the set of government measures - targeted at
specific industries or firms - implemented with the objective
to support the development and upgrading of industrial
output (thus not limited to manufacturing sector).
• For this reason, IP naturally includes a large set of policies
belonging to different domains of intervention, namely:
–
–
–
–
–
–
innovation and technology policies
education and skills formation policies
trade policies
targeted industry support measures
competitiveness policies
competition and anti-trust regulation
Outline
1. The importance of manufacturing for
economic development
2. The return of Industrial Policy (IP)
3. What is IP?
4. Theoretical justification(s) for IP
5. Historical experiences
6. Empirical evidence (trade)
7. A special case: innovation policy
When IP does makes sense
in theory
• The theoretical justification for IP is based on
the fulfillment of three conditions:
1. some market failure is present (e.g., sector level
externalities);
2. the firm/sector is potentially competitive in the
international markets;
3. the discounted future benefits of intervention
exceed the costs of the distortion.
When IP does makes sense
in theory
Baseline:
Under perfect competition, Government
intervention is always bad !
When IP does makes sense
in theory
The theoretical justification for IP is based on the
fulfillment of three conditions:
1. some market failure is present (e.g., sector
level externalities);
2. the firm/sector is potentially competitive in
the international markets;
3. the discounted future benefits of intervention
exceed the costs of the distortion.
When IP does makes sense
in theory
The theoretical justification for IP is based on the
fulfillment of three conditions:
1. some market failure is present (e.g., sector
level externalities);
2. the firm/sector is potentially competitive in
the international markets;
3. the discounted future benefits of intervention
exceed the costs of the distortion.
Market failures
There are three main types of market failures.
1. the existence of a sector level positive (technology
or demand) externality
2. informational externality related to the difference
between the private and the social benefit in
exploring the profitability of a new activity.
3. investment coordination failure: because of a lack of
required investments in related actives—the private
sector investment is sub-optimal.
When IP does makes sense
in theory
The theoretical justification for IP is based on the
fulfillment of three conditions:
1. some market failure is present (e.g., sector
level externalities);
2. the firm/sector is potentially competitive in
the international markets;
3. the discounted future benefits of intervention
exceed the costs of the distortion.
When IP does makes sense
in theory
The theoretical justification for IP is based on the
fulfillment of three conditions:
1. some market failure is present (e.g., sector
level externalities);
2. the firm/sector is potentially competitive in
the international markets;
3. the discounted future benefits of
intervention exceed the costs of the
distortion.
When IP does not make sense
in theory
Two main arguments against the use of IP in developing countries:
1. even in the presence of imperfect markets, there is no reason
to suppose that the government has better access to
information with respect to the market. Since government
information is necessarily limited, good selectivity is
impossible
–
This implies - for instance - that the “picking winners” strategy is
deemed to fail
2. any government measure (e.g., investment support, tax
exemptions, etc.) creates rents. Firms find it profitable to
(legally or not) invest their resources to obtain them. This is a
wasteful activity that also distorts allocation of resources
because it makes competition between firms unfair.
Outline
1. The importance of manufacturing for
economic development
2. The return of Industrial Policy (IP)
3. What is IP?
4. Theoretical justification(s) for IP
5. Historical experiences
6. Empirical evidence (trade)
7. A special case: innovation policy
Historical experiences
• We look at the historical experiences to understand
the effects of IP
• Past successful experiences
1. England (1800); Germany (1880); USA (1900)
2. 1960s: NICs (South Korea, Taiwan, Singapore, Hong Kong)
• We focus on two different set of countries
1. African countries
2. BRICS (Brazil, Russia, India, China, South Africa)
Industrial Policy in Africa
Industrial policy in Africa
This section has two objectives:
1. To provide a survey of the literature on IP in Africa
(historical and comparative perspective)
2. To suggest some policy recommendations based on
the analysis of new approaches to industrialization
Outline
1. Industry in Africa: some stylized facts
2. IP in Africa: a very brief historical overview
3. The new world, the new rules and IP in Africa today
4. What are the main IP options for African countries?
Industry in Africa:
problems and perspectives
• African Export
– nearly 75% are primary products
– the composition of African exports to other developing countries has shifted
towards primary products.
• Primary products
– production is capital intensive often poorly linked to other sectors
– prices are set at the world level and characterized by high volatility
• The increasing concentration of Africa’s production and exports
on primary commodities casts some doubts on the potential for
future growth in the region.
• The type of product a country exports matters for long-term
growth
Industry in Africa:
problems and perspectives
• The experience of other emerging countries (i.e. East
Asia and Latin America countries) show that
industrialization has been the engine of growth
• IP is needed to foster industrialization in Africa.
• The failure of past industrialization strategies in Africa
calls for a renewed developmental IP
• Are there still lessons to be learned from the past?
IP in Africa: historical overview
The Developmental State in Africa
– since the 1950s African governments implemented a
number of measures to promote industrialization.
– this process which was characterized by an Import
Substitution Industrialization (ISI) strategy to development.
– governments
• offered protection to domestic firms
• used a range of policy measures to implement protectionist trade
policies (tariff and nontariff barriers, such as quotas and licenses
• nationalised foreign firms and made large public investment
IP in Africa: historical overview
• Why did the Developmental State (DS) performance has been
so different in NICs and in Africa?
• Differences in initial conditions and in the characteristics of the
policies adopted
– initial conditions (quality of education and technological knowledge)
– governments
• offered protection to domestic firms
– (little discrimination between activities, no time limit and no requirements of
international competitiveness)
• used a range of policy measures to implement protectionist trade
policies (tariff and nontariff barriers, such as quotas and licenses
– (no control on the activity of protected firms)
• nationalised foreign firms and made large public investment
– (inefficient management of public firms)
– role of innovation and technological change
IP in Africa: historical overview
• In mid 1980s, the economic situation of most of African
countries was very difficult.
• Adoption of Structural Adjustment Programs (SAPs) [FMI, WB].
• The DS apparatus was eliminated and the ISI strategy abandoned
• SAPs successful in:
– liberalizing trade and the financial-sector,
– favouring the privatization of public enterprises
– inducing currency devaluations
• SAPs not successful in favouring industrialization:
– the industrial performance has been disappointing. Many African
countries suffered de-industrialization process in the 1980s and 1990s
IP in Africa: historical overview
Assessment of the Structural Adjustment Programmes (SAPs)
– SAPs did not promote significant improvements in
technological capability, skill levels, productivity and export
quality and greater value-added in the agro-industry sector
(these were the expected responses from the reforms).
– The weak African industrial structure is, at least in part a
consequence of these interventions.
– Several industrial sectors have still to recover from the SAPs
period and, given the new international context, this task
seems to be increasingly difficult
The new world, the new rules and
industrial policy in Africa today
• The world economy is rapidly changing
• New rules (WTO, REC, etc.)
• New actors (China, India, etc.)
• New products and new technological paradigms
• Opportunities and challenges are different
The new world, the new rules and
industrial policy in Africa today
• Industrialisation figures today among the highest
policy priorities at the continental level: several
initiatives, plans of action, development projects and
call to develop industrialization in Africa.
• African governments are still largely engaged in
industrial policy.
• A number of different industrial policy instruments
are employed in African countries (next slide)
Industrial Policy in Africa today
What are the new IP options for
African countries?
New approaches to industrial policy
– industrial clusters
– upgrading along the agricultural value chain
Industry in Africa: Industrial clusters
• An emerging element in the African economic landscape is the
industrial cluster.
• Clusters are believed to play a significant role in the promotion
and development of SMEs
• The benefits of clustering are:
1. making market access easier
2. create labor pooling
3. facilitate technological spillovers
4. create an environment conductive to joint actions
• The benefits of clusters would be particularly valuable to
African SMEs given the difficult economic environment in which
they operate.
Industrial cluster: which policies?
• Policies should be designed to create an environment
conducive to the conditions under which a cluster can emerge.
• The cluster approach works well when (at least) three actors
take part into the initiative: the university, the government and
the private sector.
• While differentiated by cluster characteristics, IP should:
– encourage acquisition, adaptation and diffusion of technology
(science parks)
– strengthen the education-business sector link
– strengthen and upgrade skill training
– provide physical infrastructure
IP to upgrade along
the agricultural value chain
• Agriculture is crucial for African countries’ growth
• Not all agricultural sectors provide the same opportunities for
export-led growth.
• Over the past quarter-century, there has been a significant
transformation of global trade: away from traditional tropical
products and towards non-traditional agricultural exports
• There are a number of government projects and plans of
action to support the agriculture sector in Africa.
• NEPAD’s Comprehensive Africa Agriculture Development Programme (CAADP)
• Alliance for a Green Revolution in Africa (AGRA)
• UN, World Bank, and IMF High Level Task Force on the Global Food Crisis
IP to upgrade along
the agricultural value chain
• The new content: increasing importance of GVCs in agricultural
trade
– the role of standards
– global buyers become more demanding
• Governments should:
– provide physical and informational infrastructure to support
coordination between enterprises and traders
– develop efficient marketing organizations
– support the development of local consultancy and certification
companies for standards
– collaboration between export enterprises
– provide business-oriented services to farmers
Some remarks
• African countries need to strengthen the processing activity to
be able to compete at the world level and to induce a structural
change of their economies
• Historically, industrialization and structural change has been
possible only through government intervention and IP
• The world and the rules of the game have changed but there is
still room for government intervention to favor industrialization
• New tools and strategies are available: cluster approach and
policies to up-grading along the agricultural value chains
Industrial policy in BRICS
IP in BRICS
• We explore the history and the evolution of IP in BRICS (Brazil,
Russia, India, China, South Africa).
• They are the new success stories
• We try to answer to a number of difficult questions such as:
1.
2.
3.
4.
What has been the role of IP in the BRICS countries’ development
process?
Which are the common elements and the main differences (if any)
between the different IP models?
Are the IP models converging towards a similar type of IP?
Are there lessons that can be learnt from the BRICS industrialization
experiences?
Brazil
The history of IP in Brazil (in one slide)
• ISI strategy (since 1940s)
• 1982 crisis (partially related to the ISI strategy)
• Washington Consensus reform
• Return of IP (since Lula Presidency, 2003)
Main characteristics of the current
approach to IP
• Large involvement of the Government in
supporting manufacturing
• Creation of new agencies and institutions to
manage IP
• Attempt to improve the public-private
dialogue (and cooperation with university)
• Emphasis on technology and innovation
policies
Lessons from the Brazilian
experience
• IP may require a long-term perspective –
especially if it targets high-tech sectors
• This also implies that IP needs to adapt to the
changing internal and external conditions: a
given objective could be achieved through
different specific measures
China
The history of IP in China in one slide
• Industrialization through central economic
planning (since the 1950s)
• 1978 Economic reforms
• Since mid 80s, adoption of an IP characterized
by an evolving (creative) combination of
different measures
– State highly interventionist
– Reduction and modification of the role of SOEs
– Attraction of FDI (technology acquisition)
Lessons from the Chinese
experience
• One of the reasons for China‘s economic
success has been the ability to choose and
adapt IP to the numerous changes that took
place in its domestic development strategy
and international conditions.
This suggests that flexibility in the type and use of
policies may be crucial to the effectiveness of the
industrialization strategy.
Lessons from the Chinese
experience
• The Chinese case is characterized by unique
characteristics and several peculiarities.
– Example. issues related to the regulation of coexistence of private firms and SOEs; the possibility
to attract FDI because of the size of the domestic
market, etc.
This implies that extreme care is needed when it
considered as a model to be replicated.
India
• ISI strategy (since independence)
– strict regulation of industry
– five years plans
– State highly interventionist
• 1991 Structural Reforms (drastic trade
liberalization, deregulation of economic
activity)
• Since the 2000s, pragmatic approach to IP
Lessons from the Indian experience
1. The recent high GDP growth has been
achieved through not-orthodox policies.
– This is not to deny the positive effect of the
reforms. Though one should recall that the
liberalization process has taken place at a
controlled pace and that even after the reform
several industrial policies remained in place.
Lessons from the Indian experience
2. The Indian experience also tells us what IP
should avoid: 1) controlling prices; 2)
controlling quantity; 3) imposing the
geographical location of economic activities.
3. The need and advantage (in terms of
implementation ad support) of IP enjoying
political and social acceptance.
Russia
IP since the end of URSS
• Drastic economic reforms (liberalization,
privatization and de-regulation)
• Policies to attract FDI: various phases
(increasingly more welcoming but with some
halt)
• Attempts to create a dialogue between the
Government and the private secto
Lessons from the Russian
expericence
• IP may take very different forms depending on
the characteristics of the economy (e.g.
reducing uncertainty in the economy)
• Effective IP needs a continuous dialogue
between the Government and the private
sector: this requires the building of mutual
trust, which is something very delicate and
requires long time
South Africa
The history of IP in one slide
• Two peculiarities
– apartheid
– the co-existence of the mineral-energy complex
and manufacturing (conflict between the two)
• ISI strategy (since the 1940s)
• New industrial policy (since the democratic
transition)
Lessons from
the South African experience
• The activities and successes of the DTI (Department of
Trade and Industry) and of the IDC (Industrial
Development Corporation) clearly show the importance
of developing government agencies’ capabilities to make
IP effective
• The way in which the IP has been presented to the public
and conducted created a large support for that. Given
the risk associated with IP (possible mistakes and
failures) and the long-term horizon usually associated
with it, it is crucial that there is a large support for IP.
Some remarks
• BRICS are not much different as for their (nonorthodox) approach to IP
• BRICS countries are very different as for the
specific measured of their IP
• External elements (i.e. WTO) will probably
contribute to force convergence in general IP
design
• Country experimentation will (probably)
continue
Historical evidence: some remarks
• Necessary conditions (sector-level externalities or
sectoral a latent comparative advantage) not easy to
identify ex ante
• There is no evidence that sectors which have been
protected historically are those with such a latent
comparative advantage and sector-level externalities.
• Protection to declining not emerging sectors: an
inherent bias against promoting sectors with a latent
comparative advantage.
Empirical evidence
How to resolve the debate?
Empirical evidence
• Evidence on infant industry protection
• It is the best known and most maligned type of IP
• All countries in any time have used it: from England in the
XVIII century to present day US (Boeing), Europe (Airbus), and
China (cars).
• Look at costs and benefits of intervention.
– Mill test : protection allows sector to exploit learning
effects and move down marginal cost curve
– Bastable test: aggregate benefits outweigh costs to
consumers
Sectoral studies
Evidence is mixed: getting interventions “right” is difficult
1. Industry-specific case studies
– Yes, welfare increased due to intervention
• Aircraft in Europe
• Steel rail industry in the USA
• Production of electricity from wind power
– No, welfare fell as a consequence of intervention
• Semi-conductors in Japan
• Tinplate in the United States
• Computers in Brazil
2. Cross-industry studies
– Removal of protection often generates within-firm and
within-industry productivity gains
– But studies typically fail to measure the impact of policies,
focusing instead on outcomes (like trade shares).
What to conclude from this mixed evidence?
• We know externalities exist but exploiting them
is not easy
• If agglomeration economies are important, then
IP in small domestic markets is likely to fail
• This means that:
– Intervention should be oriented towards
• sectors with a latent comparative advantage
• sectors with large externalities or coordination failures
Policy Implications for IP and Trade
• Who is doing IP matters (need strong institutions to
prevent capture)
• What is being promoted makes a big difference:
– sectors with strong externalities (learning by
doing; spillovers to other sectors)
– sectors with a “latent” comparative advantage
• When to promote: emerging not declining sectors
Warning: Agglomeration may be necessary but not
sufficient for increased productivity. Subsidizing the
software sector may not generate a Silicon Valley
FDI attraction as IP
• All countries promote incoming foreign
investment, but this is rarely referred to as IP.
• In 2010, 103 countries offered tax concessions
to foreign companies setting up facilities
within their borders.
• Countries frequently offer also other benefits,
such as free or subsidized infrastructure.
FDI attraction as IP
• Multinationals should be attracted to produce key inputs or to
bring specific knowledge needed by clusters with the ability to
absorb them.
• Without host-country policies to develop local capabilities,
MNC-led exports likely to remain technologically stagnant,
leaving developing countries unable to progress beyond the
assembly of imported components.
• Countries should target specific sectors more than others,
moving away from policy neutrality: promote FDI selecitvely
• These are: telecommunications, vehicles and transport
equipment, computers). The sectors where we expect there
to be Marshallian externalities.
Suggestions for effective IP
• Don’t expect governments to identify coordination
failures, but invite sector and cluster organizations to
come forward
• If such organizations are weak, provide support to
sectors that want to initiate or improve their
organizations
• Public-private collaboration is crucial
Outline
1. The importance of manufacturing for economic
development
2. The return of Industrial Policy (IP)
3. What is IP?
4. Theoretical justification(s) for IP
5. Historical experiences
6. Empirical evidence (trade)
– evidence on infant-industry protection
– cross-country evidence on tariffs, trade, and growth
– “soft” versus “hard” IP
7. A special case: innovation policy
Innovation and innovation policy:
what are they and why they are important
Outline
1. Innovation: definition(s), actors, determinants
2. Why innovation is important
3. Measurement of innovation
4. Innovation policy
Outline
1. Innovation: definition(s), actors, determinants
2. Why innovation is important
3. Measurement of innovation
4. Innovation policy
Definition of Innovation
• According to OECD, an innovation is the
implementation of a new or significantly improved
product (good or service), or process, a new marketing
method, or a new organizational method in business
practices, workplace organization or (even) external
relations (OECD, 2005).
• Innovation also includes social innovation, i.e.
innovations that seek new answers to social problems.
The actors of innovation
• This definition clearly suggests that there are several
economic actors engaged in innovation.
• Among these, the most important are 1) private and
public firms, 2) universities and public research
institutes and 3) the government.
• Universities and public research institutes play a
crucial role by providing education, training, creation
and diffusion of knowledge,
• Government’s role is to support private initiatives
through measures designed to favor innovation.
The main characteristics of innovation
• Innovation may be characterized by several
dimensions including:
1. the type of innovation (product/ process innovation),
2. the degree of novelty of the innovation
(incremental/radical innovation),
3. the source of innovation (technological/nontechnological innovation).
(1) The type of innovation
(product/ process innovation)
• Product innovation is the introduction of a good or service
that is new or has significantly improved characteristics or
intended uses.
• Process innovation refers to the implementation of a new or
significantly improved production or delivery method.
• Type of innovation firms perform varies significantly across
countries, across firm size and economic sectors.
• Firms often adopt mixed model of innovation.
(2) The degree of novelty of the innovation
(incremental/radical innovation)
• A radical innovation is one that has a significant
impact on a market and on the economic activity of
firms in that market.
• An incremental innovation concerns an existing
product, service, process, organization or method
whose performance is significantly enhanced or
improved.
• The dominant form of innovation is the incremental
one.
– Incremental innovation is also the more relevant form in
the case of developing countries.
(3) The source of innovation
(technological/non-technological innovation).
• Technological innovations are usually associated with
product and process innovation.
• Non-technological innovations are generally
associated with organizational and marketing
innovations.
• In practice, technological and non-technological
innovations are in fact highly interconnected.
Other determinants of innovation
• The nature of innovation greatly differs
– from sector to sector
– across countries
– time periods
Sectoral characteristics of innovation
• The nature of innovation depends on the
characteristics of the sector.
– Some sectors are characterized by rapid change and radical
innovations, others by smaller, incremental changes.
– The source of innovation may significantly vary between
sectors.
• high-technology sectors: R&D plays a central role in innovation
activities, while other sectors rely to a greater degree on the
adoption of existing knowledge and technology.
• Low-and medium-technology sectors: often characterized by
incremental innovation and by foreign technology adoption.
Social Innovation
• No agreed definition of social innovation.
• OECD (2010) defines social innovation as a tool to
identify and respond to social challenges when the
market and the public sector have failed to do so.
– a form of economic innovation satisfying new needs not
provided for by the market (even if markets may also
intervene).
• defined more by the nature and objectives of the innovation
rather than by the characteristics of the changes themselves.
• The non-profit sector plays a special role in fostering
and implementing social innovation
Outline
1. Innovation: definition(s), actors, determinants
2. Why innovation is important
3. Measurement of innovation
4. Innovation policy
Why innovation is important
• Innovation plays a key role in economic development
by contributing to growth, jobs creation and helping
address social and environmental challenges (OECD,
2005).
• Innovation leads to improved competitiveness and is
a major explanation of why growth rates at the firm,
regional and national level differ
Why innovation is important
for developing countries
• Innovation is important for developed countries
• Sometimes still questioned for developing countries.
• Innovation is often understood only as high technology.
• Innovation takes place in all sectors, including services,
agriculture and mining (OECD, 2010).
• Different types of innovation play different roles at
various developmental stages.
– in earlier stages, incremental innovation is the most relevant form of
innovation as it is associated with the adoption of foreign technology.
– at later stages, high-technology and R&D-based innovation matter more.
Three stages of technology acquisition
• There are three main stages of technology
acquisition within a developing economy:
– first stage: the economy acquires mature foreign
technologies (assembly operations);
– second stage: consolidation of technology (duplicative
imitation followed by, creative imitation;
– final stage: domestic generation of new technologies.
Stages of economic development and characteristics of innovation
Country category
Developing countries and
emerging and countries
Mainly emerging countries
but also developing ones
Mainly emerging countries
Type/source of
innovation
Improve productivity and
Incremental innovation
process technology
based on adoption of
foreign innovations and
technologies. Innovation
needs to respond to
specific “local” conditions
for outcomes.
Favour the generation of
Incremental innovation
inclusive innovation to
based on combination of
improve welfare and access foreign technology and/or
to business opportunities.
local, traditional
knowledge.
Build up innovation
Incremental and radical
capacities to reach the world innovation capacity to
technological frontier
compete with leading
world innovators.
Build-up niche competencies Incremental innovations
based on applying foreign
innovations and
technologies strategically
to support industrial
development.
Climb the value ladder in
Incremental and radical
global value chains
innovation capacity to
differentiate
contributions
Objective of innovation
Keep competitiveness in
frontier industries
Innovation is identical to
developed countries
exposed to developments
in the global market.
Main agents involved
Evidence/example
Universities and research
institutes, private businesses,
especially those with
exposure to foreign markets

NGOs, small firms, public and
private associations engaged
in disseminating knowledge
via networks



New plant varieties for
agriculture
New methods for
mineral extraction
(Chilean copper
industry)
India (nano cars;
grassroots innovation)
Mobile banking services
Private firms, Universities and 
research institutes, public
institutions
South Korea in the
1990s.

Colombian and
Ecuadorian flower
industry
Malaysia’s palm oil
sector
Public institutions to address
co-ordination challenges,
private sector initiative
including foreign companies

Private sectors with support

from public agents,
intermediaries, diasporas can
play a central role, large firms 
can be important.
Private sector in interaction
with public research
institutions and universities,
role of large firms

Automotive industries
in Malaysia and
Thailand
India’s software
industry
Brazilian company
Embraer
Outline
1. Innovation: definition(s), actors, determinants
2. Why innovation is important
3. Measurement of innovation
4. Innovation policy
The measurement of innovation
Data on innovation
• Innovation is a complex phenomenon
• Its measurement is difficult: data and indicators
• Several data can be used to measure innovation.
1) firm level data;
2) industry level data;
3) household-level data;
4) labour force survey;
5) R&D statistics;
6) innovation data;
7) patent data;
8) IPR data (trademarks, design rights and utility models);
9) scientific and technological output (citations, articles, etc.).
Data collection: innovation survey
• Innovation survey: a powerful and important
instrument to increase knowledge about why and
how innovation happens in firms
• Innovation surveys collect information about:
–
–
–
–
–
innovation strategies,
reasons for investing in innovation,
how firm combine different types of innovation,
quantitative data on sales from product innovations
spending on a range of assets beyond R&D
The measurement of innovation
• All these data can be used and combined to construct
quantitative indicators of innovation activities.
• Examples of innovation indicators are the level and rate of
growth of:
–
–
–
–
–
–
–
R&D expenditure (as % of GDP);
number of researcher employed in R&D activities (country level);
number of total patents (country level);
school enrollment in tertiary education;
number of articles in scientific and technical journals;
high-tech export (as % of manufacturing export);
ICT expenditure (as % of GDP).
The measurement of innovation
• Different types of innovations need different type of
indicators.
– indicators to measure the degree of product innovation
are different from the ones used to measures the rate of
process innovation.
• IMPORTANT: traditional and most commonly used
measures of innovation may not be able to capture
the full richness of innovation activities in developing
countries.
The measurement of innovation
in developing countries
• Commonly used measures of innovation may not be able to capture
the full richness of innovation activities in the Pacific region.
• Innovation creation and knowledge diffusion may be have
significantly different characteristics from those found elsewhere.
• A different approach to the measurement of these activities needed.
• To improve the understanding of the specific innovation process
taking place in the local economies, we could use
 semi-structured interviews,
 ad-hoc questionnaires
 focus-groups
Outline
1. Innovation: definition(s), actors, determinants
2. Why innovation is important
3. Measurement of innovation
4. Innovation policy
Innovation policy
Innovation policy: what is it, why we need it
and what it is its content
• Innovation is a heterogeneous phenomenon whose
characteristics depends on various conditions at various
levels (firm, industry, region, country, world).
• At the firm level: innovation determinants include
•
•
•
•
•
•
•
level of R&D expenditure,
the degree of sectoral innovation opportunities,
the easiness to access finance,
the availability of skilled workers,
the market conditions (degree of competition, demand conditions, etc.)
the regulation of intellectual property rights,
the degree of knowledge spillovers and so on.
Innovation policy: what is it, why we need it
and what it is its content
• One crucial elements determining the emergence,
the development and the expansion of innovation
activities is government intervention.
– Governments in both developed and developing countries
are increasingly making innovation a key issue on policy
agendas, recognizing its potential to promote economic
growth and address social and environmental challenges.
• Interestingly, innovation policy is usually less
controversial than other government policies.
Innovation policy: what is it, why we need it
and what it is its content
• The basic argument for government support to
innovation is that a market economy cannot generate the
optimal levels of investment in innovation because of:
1. market failures;
2. partial appropriability due to spillovers;
3. information asymmetries
• These market failures inhibit private firms from investing
the optimal amount of resource (they underinvest) in
innovation activities, thus depriving the economy from
one of the key levers of sustained growth.
• The role of government is thus to restore optimality by
providing different forms of support to firms’ investment
in innovation.
Why the market cannot provide the optimal
investment in innovation
There are three main reasons:
1. market failures
2. only partial appropriability due to spillovers
• firms investing in innovation risk that their
discovery are copied by competitors that have
not incurred in discovery costs
3. information asymmetries
Innovation policy: what is it, why we need it
and what it is its content
• The notion of which measures should be used to
sustain innovation has changed considerably over
the past decades.
• Nowadays, innovation policy can be defined as the
(large) set of measures direct to induce, support and
foster innovation at the local, firm, sectoral and
national level.
Innovation policy: what is it, why we need it
and what it is its content
• Innovation policy includes a number of different
measures and instruments.
• In particular, innovation policy includes technology
policy and science policy.
• There are several measures through which
government support innovation:
–
–
–
–
–
tax exemptions for innovation investments
subsided credit for innovative firms
the creation of public research centers
attraction of FDI
public procurement
Innovation policy in developing countries: main
characteristics and future challenges
• The literature on innovation policy in developing
countries is limited
• Often official documents by LDCs governments overlook
the topic and do not include innovation policy among
the priorities.
• LDCs have peculiar elements (e.g. the role of traditional
knowledge, its rich biodiversity, etc.) that need to be
properly considered in the context of innovation policy
Innovation policy in developing countries
• There are several topics within the innovation
domain that are extremely relevant for on which
governments should focus more their efforts.
• These are:
1.
2.
3.
4.
5.
6.
7.
renewable energy production,
marine resources management,
telecommunications and IT regulation and development,
climate adaptation strategies,
waste management,
natural disaster mitigation
sustainable land use
What do we have learnt on innovation policy in
developing countries
The review of the international experiences also
suggests that
– successful innovation policy has been often the result of
experiments of cooperation between the government and
the private sector concerning the design and also the
implementation of the different measures. In some other
cases, entrepreneurial association has also taken the lead
in making policy proposals (i.e. Colombia and Mexico)
• example of a co-responsible attitude of government and private
sector, which in the end are the beneficiaries of innovation policy.
Innovation for sustainable development
The importance of innovation for sustainable
development
• During the last decade, major global and regional
changes in climate and the biosphere had serious
implications for the sustainability of the ecosystems
• Recently research centers in the region have started
focusing on understanding better the co-evolution of
the atmosphere, the weather, the ocean and the
biological diversity.
Example of benefit-sharing arrangements for
indigenous and traditional knowledge.
The development of an anti-HIV compound through
traditional methods:
Traditional healers in the Falealupo village of Samoa have for centuries used a
tea made by steeping ground-up stems from the mamala tree to treat yellow
fever virus and hepatitis. The Samoan healers introduced Western research
scientists to the plant’s healing capacity. The National Institutes of Health and
the AIDS Research Alliance used the plant to isolate a compound called
prostratin, which is thought to have high potential as an HIV retroviral. In 2004,
the University of California at Berkeley and the Samoan government signed an
agreement allowing the university’s researchers to use the mamala tree to
develop an anti-AIDS drug. The university will share any royalties from the sale
of a gene-derived drug with the people of Samoa. [World Bank, 2010]
Example of benefit-sharing arrangements for
indigenous and traditional knowledge
• This example is important because it illustrates
– the economic and social characteristics that are peculiar to
developing countries
– how different may be the analysis of innovation in these
contexts
– more research is needed to fill the knowledge gap about
the opportunities for innovation, the mechanisms behind
innovation in the region and which type of measures and
interventions can favour innovation.
Future research
• More research is needed concerning both innovation
and innovation policy in developing countries
• Knowledge gaps that have to be filled in order to
create the conditions for fostering innovation and
inducing sustainable long-term economic
development.
Future research
There is the need to better understand the factors, the
mechanisms and the obstacles that characterize innovation
processes in developing countries
– more information about the current domestic innovation
capabilities and the type and number of innovation actives
already conducted by domestic firms and public institutions.
– more effort should be put to have a better understanding of the
possible future opportunities for innovation in the region.
– possible role that scientific and technological cooperation would
perform in the generation of new products and processes and of
novel forms of collective organization.
Future research
• A better understanding of the national and regional
innovation systems
• There are three aspects on which future research
should focus:
1. to identify the country-specific characteristics of the
different national innovation systems
2. to map the innovation capabilities and opportunities
3. identifying ‘niches’ for innovation as to understand what
should be improved and in which direction to intervene
Some final remarks
• Manufacturing is crucial to economic development
• Industrial policy is an important instrument to
support the industrialization process
• IP is very complex and dangerous tool
• Theory says that IP is needed in several situations
• Historical experiences shows that the effects of IP
have been (often) very disappointing
• It is not anymore IF, it a matter of HOW to do IP
References
•
Di Maio, M. (2014). Industrial Policy in BRICS Countries: Similarities, Differences and Future
Challenges. In: Structural Change, Industrialisation and Poverty Reduction in the BRICS,
edited by Naudé, N., Szirmai, A. and N. Haraguchi. Chapter 17. Oxford: Oxford University
Press
•
Di Maio, M. (2014). Industrial Policy. In: International Development: Ideas, Experience, and
Prospects, edited by Currie-Alder, B., R. Kanbur, D. Malone and R. Medhora. Chapter 32.
Oxford: Oxford University Press
•
Di Maio, M. (2009). Industrial Policies in Developing Countries. History and Perspectives. In:
The Political Economy of Capabilities Accumulation: the Past and Future of Policies for
Industrial Development, edited by Cimoli, M., Dosi G. and Stiglitz, J. E., Ch.5. Oxford
University Press
•
Harrison, A. and Rodríguez-Clare, A. (2010). Trade, Foreign Investment, and Industrial Policy
for Developing Countries*, In: Dani Rodrik and Mark Rosenzweig, Editor(s), Handbook of
Development Economics, Elsevier, Volume 5, Chapter 63 , Pages 4039-4214
•
UNECA (2012). Industrial Policies for the Structural Transformation of African Economies:
Options and Best Practices
How to contact me
Michele Di Maio
Department of Business and Economic Studies
University of Naples “Parthenope”
E-mail:
michele.dimaio@uniparthenope.it
Webpage:
https://sites.google.com/site/micdimaio/micheledimaio