The Foundations of the
Knowledge Economy: Global
Evidence
Carl Dahlman
Georgetown University
Ukraine Knowledge Economy Training Initiative
January 22, 2008
Structure of Presentation
1.
2.
3.
4.
What is the Knowledge Economy and Why is it
Relevant
Foundations of the Knowledge Economy
Benchmarking Countries in the Knowledge
Economy
Recent Transformation of Key Developed and
Developing Countries
5.
What is at Stake?
6.
Key Strategic Areas for Ukraine
7.
What is to be Done?
©cd
1. What is the Knowledge
Economy?
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It is an economy that increasingly bases
its economic activity on value enhancing
knowledge rather than limited natural
resources
Knowledge has always been important
It is becoming more important now
because there has been an acceleration
in the creation and dissemination of
knowledge
Why is it Relevant?




There are many possibilities to leverage
growth by making effective use of knowledge
that already exists as well as by generating
new knowledge
Most new knowledge creation is being led by
developed countries
There is risk that developing countries will be
falling behind
But to make effective use of knowledge as
well as to create relevant knowledge it is
necessary to develop appropriate policies,
institutions, and capabilities
2. Foundations of the
Knowledge Economy

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Technological Trends
Increasing Importance of Knowledge
Growing Technology Intensity of Trade
Increasing Globalization and
Competition
Changing Education Paradigm
Major Global Restructuring
Changing Nature of Competitiveness
Technological Trends

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There has been speed up in the generation and
dissemination of knowledge
The ICT revolution is becoming an increasingly
important element of the current techno
economic structure
It is spawning changes in management and
organization of production and distribution
Production and Trade are becoming more
knowledge intensive
Innovation and high level human capital are
becoming critical elements of competitiveness
The knowledge and innovation markets are
global and have big implications for successful
participation in the global economy
Investments in Knowledge*
now as high % of GDP as Investments in Machinery
and Equipment in Advanced Countries (2002)
8
7
6
5
4
3
2
1
0
Investments
in
Knowledge
US
Sweden
Finland
OECD
Investments
in
Machinery
&
Equipment
*Investments in Knowledge = R&D, Software, and Higher Education; Source OECD 2005
©Knowledge for Development, WBI
Knowledge Intensive Services* Greater % of Gross GDP than
Technology Intensive Manufactures in Advanced Countries
(2002)
25
20
15
10
US
EU
Japan
5
0
High and
Medium
Technology
Manufactures
Knowledge
Intensive
Services
*Knowledge Intensive Market Services exclude government and include following services: posts and
telecommunications, finance & insurance, business services: Source OECD 2005
©Knowledge for Development, WBI
Changing Structure of World Merchandise
Export 1985 vs. 2004: Primary vs. Manuf. by
Tech. Intensity
Annual
Growth
Rate
1985 2004
% %
Products
1985
2004
All Products
1,689
7,350
7.6 100.0
391
1,018
4.9
23.2
14.7
1,244
6,063
8.2
76.8
85.3
Resource based
327
1,148
6.5
19.4
15.6
Low technology
239
1,962
7.9
14.2
15.0
Medium technology
480
2,169
7.8
28.5
29.5
High technology
196
1,643
11.2
11.6
22.4
Primary products
Manufactured
products
100.0
An Increasingly Globalized and
Competitive World Economy

Increasing Globalization

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Increasing Competition

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Rapid reduction of transportation and communications
costs.
Increasing global information (political, cultural, socio
economic)
Strong trends towards regional integration (NAFTA, EU,
ASEAN+3)
Significant trade liberalization is creating larger global
market and increased competition
Share of exports and imports to GDP has increased
from 40% in 1990 to 58% in 2005
MNCs are becoming the most important
agent in global economic activity

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MNCs account for more than 50% of global R&D
They are responsible for about 2/3 of trade, and
organize and control global supply and distribution
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Changing Education &
Training Paradigm
Traditional Model
Information based
Rote learning
Teacher directed
Just in case
Formal education
only
Directive based
Learn at a given age
Terminal education
Knowledge Economy
Model
Knowledge
creation/application
Analysis and synthesis
Collaborative learning
Just in time
Variety of learning modes
Initiative based
Incentives, motivation to
©Knowledge for Development, WBI
Changes in Job Task-Skill
Demands
USA: 1960–98
16
14
Expert Thinking
12
Percentile Change
10
8
Complex
Communication
6
4
2
Routine Manual
0
1969
1974
1979
1984
1989
1994
1998
-2
Routine Cognitive
-4
-6
Non-Routine Manual
-8
-10
Source: Autor, Levy, and Murnane (2003) “The Skill Content of Recent Technological Change: An Empirical Exploration,” Quarterly Journal of Economics.
© K4D program
Major Global Restructuring

Three major components
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Unbundling of production of goods to emerging countries facilitated
by reduction of transportation costs
Unbundling of tasks to emerging countries facilitated by ICT
revolution
Roughly doubling of global labor force participating in export
markets with entry of China, India, and former Soviet republics
Implications

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Returns to labor in developed countries are decreasing because of
doubling of global labor force with entrance of newly emerging
countries
Returns to capital are increasing because of expansion of labor
force and ability to operate globally
Job security is decreasing
Increasing tension between objectives of MNCs and national
interests
Changing Nature of Competitiveness

Competitiveness traditionally based on

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Capital and labor costs
Costs of inputs and infrastructure services
General business environment and ease of doing
business (including macro stability, taxes, x rate, etc)
Superiority in technology or management
But it is increasingly being based on

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Ability to redeploy resources to take advantage of
those changing opportunities
Quality, skills and flexibility of labor force (and
management)
Ability to constantly keep up with rapidly changing
technological and organizational advances
Ability to make effective use of information
technologies to reduce transactions costs and improve
capacity to respond quickly to changing opportunities©cjd
and threats
Changing Nature of Competitiveness
(cont)

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Greater value added now comes from
knowledge and information
As a result there is increased attention
across countries on
 Improving their overall business
environment and the flexibility and
speed of their economies to respond to
rapidly changing circumstances
 Improving education and skills systems
 Improving their innovation systems
 Improving their information
infrastructure
©cjd
3. The Four Pillars of the Knowledge Economy
EIR provides
incentives for the
efficient creation,
dissemination, and
use of existing
knowledge
To facilitate
the effective
communication,
dissemination,
and processing
of information.
Economic and
Institutional
Regime
Information
Infrastructure
An educated and
skilled
population that
can use
knowledge
effectively
Education
Innovation
consisting of
organizations
that can tap
into the stock
of global
knowledge,
assimilate
and adapt it and
create local knowledge
Innovation
©cjd
Benchmarking Countries in the Knowledge Economy:
The Knowledge Assessment Methodology

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KAM: 83 structural/qualitative variables to benchmark
performance on 4 pillars
Variables normalized from 0 (worst) to 10 (best) for 140
countries and 9 regions
www.worldbank.org/kam
Basic scorecard for 14 variables for two points in time,
1995 and most recent
Knowledge economy index (KEI) which includes 3
variables for each of the four pillars:
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Economic and institutional regime: tariff and non-tariff
barriers, rule of law, regulatory quality
Education: literacy, secondary and tertiary enrollment rates
Innovation: researchers in R&D, scientific and technical
scientific publications, and patents in the US
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ICTs: fixed and mobile phone lines per 1000 people, computer
per 1000, internet users per 10,000
Basic Scorecard
Knowledge Economy Index
Economic and Institutional
Regime Sub-Index
Education Sub-Index
Information & Communication
Technologies Sub-Index
Innovation Sub-Index
(Unweighted)
Innovation in Context of
Developing Countries
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Innovation should not be considered narrowly
just as R&D to move the global frontier
It should be understood as new to the
country, new to the sector, even new to the
firm
Developing countries, like Ukraine, will get a
much higher return from effectively tapping
into global knowledge through trade, foreign
direct investment, technology licensing,
foreign education, etc than just from own
R&D
Broad Innovation Scorecard
4. Recent Transformation of Key
Developed and Developing Economies
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Developed Triad: US, Europe, Japan
Exemplary European Examples: Finland
and Ireland
The Four East Asian Newly
Industrialized economies
Developing Country Giants: China and
India
United States: technological leader
building on large market, flexible
institutions, and entrepreneurship

The US is the dominant Knowledge Economy in the World
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The US show tremendous ability to restructure
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Is the largest single country market
Spends the most on education (especially higher education and continuous
training)
Spends the most on research and development
Largest home to multinationals
Reaps tremendous gains from scale economies and first mover advantage
Thanks to great flexibility of capital and labor markets
Tremendous ability for technical, institutional and organizational innovation
Strong entrepreneurial and risk taking culture
But other countries/regions are catching up
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EU is now larger economic market
Other countries are catching up in tertiary education and R&D
Even US multinationals are now becoming more global than American
companies
Is beginning to suffer from over reach in Iraq fiasco and lose hearts and
minds of many parts of world
European Community: building large
internal market to compete with US
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Part of the rational for creation of EU was to create large market to get
economies of scale to compete with US
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EU launched ambitious Lisbon Plan in 2001 to make EU the “most
knowledge intensive” region in the world by 2010
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First was progressive trade integration
Then common currency area now covering most EU countries
Now working on integration in services and in regulatory mechanisms, but
has proved more difficult-note failure of EU constitution in 2006
Also expanded from EU 15 to EU 25 countries in 2004
Included creation of European Research Area and many framework
programs to promote joint R&D across countries and increase innovation
efforts
Also included European Education Area with many programs to integrate
education and training programs across countries
In spite of many advances plan is falling short of goals
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Productivity increases and use of information technology in Europe have not
kept up with advances in US
Few countries that were not already meeting R&D goals are significantly
expanding spending to plan levels
Japan: producer oriented economy
leveraging re-engineering and
manufacturing capability
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Japan was leading world in competitiveness in 1970s and 1980s
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Japan had major financial crisis in 1991 and unlike Finland
(financial crisis in 1991) and Korea (financial 1997) still has not
fully recovered growth momentum
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Initially absorbed foreign knowledge
Then developed superior production system with just in time, multi-skilling, multitasking and flexible specialization, and life-long employment
This was an autonomously led development, with little foreign direct investment.
Rapidly expanded share in global economy, with rapid advances in auto and electronics
industry
Failed to tackle necessary structural reforms in finance , education, and distribution
systems
Failure from excessive focus on growth of market share w/o sufficient emphasis on
profitability and sustainability
Was not sufficiently innovative in basic science
Nevertheless Japan still very technologically strong country

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Second largest R&D spender
Strong technological innovator-growing leadership in autos, capital goods, energy
efficiency
Home to many successful multinationals
Exemplary European Examples

Finland (from natural resource to knowledge based
country)
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Major financial and exchange crisis in 1990/91 with collapse
of Soviet Union
Crisis lead to creation of national vision based on investment
in telecommunication technologies
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Government lead increase in R&D investment & ICT engineers
Private sector followed and deepened ICT and forestry clusters
Became one of most globally competitive economies
Ireland (from poorest of Europe to one of richest
based on FDI, software and ICT
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Was poor agricultural economy until 1970s
Developed national vision with respect to entry into EC
Invested heavily in higher education and attracted European
oriented FDI
Also developed knowledge based service sector as well as
tourism
East Asian NIES: Different entry
points and leveraging strategies
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Korea and Taiwan (more technologically autonomous
a la Japan)
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Korea: resource poor economy becomes global competitor
by investing in education and skills and technologically
strong domestic conglomerates
Taiwan: plugs into global production networks and moves
up global value chains, with help of Chinese Diaspora
Hong Kong and Singapore (FDI dependent)
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Hong Kong: leverages its human resources as free trade
entrepot service economy for trade with China and node of
global production system in East Asia
Singapore: leverages its human resources by strategically
attracting FDI with value increasing activities by investing in
human resources and trade infrastructure
China: Becoming the World’s
Manufacturing Hub
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Speed, scale and scope of China’s entry into global system
unprecedented in history
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Initially based high investment rate and tapping into global knowledge
through
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Trade
FDI
Technology licensing
Early start in basic and secondary education
But moving rapidly up technology ladder through massive investments
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Second largest economy in ppp terms since 1994 when passed Japan
Third largest merchandise exporter since 2005 when passed Japan
Will pass US in merchandise exports by end 2007
Tertiary education (now largest # of tertiary students in world)
R&D (now second largest in PPP terms-surpassed Japan end 2006)
Physical infrastructure
Strong global competitor advantage not just low cost labor but also
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Skills, knowledge, logistics
Being plugged into global production system through FDI and Diaspora
India: Becoming the World’s
Off shoring Service Center
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India increased rate of growth
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Post 2000 increase due to
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From 2-3% Hindu rate of growth of 1950-1980s
To 6% in 1990s
To 8% last three years
Great success in post Y2K ICT service exports
Having made early investments in elite English speaking
engineering schools
Growth of business and financial services
India is becoming a knowledge intensive service
economy with services, pharmaceuticals, and auto
parts as main drivers
Has offset constraints of poor infrastructure and
bureaucratic constraints on physical trade through
possibilities opened up by ICT enabled services
5 .What is at Stake for
Ukraine?
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Given present trends, where will Ukraine be 10, 20,
30 years from now?
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Will it have increased the income and welfare of its inhabitants,
and its role in the world?
Will there be many world class knowledge driven companies who
can open new opportunities
Or will Ukrainian companies be left behind and become
marginalized?
Weakness in all the fundamental elements of growth
and competitiveness
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Relatively weak government and institutions
Low savings and investment
Weak human capital particularly new skills and life long learning
Weak ICT infrastructure and use
Weak innovation in terms to tapping global knowledge
6. Key Strategic Areas for Ukraine
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Ukraine needs to develop more explicit
strategies to improve competitiveness and to
benefit more from participation in global
economy
These strategies need to pay more attention
to:
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Economies of scale in regional markets
Quality of institutions and market
Education and high level skills
Innovation, not just R&D, but tapping global knowledge
Effective use of information and communication technologies
Trade logistics
©cjd
7. What is to be done?
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The objective of this training seminar is to
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Provide an overview of some of the key global trends of the
knowledge economy
Give an initial assessment of where Ukraine stands in this
new very competitive, demanding and dynamic international
environment
Give some examples of strategies of different countries are
using to deal with the challenges
Stimulate thinking about some of the key strategic issues
Ukraine needs to focus on to improve its competitiveness in
this context
Successful strategies depend on leadership and on
good coordination between private sector, civil
society and government
That requires developing a common vision, and
strong implementation and monitoring capability
End
Carl J. Dahlman
Luce Professor of International Affairs
and Information Technology
Georgetown University
Email: cjd42@georgetown.edu
Telephone: 202 687 8045
©cjd
Ukraine’s Knowledge Economy
Index Compared to other Regions
Ukraine: Current vs 1995
Ukraine and Russia