1.3.2 Trade and technology

This section discusses how the approach to trade issues associated with innovation studies relates to developing countries. It has three parts. The first deals with background. It recalls that development economics has always been concerned with relationships to the international economy as a central theme, and that many influential approaches to economic development have incorporated important assumptions about technological factors, albeit implicitly.

The second part argues that the shift from import-substituting industrialization to more open-economy models of development, has made innovation studies more relevant to industrialization policies in developing countries. The third part sets out a rough and ready typology of the technology policies which accompany industrialization in an open-economy context.

1.3.2.1 The background: technology factors in industrialization theories

Development economics is characterized by concern with changing the relationship of countries to the international economy. The transformations required have often been 'technological'. For example, learning curve arguments were implicit in List's espousal of the infant industry argument as a basis for protectionist policies (List, 1844). Preobrazhensky (1926) addressed this issue during the course of the Soviet Debate on Industrialization in the 1920s. In discussing the choice between importing the means of production or making them at home, he refers to the possibility of 'improving and cheapening our own products' (Preobrazhensky, 1926).

Similarly post-war writers on development frequently rationalized their underlying dissatisfaction with traditional trade patterns by appeal to 'technology' arguments. Rosenstein-Rodan's 'big push' (Rosenstein Rodan, 1943) and the Nurkse formulation of 'balanced growth' (Nurkse, 1958, Chapter 1), were both in essence responses to problems of technological economies of scale. Prebisch (1950, inter alia) was less specifically concerned with infant industry arguments, but technological factors played a major role in his terms of trade analysis. Prebisch believed that the welfare gains from technological change in the world economy would mainly benefit the centre (i.e., the industrialized countries). Thus, increasing productivity in the oligopolistic industrial sectors at the centre would result mainly in increased profit margins and increased real wages in the centre's industries; whereas technological change in agriculture and primary production, where producers are inevitably price-takers, would benefit consumers and user industries mainly in the centre economics. Differential direct impacts of technological change also played a more direct role in the alleged tendency of the terms of trade to turn against the periphery, through product innovations (like the development of synthetic materials) which substituted for periphery exports.

The Prebisch inheritance passed to the Latin American dependencia school, which criticized Prebisch for failing to see that protected industrialization in the periphery would produce new patterns of technological dependency in the protected industries of Latin America. Technological dependency ensured that the biased distribution in gains from trade which had concerned Prebisch would simply be replaced by a biased distribution of gains from technological change, because of appropriation of technologies of production by industries in the centre. Furthermore, according to the technological dependency school, there were reasons to expect that these tendencies would be self-perpetuating (see for example, Cooper and Sercovich, 1971). There were different ways to account for this tendency. A purely descriptive approach, which had little to offer from the normative point of view, simply listed the different ways in which availability of centre technology would substitute for development of domestic technological capability. A more normative approach (surveyed in Cooper, 1980) focused on reasons why market forces and the institutional context in the periphery would likely result in sub-optimal investments in local technology. Both lines of argument were subsequently overshadowed by empirical research which showed the existence of considerable domestic technological capability in circumstances where dependistas had predicted that it would be absent (e.g., Katz, 1987 and Lall, 1984a).²⁶

It is probably fair to say that the early post-war intellectual history of development economics was characterized by a series of swings from interventionist, 'delinking' ideas, to liberal open-economy proposals with occasional attempts at superordination and reconciliation of the need for growth and accumulation,²⁷ and the exigencies of short-run allocative efficiency. In these arguments, the technology factor came in repeatedly mainly on the side of intervention and infant industry. In fact, many of the arguments that appear today in the innovation studies literature have long been present in the writings of development economists.

1.3.2.2 The shift from import substitution to export promotion

Despite the repeated use of technological factors to justify various types of import-substitution policies, the approach to technology policy associated with import substitution was in many ways essentially defensive. The case of Indian technology policy in the 1960s and 1970s gives a reasonably representative picture of the way technology policy was approached under import-substituting, closed-economy conditions.²⁸ In particular it illustrates the relatively limited concern with technological change, which was common at the time.

From the late 1960s Indian technology policy-makers were increasingly seized with two main ideas: first, that innovative technologies licensed to Indian producers were often the source of monopolistic advantages to the licensers (a straightforward extension of the Schumpeterian innovative monopoly to international markets); and second, that ready availability of technology on licence would simply substitute for the development of technologies at home, and thus 'perpetuate technological dependence'. The response to the first issue was to set up a control system, which was largely bureaucratic, and involved the scrutiny of all proposals for technology licensing to see that the payments proposed under various headings (royalties, expatriated profit, input prices, and technical assistance) were within acceptable limits.

The second issue was less amenable to bureaucratic solutions. It was dealt with by requiring various Indian state industrial laboratories and other authorities to guarantee that no alternative Indian technology was available. Furthermore, there were checks to prevent 'repeated' technology imports, that is importation of the same or similar technologies by more than one Indian firm.

Whatever the conceptual background of Indian policy, it was unsatisfactory in important ways. There may have been some success in controlling various types of monopolistic pricing, but if so it came at the cost of long bureaucratic delays in processing technology agreements through the various Ministries. It is not clear whether the attempt to encourage the development of Indian technological capabilities worked at all. In any case, it is likely that it was wrongly directed: the key objective is to encourage development of technological capability within firms, so as to support their ability to compete in innovative sectors, and it is not clear that this would be facilitated by preventing importation of foreign technology in areas where Indian substitutes exist. On the contrary, there is growing empirical evidence of complementarities between importation of technology and development of local technological capabilities. Restrictive policies probably had the main effect of slowing importation of foreign technology just at the time when India was concerned to develop technologically intensive producer goods industries. It is curious that the objective of industrial self-sufficiency, which was dominant at the time, gave priority to producer goods industries, which were bound to depend importantly on imported technology, since they do so even in highly industrialized countries. It could be argued that there is an incipient contradiction between an industrial policy directed towards increasing autonomy and the simultaneous search for greater 'technological independence'.

The main point about the Indian case is that the approach to technology policy was very limited. It was concerned in the main with limiting the damage which might result from rent-taking by foreign enterprise, and only to a limited extent with the development of local capability. In practice the bureaucratic devices designed to protect domestic technological capability had very little effect. Much the same point could be made of many Latin American technology policies during this period.

As far as import-substituting economies were concerned, the shift towards open-economy industrialization and export orientation radically changed the terms of reference for technology policies, and added new relevance to the findings of innovation studies in the industrial economies. There were two key changes.

First, export orientation implies that industrialization policy must help firms in the home country to enter global markets, which in many sectors are oligopolistic. There is no need to underline in general what a radical change this is from the circumstances of import-substituting industrialization. A particular implication is that in the context of export-promoting policies monopolistic control of information by technology suppliers, whilst still often a reality, does not necessarily lead to the transfer-pricing practices which were so much a characteristic of the import-substituting case. At the least licensees- the recipients, or purchasers of technology-have much stronger incentives to avoid conditions which permit transfer pricing. Under import-substituting regimes, licensees in highly protected markets can afford to accept conditions that facilitate transfer pricing by suppliers, since all that is involved for them is a smaller share in the monopolistic rents accruing to an enterprise with unique advantages in a protected market. Provided they get some of the rents, they are likely to improve their profitability. But there is no such cushion of rents under the more competitive conditions of global markets. Consequently, one of the major concerns of policy under the import substitution regime is no longer relevant.

Second, when firms seek a place in a global industry they need to be concerned with more than just the problem of initial entry. They also have find ways to sustain themselves in markets where, in varying degrees depending on the sector, there is innovative competition. This usually means that they must have access to relevant technological capabilities to cope with continuing innovation in the international market. Of course, this situation simply does not arise under import-substituting conditions, where the need for technological dynamism was generally much less pressing. From what we know of about situations in countries that have succeeded in manufacturing export markets-Japan in an earlier period, the Southeastern Asian NICs more recently-policies in each case have focused on using technology transfer arrangements with foreign enterprises in ways which help to cumulate relevant technological skills in the local firms. Not surprisingly, concerns with the costs of technology, in the forms of monopoly rent, have been of secondary importance.

1.3.2.3 Broader implications and a typology

In the open economy context, issues of innovative competition and imitation have direct implications for industrial policy.

The starting point is the observation that the incidence of innovative competition varies between sectors-and also varies within sectors, since older products sometimes remain in competition to serve lower income segments of the market. These inter- and intrasectoral differences are of considerable importance. Entry into international markets where there is some degree of innovative competition requires that firms should be able to meet some fairly exacting conditions. They must have sufficient technological capability to obtain access to the technologies required; and they must be able to build on these capabilities sufficiently to keep up with subsequent process and product changes. The fact that conditions of innovative competition, are less present or less exacting in some sectors or parts of sectors than in others means that entry opportunities are not limited to firms, or countries with the best endowments of technological capacity, but that opportunities exist for less well-endowed firms. Tentatively we might distinguish three scenarios for countries attempting export-oriented industrialization.

1. Some countries have started industrialization in technologically undemanding sectors, and then, after accumulating a wider range of capabilities, have moved up to technologically more and more advanced sectors characterized by increasing intensity of innovative competition. The clearest example today is South Korea; Japan went through a similar cycle. China, or at least parts of China, may be starting such a pattern. Korea illustrates the potential of this stepwise process: over the 20 years from 1969, exports by volume grew at an annual rate of 15%. Real wages grew at 7% per annum, as did real value added per worker. Thus, profit's share in value added was more or less constant. The increase in labour productivity was facilitated by a shift from low to high value-added types of production, characterized by increasing degrees of innovative competition.

2. Other countries have entered manufacturing trade successfully, but have not achieved the step up to higher levels of innovative competition that Korea has managed. They have kept up with international technological change. Exports have grown but less rapidly and less sustainedly than in Korea. Hong Kong is a case in point. There has been a much less spectacular growth in productivity and also in real wages. Wage pressure on profits' share has been a problem from time to time. There have been periods when real wages in Hong Kong have fallen, probably in response to a slow down in productivity growth.

3. In yet other countries, the large majority of developing countries in all probability, where entry into manufacturing trade has been in sectors or subsectors with a low degree of innovative competition, competitiveness is based on low real wages and relatively low rates of productivity growth are required. Many countries have shifted into a pattern of this kind after adjusting out of the import-substitution policy. Chile seems a particularly clear example. Entry on these terms is evidently much less demanding in terms of technological capability than in the preceding cases, but the economic and social outcomes are less favourable.

This differentiated pattern of entry is not stable. In a world of innovative competition matters do not stand still for long. There is a tendency for areas of production which were hitherto calm backwaters of steady technology and fairly predictable price competition to be caught up in new rounds of innovative competition. When that happens, success depends on whether existing producers possess the technological capabilities needed to imitate process and product innovations. If they do not, they may be forced out of international markets, or they may hang on by cutting costs through real wage reductions. This pattern seems to be present in a number of low-wage sectors in developing countries. Successful industrialization depends increasingly not only on efficient production at today's technology and relative price patterns but also a capacity to keep up with an often unpredictable pattern of technological change. The success with which countries do this affects importantly the welfare implications of export-oriented industrialization. High rates of technological change permit increases in real wages without adverse implications for profitability and the incentive to invest. Lower rates often imply that the only way to succeed internationally is by forcing the real wage down, and turning the functional distribution of income against labour.

Plainly what is in question is a specification of conditions for industrialization which go considerably beyond the relative factor availability conditions of Hecksher-Ohlin. There have indeed been attempts to expand that standard framework - for example by including 'human capital'. But the impacts of technology go much further than the human capital concept and cannot be contained in it without losing the essential point. What is needed is a wider framework that includes the standard Hecksher-Ohlin conditions at one end of the spectrum and the conditions of entry under innovative competition at the other. The Hecksher-Ohlin conditions would apply in sectors where technologies are more or less stable. Proposals along these lines have been made by Dosi et al. (1990).