Technology Policy for a Detour to Escape the Middle Income Trap: Schumpeterian Reflections on the Asian experience

1. Technology Policy for a Detourto Escape the Middle Income Trap:Schumpeterian Reflections on the Asian experience Keun Lee Prof. of Economics, Seoul Nat’l University Director, Center for Economic Catch-up www.keunlee.com; www.catch-up.org;

2. Motivating Question :Why Catching up rare and not sustained?-> Middle Income country Trap?

3. Middle income country trap: Per capita in 2000 Dollars, 1980-95

4. Why the Middle Trap important? To give hope for the Low incomers who are trapped with the adding-up problem. Eg) China needs to go beyond the low-end goods based growth, so that it may leave rooms for other low income countries

5. Solution for the Middle Trap= Detourrather than direct emulationor static specialization

6. Can take a Detour if you have a high driving skill , when the straight road is jammed Straight Road: but traffic jam (adding-up problem) 1980 Detour: No jam but rough & winding road -> need skill (tech. capability)

7. Trend of the Income Levels as Percentage of that of Japan: • Korea, Taiwan: No catching up in 60s, 70s:-> only from 1980s: • what happened? Just more R&D, in which sector?

9. detour: short cycle technology sectors Cycle time = speed of change in the knowledge base of a technology Short cycle tech = old knowledge quickly obsolete/useless + new knowledge tend to emerge more often -> less disadvantageous for the latecomers => technological sectors with less reliance on the old technologies but with greater opportunity for emergence of new technologies, Measured by the mean citation lag = the time difference between the application year of the citing patent and that of the cited patents (Jaffe and Trajtenberg, 2002).

10. Intra-national Citation in Patents (~self-citation)

11. Criterion for Technological Specialization

12. Catching-up (Korean) vs. Mature (US) firms: The former in short cycle technologies

13. Catching-up (Korean) vs. Mature (US) firms: The former in low self-citation (localization) USA Firms

14. Regressing growth onto National Innovation systems: Asian 4 as benchmark Similar Results with Firm-Level Data

15. Detour => short cut Cycle Time of Korea & Taiwan Patents getting longer recently

16. How: From Middle to High Income Countries

17. Now, How to drive the Detour:Implementation Strategies The detour is not just smooth and easy; -> requires certain level of absorption and technology capacity, not only firm-level but also at the national-level

18. 3 Steps along the Detour Acquiring Design Capability (to move beyond OEM/assembly) 2) Targeting/Entering the mature /low-end segment of short cycle Sectors 3) Leapfrogging into New/Emerging Technologies in the Short-cycle Sectors

19. Stage 1: Acquiring Design Capability: a. Hyundai's development of engine as Mitsubish refuse to transfer its latest engine technology (from 1984 to 1992) -- Co-dev’t contract with a specialized R&D firms, Ricardo Co. UK. tried more than 1,000 proto types until success after 7 years .  b. 256 K to 64 M Dram by Samsung   -- Samsung chose to develop its own design technology for 256 or higher K Dram as it was not easy to buy the design -- overseas R&D outposts in Silicon Valley and reverse brain drain c. Taiwan: electronic calculator in mid 1980s : went around the world to study LSI applications, and combined what they saw and what they learned from Japanese suppliers. => Policy Tools: Tariffs and under-valuation important.

20. Stage 2 Entering Mature Segment of Short cycle Sectors By public-private partnership (PPP): eg) Telephone switch development in Korea & China Government: R&D by Public labs (ETRI in Korea) Government: Market protection or Procurement ( local telephone authorities) Private: Manufacturing (private Co’s: Samsung, LG in Korea) India & Brazil had the same development but not sustained without initial protection; => Infant protection still matters, together with joint PP R&D

21. Stage 3: Leapfrogging into Emerging Technologies eg) Korea: Digital TV, mobile phones (CDMA) ; China: 3G TD-SCDMA, Photovoltaic; electric vehicles G: R&D by Private & public labs G: Procurement or Standard Policy P: Manufacturing Policy tools: Standards policy matter, eg), exclusive standards in wireless.

23. Stages of Knowledge Learning/ Creation and Catch-up operational skills production/ process technology design technology Learning Objects Product Development technology Learning Learning by by producing/ in-house R&D Co-development Mechanism doing organizing Overseas R&D strategic alliance following foreign P&P R&D designs

24. Three Patterns of Technological Catch-up(Lee & Lim 2001) Path of the Forerunner : stage A --> stage B --> stage C --> stage D Path-Following Catch-up : stage A --> stage B --> stage C --> stage D eg. PC, some consumer goods, and Machine Tools Stage-skipping Catch-up (leap-frogging I) : stage A ---------------> stage C --> stage D eg. Hyunda's fuel-injection engine (cf. carburetor engine) Samsung' 64 K D-Ram production technology; 256 K D-ram design technology Tlephoneswitch in in China Path-Creating Catch-up (leap-frogging II) stage A --> stage B --> stage C' --> stage D' eg. CDMA development, digital TV ( Notes: C and C', represent competin technologies.)

25. More Examples Late Entry: Entering Mature Segment of Short cycle Sectors: eg) High speed Train in China, India’s IT service, Middle sized Jets by Brazil Entry into notebooks by P-P in Taiwan Suggestion: Nigeria can build oil refinery, rather than keep exporting crude oils Leapfrogging into New/Emerging Segments of Shorter-cycle Sectors: eg) Photovoltaic industry in China, Electric Vehicles by China Ethanole or Biofuels in Brazil

26. China and the Middle Trap? • Average Cycle Time of China’s top 30 class US patents • = 8.1 years (2000-2005 yrs) • Cf) Korea and Taiwan = 7.7 yrs (avg of 1980-95) • Brazil & Argentina = 9.3 yrs (avg. 1980-95) • China more similar to Korea & Taiwan • than to Brazil and Argentina

27. In concludingGovernment activism for 2 reasons1) to handle not market failure but capability failure in R&D,2)because they are below the frontier, and less uncertainty with targeting

28. Not market failure but Capability failure in R&D Market failure: more or less R&D than optimal (assumption = latecomers are capable of doing R&D) Capability failure = afraid of R&D = zero R&D • Need not only the provision of R&D money but also various ways to cultivate R&D capability itself, eg) joint public-private R&D consortium

29. When not on the frontier, less uncertainty of targeting latecomers are not on the technology frontier but have clearly defined (existing) technologies or projects to emulate, -> better chance of success if they mobilize all public and private resources Assumption behind the caution or warning against technological targeting is that countries are on the frontier. However, many latecomers rely on imported technologies, but they are often charged with monopoly prices. Eg) Telephone switches in Korea & China high speed train by China

30. In concludingShould allow ‘detour’ for latecomers!cf) than forcing direct replication of the developed Korea used to be more protective; but now most open with FTAs with US: 2) Lowest protection of IPRs in Korea, Taiwan but one of the highest level of IPR protection 3 ) Big Bang vs. Gradualism in system transition Detour -> capability up -> can afford to open cf) no detour -> no capability up -> cannot open

31. Tariffs in Korea and of Asymmetric Opening (Source: Shin 2011).

32. Composition of Major Export Items, (% in total Exports)

33. Successive Entries: Composition of sales in Samsung 2.4 1 1.1 3 1 1.6 Source : Chang (2003), Notes: numbers are share percentages in sales

34. Gracias! Meu Amigo! Obrigado! Thank you! 謝謝大家 감사합니다

35. References (www.keunlee.com) • Lee, Keun, 2012, a book manuscript, “Knowledge and Detour for Sustained Catch-up: Schumpeterian Recipe to escape the Middle income trap.” • Lee, Keun, Chaisung Lim, and Wichin Song (2005), "Digital Technology as a Window of Opportunity and Technological Leapfrogging: Catch-up in Digital TV by the Korean Firms”, Inter.J. of Tech. Management, Vol. 29, 1/2, pp. 40-64. • Lee, Keun, “Making a technological Catchup.” Asian J.of Tech. Innovation, 2005. • Mu, Qing, and Keun Lee (2005), “Knowledge Diffusion, Market Segmentation and Technological Catch-up: The Case of Telecommunication Industry in China”, Research Policy.

36. Top 10 Classes in Patenting by G5 vs Korea-Taiwan

37. Top 10 Classes in Patenting by G5 vs 8 middle-income countries

38. Knowledge and firm performance III: with 3 variables together

39. Every country for IT’s? Another Adding-up? Analogous to the adding-up problem or risk of specialization in labor-intensives by all low-income countries. Big difference: 1) specialization based on factor endowments : fixed with few opportunities for change, 2) specialization in short-cycle technologies : no fixed list of technologies but rather specializing in a field or sector where new technologies always emerge to replace old ones, as existing technologies become obsolete soon.