Innovation and Competitiveness: A WBI Perspective Carl Dahlman ECA Innovation and Competitiveness Workshop World Bank In

1. Innovation and Competitiveness:A WBI PerspectiveCarl DahlmanECA Innovation and Competitiveness WorkshopWorld Bank Institute February 18,2004

2. Structure of Presentation • Knowledge and Growth in Historical Perspective • The Knowledge Revolution • Implications for Developing Countries • High Growth Performance and Knowledge Strategies • Benchmarking the World Knowledge Economy • Innovation in Developing Countries • Challenges to Developing Countries • Challenges to World Bank ©Knowledge for Development, WBI

3. World GDP/Capita and Population ©Knowledge for Development, WBI

4. Growing Differences in GDP/Capita

5. GDP/Capita Growth: Korea vs Ghana ©Knowledge for Development, WBI

6. Puzzle and Challenge • Puzzle: If it is so obvious that the effective use of knowledge is such an essential element of development,mwhy hasn’t it made a central focus of development strategy and advice? • Challenge: What do we need to do to bring it to the mainstream and how can we prepare Bank to provide relevant advice.

7. New Growth Patterns • In last decade there has been renewed interest in growth because: • Micro level evidence of increasing importance of new technologies • ICT revolution • Increased share of high tech products in exports • Managerial and organizational changes • Macro level evidence of changes of patterns and nature of growth among OECD countries • Surprisingly strong growth of US economy 1995-2002 • Reversal of trend towards convergence of per capita income among OECD countries. • This has lead to focus on “new economy” to understand what is going on

8. The Knowledge Revolution and “The New Economy” • Ability to create, access and use knowledge is becoming fundamental determinant of global competitiveness • Seven key elements of “Knowledge Revolution” • Increased codification of knowledge and development of new technologies • Closer links with science base/increased rate of innovation/shorter product life cycles • Increased importance of education & up-skilling of labor force, and life-long learning • Investment in Intangibles (R&D,education, software) greater than half of machinery & equipment investments in OECD. ©Knowledge for Development, WBI

9. The Knowledge Revolution -2 • Greater value added now comes from investment in intangibles such as branding, marketing, distribution, information management • Innovation and productivity increase more important in competitiveness & GDP growth • Increased Globalization and Competition • Trade/GDP from 38% in 1990 to 52% in 1999 • Value added by TNCs 27% of global GDP • Bottom Line: Constant Change and Competition Implies Need for Constant Restructuring and Upgrading ©Knowledge for Development, WBI

11. Changing Structure of Manufactured Exports Toward High Tech. Products in OECD • High technology industries increased from 18.8% in 1990 to 25.3% in 1999 • Medium high technology industries increased from 38.7% to 39.1% • Medium low technology industries decreased from 17.9% to 14.1% and • Low technology industries decreased from 24.3% to 21.3% Therefore roughly 2/3rds of manufactured exports from the OECD countries is high or medium technology

12. Implications for Developing Countries • The knowledge revolution is being led by the industrialized countries • Developing countries run risk of being left further behind. • There is also trend towards rising inequality with-in both developed and developing countries • Developing countries need to develop explicit strategies to take advantage of knowledge revolution to improve their competitiveness • Improve performance of traditional sectors • Leapfrog technologies • Develop new sectors • Address problems of increasing internal inequalities

13. Eight Fastest Growing Economies (constant 1995 US$) ©Knowledge for Development, WBI

14. Few Countries Have Sustained High Growth Rates over Long Periods • Most of these countries are or were until recently developing countries • They have followed successful knowledge strategies • Key elements of those strategies, in addition to appropriate macroeconomic management and good economic incentive regimes have been: • Massively tapping into global knowledge • Investing strongly in education • And now investing heavily in ICT

15. To Help Developing Countries to this the World Bank has Knowledge for Development Program • Policy Forums, Policy Conferences, Seminars, and Training on K4D • Policy Services on K4D, ranging from full fledged reports to customized policy notes • KAM Web-based tool on country knowledge assessments (do-it-yourself analysis) www1.worldbank.org/gdln/kam.htm • K4D Community of Practice www.K4DCommunity.org

16. Framework for Using K4D:Four Key Functional Areas • Economic incentive and institutional regime that provides incentives for the efficient use of existing and new knowledge and the flourishing of entrepreneurship • Educated, creative and skilled people • Dynamic information infrastructure • Effective national innovation system ©Knowledge for Development, WBI

17. KAM Methodology • KAM: 76 structural/qualitative variables to benchmark performance on 4 pillars • Variables normalized from 0 (worst) to 10 (best) for 121 countries • www1.worldbank.org/gdln/kam.htm • Basic scorecard for 14 variables at two points in time, 1995 and 2002 • Aggregate knowledge economy index (KEI) • Will illustrate with quick analysis of Slovakia ©Knowledge for Development, WBI

18. Armenia • INNOVATION: • Researchers in R&D / mil pop • Patents granted by USPTO / mil • Scient. & Tech. • Publications / mil pop. • ECON. INCENTIVE REGIME: • Tariff & Non-tariff barriers • Rule of Law • Regulatory Quality • INFORMATION INFR.: • Tel. Lines per 1,000 people • Computers per 1,000 people • Internet users per 10,000 people • EDUCATION: • Adult literacy rate • Secondary Enrollment • Tertiary Enrollment Armenia ©Knowledge for Development, WBI

19. ECA & the World: Knowledge Economy Index ©Knowledge for Development, WBI

20. ECA & the World: Innovation ©Knowledge for Development, WBI

21. ECA & the World: Innovation (absolute values) ©Knowledge for Development, WBI

22. New Area of Focus: Innovation Policy and Strategy • Conceptual framework for innovation in context of developing countries • Benchmarking countries in terms of their knowledge capabilities • Developing policy toolkit for policy advice in different archetypes of countries

23. Conceptual Framework for Innovation in Developing Countries • Innovation in developing countries should be understood broadly as something new to the local environment • Therefore distinguish two broad types of innovation • Local improvements through adoption of existing foreign technology • Development of technologies new to world

24. Innovation in Developing Countries • In developing countries the first type is the most relevant, the second is more rare, except for the most advanced developing countries • Developing countries will get a bigger economic impact from raising average local practice to best world practice than from creation of their own new knowledge • They will also get a bigger impact from raising average local practice to best local practice, therefore the tremendous importance of domestic diffusion

25. Sources of Domestic Innovation • Imports of capital goods, components, products or services • Products and services brought to and produced in country by foreign investors • Copying or reverse engineering of foreign products and services • Technological efforts of domestic or foreign firms, not all of which is based on formal R&D

26. Bias Towards Formal R&D Efforts • Policy makers in developing countries tend to focus on formal R&D and on publicly funded research efforts • They tend to focus on glamorous high technology sectors • They tend to focus on industry, to a lesser extent on agriculture, and very little on services • They also tend to focus on R&D inputs and outputs, not so much on entrepreneurship and management

27. Challenges • But, as noted earlier, focus of policymakers are not the most important elements of the innovation system in developing countries • R&D not the main source of innovation • High tech sectors are tiny part of developing economies • Service sector is largest share of economic activity • Successfully applying knowledge requires entrepreneurship, management, organizations,and also depends on economic and institutional regime • Need a better conceptual framework and policy tool kit that • differentiates across countries • Provides made to measure policy advice and specific project design

28. Benchmarking Countries in Terms of Knowledge Capabilities • Education and skills • Acquiring Knowledge • Creating Knowledge • Disseminating Knowledge • Applying Knowledge

29. Differentiated Strategies

30. National Innovation System • Needs to include not just R&D institutions and universities, but most critically firms and other knowledge institutions • Needs to include attention to the broader economic incentive and institutional regime, education and skills, and ICT-hence our K4D framework

31. Challenges to Developing Countries • Finding advantageous ways to plug into and compete successfully in the global system • Getting into global value chains • Moving up these value chains • Taking advantage of global knowledge to improve welfare • Preventive health • Agriculture • Developing differentiated advantages • Building on local resources • Building on culture and other intangibles • Strengthening non-traded services

32. Challenges to World Bank • How to strengthen analytical capability on innovation and growth • How to integrate this element into mainstream of Bank work: CAS, PRSPs, etc • How to learn from our experience and tha of others to design appropriate policy recommendations and project interventions for countries with different endowments and at different levels of development • How to develop appropriate skill mix and incentive mechanisms break down internal silos to be able to deliver on these complex projects. • How to break down the silos in our clients