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4th PH.D. SCHOOL ON INNOVATION AND ECONOMIC DEVELOPMENT GLOBELICS ACADEMY, LISBON, 2007. THE ROLE OF NATIONAL SYSTEMS OF INNOVATION FOR FDI IN DEVELOPING COUNTRIES. CHIARA FRANCO cfranco@spbo.unibo.it Ph.D. in Law and Economics, University of Bologna. AIM OF THE PAPER.

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slide1

4th PH.D. SCHOOL ON INNOVATION AND ECONOMIC DEVELOPMENT

GLOBELICS ACADEMY, LISBON, 2007

THE ROLE OF NATIONAL SYSTEMS OF INNOVATION

FOR FDI IN DEVELOPING COUNTRIES

CHIARA FRANCO

cfranco@spbo.unibo.it

Ph.D. in Law and Economics, University of Bologna

slide2

AIM OF THE PAPER

ANALYSIS OF THE WAY NSI IN A DEVELOPING CONTEXT PLAY A ROLE IN ATTRACTING FDI AND ABSORBING THEIR SPILLOVER EFFECTS

method

SPECIFIC RESEARCH QUESTION

METHOD

WHAT ARE THE INSTITUTIONS AND ORGANIZATIONS THAT INSIDE THE NSI FRAMEWORK ARE THE MOST IMPORTANT FOR THE INFLUENCE OF THE FDI INFLOWS, THE AMOUNT OF TECHNOLOGY TRANSFERRED AND THE ABSORPTION OF THEIR INDIRECT EFFECTS (SPILLOVER)?

  • REVIEW OF THE LITERATURE ON NSI IN DEVELOPING COUNTRIES AND ON THE RELATIONSHIP BETWEEN FDI AND INSTITUTIONS
  • EMPIRICAL APPLICATION THROUGH WORLDBANK DATABASE (KAM)
external sources fdi
EXTERNAL SOURCES: FDI

FDI inflows towards developing countries are regularly rising

Source: World Investment Report (2006)

external sources fdi 2
EXTERNAL SOURCES: FDI/2

Relevant economic weight for their economies (FDI stock as % of GDP)

Source: World Investment Report (2006)

structure of the paper
STRUCTURE OF THE PAPER
  • CRITICAL REVIEW OF SOME PAPERS WHERE THE CONCEPT OF NSI IS APPLIED TO A DEVELOPING CONTEXT
  • SUMMARY OF THE MAIN RESULTS OF THE FDI SPILLOVER LITERATURE FOCUSING THE ATTENTION ON THE INSTITUTIONAL CONTEXT
  • IDENTIFICATION OF INSTITUTIONS AND ORGANIZATIONS (INSIDE THE FRAMEWORK OF NSI) THAT ARE CRUCIAL FOR FDI
  • EMPIRICAL APPLICATION
1 nsi in developing countries
1.NSI IN DEVELOPING COUNTRIES

AIM: FIND OUT WHETHER IN WHAT WAYTHE ROLE PLAYED BY FOREIGN SOURCES IS TAKEN INTO ACCOUNT

  • THEORETICAL AND METHODOLOGICAL ISSUES OF NSI LITERATURE RELEVANT FOR DEVELOPING COUNTRIES
  • CRITICAL REVIEW OF STUDIES RELATED TO THE CONCEPT OF NSI IN DEVELOPING COUNTRIES
slide8

A. METHODOLOGICAL AND THEORETICAL ISSUES

  • NSI literature adopts a SYSTEMIC APPROACH towards innovation

Firms do not innovate alone but they are part of a complex environment where institutions and organizations shape and guide their innovative efforts (Edquist 2004; Narula 2004)

  • A lot of definitions: Freeman (1987), Lundvall (1992), Nelson and Rosenberg (1993), Metcalfe (1995)….
  • COMMON POINTS:
  • Innovation process in a developed context
  • Important role given to linkages
  • Identification of the main functions: produce, use and diffuse innovations
slide9

RELEVANCE FOR DEVELOPING COUNTRIES

  • Innovation in developing countries is of different nature
  • Both institutions and organizations can be missing or inappropriate and the interactions with firms may be missing as well
  • Absorption function
slide10

B.CRITICAL REVIEW OF STUDIES RELATED TO THE CONCEPT OF NSI IN DEVELOPING COUNTRIES

(Viotti, 2001;Mathews 2001; Wong 1999; Lall and Pietrobelli 2003; Arocena and Sutz 1999; Gu 1999; Edquist 2001; Oyelaran-Oyeyinka 2005; Intarakamnerd 2002)

  • COMMON POINTS
  • Broad approach adopted
  • NSI as an ex-ante concept
  • - Importance of firm interaction with other non firm actors (universities, standard setting agencies, research institutes, private foundations, financing organisations, schools, government agencies)
  • - Importance of the effectiveness in learning
slide11

Absorption of foreign sources of technology: function and the institutional set up concerned with this function not properly identified

Exceptions:

Lall and Pietrobelli (2003): Sub-Saharan Africa;

“Even countries that import all their technology have to undertake significant, costly and risky effort to use the technology efficiently (National Technological System)”

Viotti (2001): comparison between Brazil and South Korea;

“National Learning Systems should be centered in the activities, institutions, and relationships, associated to learning, rather than to innovation.

Absorption and incremental innovation should, therefore, be the main focuses of studies of NLS”

Edquist (2001): System of Innovation for Development;

“for developing countries the generation of technological capability is primarily a matter of absorbing products and processes developed in other countries and deepening their knowledge about them over time”

2 fdi and spillover process
2. FDI AND SPILLOVER PROCESS

AIM: FIND OUT WHETHER AND IN WHAT WAY THE INSTITUTIONAL CONTEXT IS TAKEN INTO ACCOUNT IN THE FDI LITERATURE

  • SUMMARY OF THE RESULTS OF SPILLOVER LITERATURE
  • FOCUS ON THE RELATIONSHIP BETWEEN FDI AND INSTITUTIONS
slide13

A.SUMMARY OF THE RESULTS OF THE FDI SPILLOVER LITERATURE

RESULTS OF THE EMPIRICAL LITERATURE ARE MIXED BUT:

FOR DEVELOPING COUNTRIES INTERINDUSTRY SPILLOVER ARE USUALLY GREATER THAN INTRAINDUSTRYSPILLOVER (BLALOCK 2004, SMARZYNSKA 2002, KUGLER 2006) BECAUSE OF THE BACKWARD LINKAGE EFFECTS

HOWEVER ALSO IN THIS CASE THERE CAN BE NEGATIVE RESULTS:

Yudeva et al. (2003) for Russia

Merlevede and Schoors (2005) for Romania

Sasidharan (2006) for India

slide14

It is due to the fact that the positive results are not automatic consequences of the presence of Multinational Enterprises (MNEs) but they have to be accompanied by significant efforts of local firms in term of ABSORPTIVE CAPACITIES.

LITERATURE GAP: ROLE OF INSTITUTIONS

MY PERSPECTIVE: THEY ARE IMPORTANT IN AN INDIRECT WAY BY HELPING FIRMS IN BUILDING GREATER ABSORPTIVE CAPACITIES

  • HIGHER POSSIBILITY TO QUALIFY AS A SUPPLIER, HIGHER AMOUNT OF FDI INFLOWS
  • HIGHER POSSIBILITY TO TAKE ADVANTAGE OF FDI SPILLOVER WHATEVER IS THE CHANNEL CONSIDERED
slide15

NON FIRM SECTOR IMPORTANT FOR TWO REASONS (Narula 2004):

  • TO PROVIDE SKILLED AND EDUCATED WORKFORCE
  • TO PROVIDE A SORT OF R&D INFRASTRUCTURE (UNIVERSITIES, PUBLIC RESEARCH INSTITUTE) TO DIRECT TECHNOLOGY STRATEGY

EDUCATION

R&D CAPABILITIES

slide16

B.FDI AND INSTITUTIONS

  • IN THE LITERATURE (SEE BLONIGEN 2005 FOR A SURVEY) CONSIDERED ONLY:
  • LEGAL AND POLITICAL INFRASTRUCTURE OR MACROECONOMIC ENVIRONMENT
  • (tax systems, trade protection, easiness to create a company, lack of corruption, security of property rights, transparency, contract law)
  • ANALYSIS WITH RESPECT TO LOCATION CHOICE NOT LINKED WITH THE TYPE OF FDI AND MOTIVATIONS
slide17

LITERATURE GAP

NOT CONSIDERED THOSE INSTITUTIONS THAT CAN STRENGTHEN THE INNOVATIVE CAPACITY AT THE FIRM AND AT THE COUNTRY LEVEL

This may influence the flow of FDI and the amount of technology transferred.

Exception: IPR regime

Influence the composition of FDI

Maskus (2004), Smarzynska (2004)

Lall (2003): the need of a proper IPR regime varies by level of development

3 nsi framework broad definition oyelaran oyeyinka 2005
3.NSI FRAMEWORK (broad definition)Oyelaran-Oyeyinka (2005)
  • Political and legal structures
  • Basic and high-tech infrastructure
  • Science and technological knowledge base
  • Financial and incentive structure
slide19

IPR REGIME

R&D CAPABILITIES

EDUCATION

4 empirical application
4. EMPIRICAL APPLICATION

DATABASE USED: Knowledge Assessment Methodology DATABASE (WORLD BANK)

AIM: TO FIND OUT WHETHER AND TO WHAT EXTENT THE INSTITUTION AND ORGANIZATIONS IDENTIFIED IN THE PREVIOUS SECTIONS FULFIL THEIR FUNCTION (QUANTIFICATION OF NSI)

ANALYSIS OF CORRELATION MATRIX

slide21

30 COUNTRIES SELECTED BY GEOGRAPHICAL AREA

SOUTH AMERICA

Argentina

Brazil

Bolivia

Chile

Colombia

Ecuador

Paraguay

Perù

Uruguay

Venezuela

SUB-SAHARAN AFRICA

Angola

Botswana

Cameroon

Cote d’Ivore

Ghana

Kenya

Sierra Leone

Uganda

Tanzania

Zimbabwe

ASIA

Bangladesh

China

Hong Kong

India

Malaysia

Pakistan

Singapore

Thailand

Vietnam

slide22

32 VARIABLES SELECTED ACCORDING TO THE NSI FRAMEWORK

Scientific and technological knowledge base

Researchers in R&D, 2004 

Science and Engineering Enrollment Ratio, 2004

Science Enrollment Ratio, 2004

Gross tertiary enrollment, 2004

Professional and Technical Workers as % of the Labor Force, 2004

Total Expenditure for R&D as % of GDP, 2004 

Scientific and Technical Journal Articles, 2003

Patent Applications Granted by the USPTO, average for 2001-05 

High-Technology Exports as % of Manufactured Exports, 2004 

Political and legal infrastructure

Intellectual Property Protection, 2006Regulatory Quality, 2005 

Rule of Law, 2005 

Government Effectiveness, 2005

Control of Corruption, 2005

Financial and incentive infrastrucuture

Intensity of Local Competition, 2006

Domestic Credit to Private Sector (% of GDP), 2005

Cost to register a business % of GNI per capita, 2005

Availability of Venture Capital, 2006

Basic and high-tech infrastructure

Telephone Mainlines Per 1,000 People, 2004 

Internet Users Per 1,000 people, 2004

ICT Expenditure as % of GDP

slide23

ANALYSIS OF THE CORRELATION MATRIX (FDI INFLOWS AS %GDP,2000-2004 AVERAGE)

Scientific and technological knowledge base

Researchers in R&D, 2004  -0,09

Science and Engineering Enrollment Ratio, 2004 0,1

Science Enrollment Ratio, 2004 -0.02

Gross tertiary enrollment, 2004 0,04

Total Expenditure for R&D as % of GDP, 2004  0,403

Scientific and Technical Journal Articles, 2003, 0,53

Patent Applications Granted by the USPTO, average for 2001-05  0,241

Public Spending on Education as % of GDP, 2003 0,04

Political and legal infrastructure

Intellectual Property Protection (2006) 0,35

Regulatory Quality, 20050,86

Rule of Law, 2005 0,853

Government Effectiveness, 2005 0,917

Control of Corruption, 20050,82

Financial and incentive infrastrucuture

Intensity of Local Competition, 2006 0,13

Domestic Credit to Private Sector (% of GDP), 2005 0,33

Cost to register a business % of GNI per capita, 2005 -0,18

Availability of Venture Capital, 2006, 0,33

Basic and high-tech infrastructure

Telephone Mainlines Per 1,000 People, 2004  0,55

Internet Users Per 1,000 people, 2004, 0,43

ICT Expenditure as % of GDP 0,24

slide24

RESULTS

  • LOW CORRELATION WITH:
  • R&D RESEARCHERS
  • GROSS TERTIARY ENROLLMENT
  • SCIENCE AND ENGINEERING ENROLLMENT RATIO
  • PUBLIC SPENDING ON EDUCATION
  • ICT EXPENDITURE

FDI MOTIVATIONS

INSTITUTIONS AND ORGANIZATIONS OF NSI NOT EFFECTIVE

FIRM LEVEL TECHNOLOGY ABSORPTION (0,12)

slide25

ANALYSIS OF THE CORRELATION MATRIX BY COUNTRY GROUPINGS

  • SUB-SAHARAN AFRICA
  • NEGATIVE CORRELATION WITH ALL VARIABLES
  • ONLY SIGNIFICANT CORRELATION ARE WITH:
  • BASIC INFRASTRUCTURE
  • POLITICAL AND LEGAL INFRASTRUCTURE BUT NOT IPR (-0,35)

SOUTH AMERICA

HIGH POSITIVE CORRELATION WITH:

POLITICAL AND LEGAL INFRASTRUCTURE BUT NOT IPR (-0,002)

BASIC INFRASTRUCTURE BUT NOT HIGH-TECH

POSITIVE WITH SCIENTIFIC AND TECHNOLOGICAL BASE BUT NOT RESEARCHERS IN R&D AND SCIENTIFIC AND TECHNICAL JOURNAL

ASIA

HIGH POSITIVE CORRELATION WITH

ALL VARIABLE ESPECIALLY

IPR (0,7)

SCIENTIFIC AND TECHNICAL JOURNAL (0,8)

slide26

ANALYSIS OF THE CORRELATION MATRIX (FIRM LEVEL TECHNOLOGY ABSORPTION, 2004)

Scientific and technological knowledge base

Researchers in R&D, 20040,66

Science and Engineering Enrollment Ratio, 2004 0,42

Science Enrollment Ratio, 2004 0,16

Gross tertiary enrollment, 2004 0,322

Professional and Technical Workers as % of the Labor Force -0,13

Total Expenditure for R&D as % of GDP, 2004  0,577

Scientific and Technical Journal Articles, 2003, 0,67

Patent Applications Granted by the USPTO, average for 2001-05  0,57

Public Spending on Education as % of GDP, 2003 0,269

Prof. And tech. Workforce as % of Labour Force, 2004

- 0,13

Political and legal infrastructure

Intellectual Property Protection (2006) 0,72

Regulatory Quality, 2005  0,58

Rule of Law, 2005 0,133

Government Effectiveness, 2005 0,432

Control of Corruption, 20050,193

Financial and incentive infrastrucuture

Intensity of Local Competition, 2006 0,78

Domestic Credit to Private Sector (% of GDP), 2005 0,33

Cost to register a business % of GNI per capita 2005, -0,46

Availability of Venture Capital, 2006, 0,81

University company collaboration,2006 0,85

slide27

ANALYSIS OF THE CORRELATION MATRIX BY COUNTRY GROUPINGS

MORE SIMILARITIES THAN DATA RELATIVE TO FDI INFLOWS

HIGH CORRELATION WITH

UNIVERSITY COMPANY COLLABORATION

RESEARCHERS IN R&D BUT EXCEPT FOR AFRICA

TOTAL EXPENDITURE FOR R&D AS % OF GDP

SCIENTIFIC AND TECHNICAL JOURNAL

PATENT APPLICATIONS GRANTED BY THE USPTO

SCIENCE AND ENGINEERING ENROLLMENT RATIO

GROSS TERTIARY ENROLLMENT

IPR PROTECTION

(SUB SAHARAN AFRICA HAS THE LOWEST VALUES)

R&D CAPABILITIES AND EDUCATION ARE IMPORTANT

slide28

CORRELATION FDI INFLOWS – FIRM LEVEL TECHNOLOGY ABSORPTION

ALL COUNTRIES: 0,12

ASIA: 0,46

SUB-SAHARAN AFRICA: -0,67

SOUTH AMERICA: 0,20

GREATER POSSIBILITY OF BACKWARD LINKAGES

GREATER SPILLOVER POTENTIAL

slide29

MISMATCH BETWEEN NSI COMPONENTS ATTRACTING FDI AND THOSE NEEDED TO BUILDING ABSORPTIVE CAPACITY ESPECIALLY FOR SOUTH AMERICA AND SUB -SAHARAN AFRICA

DIFFERENT DEGREE AND AMOUNT OF TECHNOLOGY TRANSFER (SPILLOVER POTENTIAL)

DIFFERENT FDI MOTIVATIONS

NOT EFFECTIVENESS OF NSI IN FULFILLING THE FUNCTION OF ATTRACTING AND ABSORBING EXTERNALITIES COMING FROM FDI