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  1. Diversification, Innovation and Growth W. F. Maloney, World Bank Knowledge Economy Forum Berlin, May 7th, 2010

  2. Three Issues • Diversification vs. innovation and growth • Doing what we do better • Natural Resources • Export Quality • 2 queries on thinking about the innovation environment Pasteur: “Chance Favors the Prepared Mind”

  3. Diversification: Where are we?

  4. ECA: Some countries likely to diversify, some not $US 1985

  5. What does this relationship mean? • From diversification to income: • Specialization leads to gains from trade (Ricardo, Krugman) • Diversified portfolio dampens sector specific shocks • Only clear negative effect from Natural Resources • For small countries, there must be a trade off of the two • Other ways of managing shocks? Sovereign wealth funds? • From income to diversification: • Taste for diversity-if opening new sectors is costly then economy will become more diverse with income. • Diversification an outcome of development

  6. What does this relationship mean? • Co-movement of diversification and income? • Discovery of new goods (ideas) embodies TFP growth • Theoretically, no better or worse than productivity gains in existing sectors. • But, becomes partly an issue of innovation

  7. Diversification as a specific innovation policy is tricky • Diversification an outcome of difficult to predict productivity shocks/opportunities? • Exports very concentrated and unsystematic (Easterly et al 2009) • Following existing patterns not obviously helpful • Market saturation? Past as prologue? • There are market failures in experimentation- discovery • But these appropriation externalities held in common with ongoing products as well • Often emerge from existing industries -Nokia • Innovation policy • Be prepared to take advantage of advances in what we do • Be prepared to take advantage of new products • Mixed support products (e.g.Tekes)

  8. Eventually, development may be about doing fewer things better ] W. F. MaloneyDevelopment Economics Research GroupWorld Bankwww.worldbank.org/laceconomist/wmaloney Source: Klinger and Lederman 2002

  9. Doing what Wedo Better

  10. 1. Natural Resources: No curse, but lots of heterogeneity in performance LeamerMeasure: Net Exports of NR/Worker Resource Scarce Resource Abundant

  11. 2. Export Quality: A new lens on resources and growth • Quality measured by price (unit value) • Huge variance within products (Schott 2004) • Standardize:

  12. Quality rises with development Schott (2005) Krishna and Maloney 2010

  13. Quality Growth: Are we are converging to the quality frontier? Krishna and Maloney 2010

  14. Convergence appears to be related to ability to place risky bets Figure 1: Unit Values: Drift and Standard Deviation, Unconditional Quantile Regression 1990-2001 Growth in Unit Value vs Standard Deviation of Growth Growth Rate Standard Deviation Krishna and Maloney 2010

  15. This appears to be related to: • Financial Intermediation: (credit by deposit money banks as a share of GDP) • Innovation Effort: (R&D/GDP) • inability to resolve market failures/indivisibilities around innovation and R&D leads to less complex, less risky products

  16. 2 queries on the Innovation Environment

  17. 1. A problem of accumulation of knowledge, or of accumulation in general? TFP vs Capital Intensity TFP K/L Source: Rodriguez y Maloney (2005)

  18. Returns to R&D vs Distance to the Frontier: Complementary factors are key Distance to the economic frontier (z) Poorercountries- lowcomplementarities Advancedinnovators Distancetothetechnologicalfrontier Peru 1996-2000 Middleincome Fuente: Goñi, Lederman y Maloney (2010)

  19. 2. What type of innovation is necessary?

  20. The national innovation system needs to be viewed very generally Innovation “supply” Demand Side Accumulation Capital Universities/ Think tanks/CTs The firm Knowledge Barriers to Innovation Market Failures (&IP) Seed/Venture capital Poorly articulated S&T system (including discovery, oversight) Labor regulation Deficient human capital Barriers to Accumulation Credit Entry/Exit barriers Business/Regulatory Climate Barriers to Demand Macro Context Trade Regime International Marketing Externalities Competitive Structure Entrepreneurship

  21. Fin