Competitiveness FDI trade innovation Competitiveness FDI trade and

Competitiveness, FDI, trade & innovation Competitiveness, FDI, trade and innovation: A global perspective Sanjaya Lall Professor of Development Economics University of Oxford sanjaya. lall@economics. ox. ac. uk

Competitiveness, FDI, trade & innovation International competitiveness has become an essential precondition for growth. The context for competitiveness is changing significantly, rapidly and irrevocably. The change is driven by technical progress, but its impact is very uneven. It is uneven across activities, regions, countries and particular groups within countries. This is driving a wedge between the technological ‘haves’ and ‘have-nots’ in the developing world – and it needs to be countered. 2

Competitiveness, FDI, trade & innovation I illustrate this for manufacturing industry with data for production, exports and technological performance for 1980 -2000 Technological performance is shown by dividing production and exports into categories according to the sophistication of technology – a simple but useful method I also consider some structural ‘drivers’ of competitive performance: skills, FDI, domestic technological effort, licensing and ICT infrastructure. This is for benchmarking reasons – it is NOT meant to reduce the importance of other factors like macro or trade policy, governance, business costs and so on. 3

Competitiveness, FDI, trade & innovation Let me start with some basic ‘scene setting’ 4

Competitiveness, FDI, trade & innovation Globalization is driven by rapid and pervasive technical change The ‘death of distance’ opens opportunities: new markets and narrower forms of specialization in ‘fragmented’ production & global value chains Innovation changes structure of industrial and export activity, shifting the dynamics of different activities – the key to success is good ‘positioning’ to exploit these changes The pace and spread of innovation make it imperative to constantly access new technologies, but raises minimum entry levels in capabilities, institutions and infrastructure 5

Competitiveness, FDI, trade & innovation Recent growth of hi-tech & other manufacturing production in 1980 -98 (US National Science Board) 6

Competitiveness, FDI, trade & innovation Technical change alters the organisation of production and trade Harnessing innovation and globalization needs more than opening up to trade or FDI: it needs building capabilities to use new technologies efficiently and moving up the technology scale Thus: globalization offers new markets and mobile resources but competing for these calls for more than primary resources or cheap labour – it requires the ability to harness innovation Globalization raises the role of MNCs in innovation, technology transfer, production and particularly exports. Around 2/3 of world trade is handled by MNCs, about 1/3 is within companies 7

Competitiveness, FDI, trade & innovation Capability building in developing countries is not ‘innovating’ at the frontier It is building the specialized skills, technical knowledge, organizational structures and inter-firm linkages to seek, absorb, adapt and improve technologies. This requires strengthening the institutional base: the ‘national innovation system’ The interacting complex of technology (MSTQ, R&D, technical services, extension), education, training and other institutions that help enterprises to become technologically capable The NIS is as important (or even more so) for less industrialized as it is for more advanced economies: they find it harder to cope with new technologies and to tap dynamic global value chains 8

Competitiveness, FDI, trade & innovation Now consider global patterns of export competitiveness and dynamism 9

Competitiveness, FDI, trade & innovation Evolution of MVA shares by development 10

Competitiveness, FDI, trade & innovation Technological structures: a simple categorisation Primary products Manufactured products RB (Resource based): e. g. food, wood & forestry products, processed minerals, petroleum products LT (Low technology): e. g. textiles, clothing, footwear, toys, sports goods, simple metal products MT (Medium technology): e. g. automotive products, TVs, machinery, chemicals, steel HT (High technology): Advanced ICT and electricals, pharmaceuticals, aerospace, precision instruments 11

Competitiveness, FDI, trade & innovation Growth rates of MVA by technology in industrialized and developing countries 12

Competitiveness, FDI, trade & innovation Developing countries’ industrial structure still lags ICs but is catching up rapidly 13

Competitiveness, FDI, trade & innovation Technology structure of MVA in developing regions (1980 -2000) 14

Competitiveness, FDI, trade & innovation Performance in developing world is skewed: regional shares of global MVA, 1980 -2000 (%) 15

Competitiveness, FDI, trade & innovation LAC was largest regional loser of MVA shares, followed by SSA 16

Competitiveness, FDI, trade & innovation Now consider export competitiveness 17

Competitiveness, FDI, trade & innovation Manufactures drive trade: values of world exports, 1985 -2000 (current $ billion) 18

Competitiveness, FDI, trade & innovation Shares of world manufactured exports by technology: note when RB, MT and LT shares peak (1976 to 2000, %) Resource based Medium Technolog y High Technolog y Low Technolog y 19

Competitiveness, FDI, trade & innovation Growth rates of manufactured exports by technology 20

Competitiveness, FDI, trade & innovation Role of HT is more evident in the 50 fastest growing world exports over 1990 -2000 (% shares) 21

Competitiveness, FDI, trade & innovation How are developing countries doing in this dynamic scene? Surprisingly well… 22

Competitiveness, FDI, trade & innovation Growth rates of industrialized and developing countries over the past two decades (% p. a. ) 23

Competitiveness, FDI, trade & innovation Developing world’s market shares by technology 24

Competitiveness, FDI, trade & innovation And the values of its exports: HT now far exceeds LT and RB (current $ billion) 25

Competitiveness, FDI, trade & innovation But developing world export performance is also highly concentrated (world market shares) 26

Competitiveness, FDI, trade & innovation Shares of developing world exports by technology 1985 2000 27

Competitiveness, FDI, trade & innovation 10 countries (of which, 8 from E Asia) account for over 75% of developing world manufactured exports ($ m. ) 28

Competitiveness, FDI, trade & innovation Industrial performance is clearly diverging, but why? Insufficient liberalization, macro instability and poor governance account for part But they don’t account for it completely – the data don’t suggest that liberalization by itself leads to competitive success Export growth and upgrading require other factors: careful strategy to build domestic capabilities by creating appropriate skills, raising technological effort, and tapping into global production systems via FDI 29

Competitiveness, FDI, trade & innovation Some simple indicators of these structural drivers of industrial competitiveness 30

Competitiveness, FDI, trade & innovation R&D financed by productive enterprises ($ per capita) 31

Competitiveness, FDI, trade & innovation R&D financed by productive enterprises at the national level (% of GDP, 1997 -2000) 32

Competitiveness, FDI, trade & innovation Skills: tertiary technical enrolments (per 1000 people) 33

Competitiveness, FDI, trade & innovation National tertiary technical enrolments (1985 -98, % population) 34

Competitiveness, FDI, trade & innovation Annual inward FDI (US$ per capita) 35

Competitiveness, FDI, trade & innovation Developing world FDI distribution 10 COUNTRIES GET 80% OF FDI IN THE DEVELOPING WORLD: AND THEIR SHARE IS RISING OVER TIME LARGE PART OF RECENT FDI, PARTICULARLY IN LAC, IS NOT IN MANUFACTURING OR EXPORT-ORIENTED ACTIVITIES: THE MAJOR EXCEPTION IS MEXICO 36

Competitiveness, FDI, trade & innovation Reliance on FDI varies greatly in EA (FDI % of gross domestic investment) 37

Competitiveness, FDI, trade & innovation Technology licence payments abroad (US$ per capita) 38

Competitiveness, FDI, trade & innovation Conclusions: East Asian lessons There are many ways to build export competitiveness MNCs play a critical role in all strategies but countries access their technologies, skills and marketing prowess in different ways Korea and Taiwan used arm’s length strategies to tap FDI, building domestic skills, innovation and institutions by coherent industrial and technology strategies. Singapore used FDI targeting with skill & infrastructure development to plug into global production and upgrade rapidly. These have the best technology systems New Asian Tigers had weak capabilities, shallow technology base, inadequate skill creation systems. They are upgrading rapidly but many gaps remain All strategies have worked well so far, but their sustainability remains to be seen… 39

Competitiveness, FDI, trade & innovation Autonomous strategies are less feasible, more risky: Acceleration of technical change Spread of global production networks Problems in managing selective industrial strategies New international rules of the game FDI dependent countries are becoming less passive as policies grow more standardized and governments realize need to target Importance of building strong technology systems is increasingly accepted as need to move up technology ladder and stay ahead of competition mounts (threat of China galvanizing EA and other regions) Least developed countries unduly neglect technology policy and institutions: even low technology and resource based industrialization needs higher capabilities and stronger technology bases 40