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Technological Innovation, Entrepreneurship, and Development

Technological,entrepreeurship,development

By Wim Naudé & Adam Szirmai

What is the relationship between technological innovation, entrepreneurship and development? Is it better for developing countries to adapt existing technologies from richer countries rather than undertake or promote intensive research and development (R&D) of their own?

Novelty and New Gadgets
Technologies are ‘rules and ideas that direct the way goods and services are produced’.1 Technological inventions are new rules and ideas about what to produce and how to do it. Technological innovations result when new rules and ideas find practical use through being applied and/or commercialized by entrepreneurs.

Technological innovation contributes to higher levels of economic output and can deliver new goods and services that change human lives and capabilities. According to Lipsey et al:

People living in the first decade of the twentieth century did not know modern dental and medical equipment, penicillin, bypass operations, safe births, control of genetically transmitted diseases, personal computers, compact discs, television sets, automobiles, opportunities for fast and cheap worldwide travel, affordable universities, central heating, air conditioning…technological change has transformed the quality of our lives.2

Today we live in a technological ‘age’ and global economy where competition has become knowledge-based. In modern theories of growth and development technological innovation has taken the centre stage. Our love for novelty and new gadgets is thus based on practical and theoretical foundations. Moreover, there is growing interest in the relationship between technological innovation (and entrepreneurship) and how it can promote global growth and development.

Popes and Patents
Figure 1 provides a comparative overview of long-run development as measured by per capita income over the past two hundred years.

Fig-1

Figure 1 shows the rapid ‘take-off’ (or “Great Divergence”) in development that occurred in the West. Notable ‘classic’ scholarly works that have tried to explain this includes Adam Smith’s ‘The Wealth of Nations’ (1776) and Joseph Schumpeter’s ‘The Theory of Economic Development’ (1911); more recent contributions include amongst many others Landes (1999), Diamond (1997), Maddison (2001;2007), Morris (2010) and Acemoglu and Robinson (2013).

There is a consensus amongst these authors on the importance of knowledge, knowledge-spillovers and the incentive structure of societies to encourage and reward innovation and risk-taking by entrepreneurs. Knowledge creation and dissemination was boosted in 12th century Europe when the first universities were founded, roughly contemporaneously with a legal and administrative ‘revolution’ initiated by Pope Gregory VII. This ‘allowed the novelty-seeking and risk-taking capitalists to pursue their enterprise over a larger space’.3 The legal and administrative reforms provided stronger protection for property rights and adherence to the rule of law, laying the ground eventually for the idea of intellectual property rights (IPRs), and the patenting of new ideas. Historians have documented a burst of innovations in Europe following these reforms. Maddison (2001:51) writes that:

Increased use of water and watermills augmented power available for industrial processes, particularly in new industries such as sugar production and paper making. There was international specialization in the woollen industry…the silk industry was introduced in the twelfth century and had grown impressively in Southern Europe by 1500…There were improvements in mining and metallurgy which helped transform and expand European weapons production.4

Today, Europe and its ‘western offshoots’ remain the most innovative region of the world. Of the roughly 2 million patent applications filed annually, the bulk is from European and USA based firms (WIPO, 2011).

“Poorer countries may profit from the ‘advantages’ of technological backwardness. Through licensing, copying, reverse engineering and appropriating, they can access new technologies without bearing the risks of investment in new knowledge.”

Copying and Catching-Up
Figure 1 also shows that other regions of the world have started to catch-up. The rate of catch-up has perhaps been most pronounced in the case of Asia since 1973. Many have argued that poorer countries may profit from the ‘advantages’ of technological backwardness. Through a process of licensing, copying, reverse engineering and appropriating, they can access new technologies without bearing all the costs and risks of investment in new knowledge. Indeed, European countries during the Middle Ages benefited much from the copying and reverse engineering of technologies from the Middle and Far East, including from China. As Szirmai writes:

In the fourteenth century, China was the most advanced society in the world in terms of technology…. China knew firearms, blast furnaces, gunpowder, hydraulic clocks, magnetic compasses, advanced seagoing ships with moveable sails, navigation techniques, and the arts of printing and paper-making.5

Each of the different ‘Industrial Revolutions’ in the West have also been driven by adoption – copying – of foreign technologies.6

The benefits of copying technology for countries at earlier stages of development is that their entrepreneurs can focus on delivering incremental improvements to foreign designs, rather than the risky development of products and technologies that are new to the world. This is a process of innovation that is new to the local market or the domestic firm but not new to the world. Once rapid growth is underway, there is a gradual shift – in the most successful countries – to innovation at the frontiers of knowledge. This is largely the story (and present challenge) of technological innovation and development in China in the modern era.

China, together with Brazil, Russia, India, and South Africa are often referred to as the ‘BRICS’. China is however quite distinct from the others. Figure 2 shows that in comparison to the others, China has been an outlier in terms of the sharp increase in its research and development (R&D) spending. In China the share of R&D intensive industries such as electronics and aerospace in total exports increased from 2.97 percent in 2000 to 13 percent by 2008.7 Moreover in China the R&D intensity increased from 0.8 per cent in 1999 to around 1.5 per cent in 2007.

Fig-2

In contrast, India and Russia spend as much on R&D now as a decade ago, whilst Brazil has seen a moderate increase. Figure 3 confirms China’s primacy in terms of innovation, showing the dominance in patents from Chinese firms registered at the US Patent Office over the 2004 to 2008 period.

Fig-3

Other indicators of technological innovation are consistent with this picture. China is now one of the major producers of wind energy turbines in the world. China Railway Construction spends around US$ 1-billion on industrial R&D, and by 2009 China’s share of world industrial R&D had climbed to 12 percent, second only to that of the USA (WIPO, 2011). At present China is designing a next generation internet that is ‘far ahead of anything any other country has at the moment’.8

Why has China been much more innovative than the other emerging economies? China’s success lies in its effort to obtain technological innovations from abroad, in combination with its willingness to invest in domestic R&D. It (i) pursuaded multinationals to transfer their technologies to the local Chinese context through directly transferring technology to their affiliate or joint ventures (JV); (ii) promoted spillover-effects and (iii) encouraged multinational firms to specifically develop and implement technologies through shifting their R&D to the country – setting in motion the internationalisation of R&D.

China attracted most of this technology-transferring FDI into its manufacturing sector. Manufacturing is in many ways intricately linked with technological innovation. Manufacturing is by its nature important for knowledge accumulation, as it generates positive externalities, including spillovers of information and new management practices, and produces variety. There are currently an estimated 9 billion different varieties of goods in production, more than the number of people on the planet.9

“Innovative entrepreneurs require venture capital or ‘angel’ investors. For the USA, angel or venture capital support created around 10 per cent of all jobs in the private sector in 2003. In developing and emerging economies, angel or venture capital finance is sorely lacking.”

Before joining the WTO, foreign investors to China were expected to form joint ventures with local firms, through which technology transfers were facilitated. Huge amounts of FDI for manufacturing never replaced indigenous efforts: the country invested heavily in domestic fixed capital formation (see Figure 4 below).

fig-4

Many challenges still remain for China. The country is not yet as innovative as the USA or Europe. Although the numbers of its patents are increasing, the economic value of its patents is not yet comparable;10 its companies are rather known for incremental innovations and imitation. In spite of rapid productivity increases since 1991, there is still a large gap in manufacturing value per person of more than 70 per cent compared to the USA.5 The indigenous innovation system in China is not yet as effective as the MNE-based system).11

Absorption and Angels
What are the lessons we can draw from the above for developing countries? The first is that even if advanced economies profit more from innovation than less advanced economies, it does not mean that innovation is less important for the latter. Nor does it imply that imitative or incremental innovation is not worthwhile or somehow inferior. On the contrary, as the example of China has shown, innovation by copying and borrowing is very important for catch-up growth.

The second lesson is that absorptive capabilities matter. It is ‘the ability of an organisation to identify, assimilate, and exploit knowledge from its surrounding environment’7 and is a function of ‘trust and social capital, sound governmental and non-governmental institutions, human capital development, and managerial and technical competence’.1 Both the speed and the intensity of adoption of foreign technologies are important. Comin and Mestieri estimate that although the speed at which developing countries adopt new foreign technologies has increased, the degree of penetration of such new technologies has been much faster in more advanced economies.12 Moreover they estimate that this difference in technology penetration-rates can explain around two-thirds of the differences in the divergence in per capita incomes across the world since 1800.

A third lesson is that the nature of innovation in its relation to growth and productivity changes over time. At some stage as ‘the latecomer approaches the technological frontier, its strategies have to shift from imitation to innovation’.11 This is the fundamental challenge about to face a handful of emerging and middle-income countries, most notably China.

“How nations harness their knowledge-economies and entrepreneurs to invent and innovate will continue to shape the dynamics of global business and international development.”

A final lesson is that entrepreneurship matters, and even more so when a country reaches the knowledge frontier.13 14 As a result, policy makers across the world are keen to promote entrepreneurship, especially the small sub-set of entrepreneurs that are really innovative, or potentially innovative. Not all entrepreneurs or firms are innovative. Innovative entrepreneurs require venture capital or ‘angel’ investors. Shane finds that for the USA, angel or venture capital support created around 10 per cent of all jobs in the private sector in 2003.15 In developing and emerging economies, angel or venture capital finance is sorely lacking.

In this regard China’s experience remains illuminating. Despite the dominant role of state finance a substantial shift has taken place towards entrepreneurial finance. Although still far from adequate, China now has more than 1,000 venture capital funds and ChiNext, a stock-exchange where new start-ups can raise risk capital.16 After ensuring the absorption capacity of its firms, the Chinese government is now providing them with the ‘angels’ to support their increasingly risky innovation efforts.

In conclusion, technological innovation is a core driver of development. How nations harness their knowledge-economies and entrepreneurs to invent and innovate will continue to shape the dynamics of global business and international development in the decades to come, just as it has in the past.

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About the Authors
Wim Naudé
is Dean of Maastricht School of Management and Professorial Fellow at UNU-MERIT, Maastricht, as well as Research Fellow at IZA – Institute for the Study of Labor Economics in Bonn. He works on entrepreneurship, innovation and development economics.

Adam Szirmai is Professorial Fellow at UNU-MERIT and Professor of Development Economics at the Maastricht Graduate School of Governance of Maastricht University. His research focuses on international comparisons of growth and productivity in manufacturing in developing countries.

References
1
. Kemeny, T. (2010). ‘Does Foreign Direct Investment Drive Technological Upgrading?’ World Development, 38 (11): 1543-1554.
2
. Lipsey, R.G., Carlaw, K.I. and Bekar, C.T. (2005). Economic Transformations: General Purpose Technologies and Long-Term Economic Growth. Oxford: Oxford University Press
3
. Lal, D. (2006). Reviving the Invisible Hand. Princeton: Princeton University Press.
4
. Maddison, A. (2001). The World Economy: A Millennial Perspective. Paris: OECD.
5
. Szirmai, A. (2014). The Dynamics of Socio-Economic Development. 2nd revised edition. Cambridge: Cambridge University Press (first edition 2005).
6
. Referring to copying and catching-up Von Tunzelmann writes that ‘each industrial spurt began by producing products that were already in production elsewhere, with the industrializing countries adopting their more advanced processes to produce relatively established products. The British in the 18th century used machine methods to produce textile yarns and cloths similar in kind to those produced by hand in India…The Americans in the late 19th century took over the principles of steel and chemicals production from Britain and Germany, and through means such as hard driving developed them for mass production. The Japanese a century later imported products like the integrated circuit and rapidly moved towards industrial leadership in products such as DRAMS’. Von Tunzelmann, G.N. (1997). ‘Innovation and Industrialization: A Long-Term Comparison’, Technological Forecasting and Social Change, 56: 1-23.
7
. Fu, X., Pietrobelli, C. and Soete, L. (2010). ‘The Role of Foreign Technology and Indigenous Innovation in the Emerging Economies: Technological Change and Catching-up’, World Development, 39 (7): 1204-1212.
8
. Mirani, L. (2013). ‘China’s internet is better than yours’, Quartz, 29 March, at http://qz.com/68972/chinas-internet-is-better-than-yours/
9
. Marsh, P. (2012).The New Industrial Revolution: Consumers, Globalization and the End of Mass Production. New Haven : Yale University Press.
10
. Economist, The (2013). ‘How Innovative is China?’, The Economist, 5 January 2013, online at http://www.economist.com/news/business/21569062-valuing-patents
11
. Tang, M. and Hussler, C. (2011). ‘Betting on Indigenous Innovation or Relying on FDI: The Chinese Strategy for Catching Up’, Technology in Society, 33: 23-35.
12
. Comin, D. and Mestieri, M. (2013). ‘If Technology Has Arrived Everywhere, Why Has Income Diverged?’ NBER Working Paper No. 19010.
13
. Thurik, R. (2011). ‘From the Managed to the Entrepreneurial Economy: Considerations for Developing and Emerging Economies’, (In Naudé, W.A. ed. 2011. Entrepreneurship and Economic Development. Basingstoke: Palgrave Macmillan.)
14
. Ács, Z. and Naudé, W.A. (2013). ‘Entrepreneurship, Stages of Development, and Industrialization’, (In Szirmai, A., Naudé, W.A., and Alcorta, L. eds. Pathways to Industrialization in the 21st Century. Oxford: Oxford University Press.)
15
. Shane, S. (2009). ‘Why Encouraging More People to Become Entrepreneurs is Bad Public Policy’, Small Business Economics, 33: 141–49.
16
. Blank, S. (2013). ‘The Rise of Chinese Venture Capital’, at http://steveblank.com/2013/04/12/the-rise-of-chinese-venture-capital/ (accessed 03-7-2013)

References to Landes, Diamond, Maddison, Morris and Acemoglu and Robinson:
• Landes, D.S. (1999). The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor. New York: Norton & Co.
• Diamond, J. (1997). Guns, Germs and Steel: The Fates of Human Society. New York: Norton & Co.
• Maddison, A. (2007). Contours of the World Economy, 1-2030 AD, Oxford: Oxford University Press.
• Morris, I. (2010). Why the West Rules – For Now. London: Profile Books.
• Acemoglu, D. and Robinson, J.A. (2013). Why Nations Fail: The Origins of Power, Prosperity and Poverty. London: Profile Books.

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