What is the role of innovation at different stages of development?

Innovation is important at all stages of development; specifically, the creation and diffusion of technologies are important for economic growth and welfare across all economies. Different types of innovation play a role at various stages (e.g. in earlier stages, incremental innovation is often associated with the adoption of foreign technology). Opportunities for successful innovation experiments and a potentially different framework for development are emerging. Notably, these opportunities result from the rise of information and communication technologies, the development of global value chains, the increased importance of some emerging countries in the global innovation system, the growth of service-based economies and a greater openness to trade and foreign direct investment. Today a key challenge for innovation policy in emerging countries is to encourage inclusive growth and support research addressing major social challenges.

 

 

 

 

 

Innovation is relevant for all countries at different stages of development
Innovation is important at all stages of development; specifically the creation and diffusion of technologies are important for economic growth and welfare across all economies.
 
In spite of its demonstrated benefits for meeting the immediate and long-term developmental goals of emerging and developing countries, the relevance of innovation for these countries is sometimes questioned. Such thinking is often based on a fairly restricted understanding of innovation as “high technology.” It is true that an exclusive focus on high-tech industries (“high-tech myopia”) can be costly if the potential for innovation in other sectors is ignored (OECD, 2011). Countries can incur high costs without reaping any benefits if they choose sectors that require expertise they lack and are highly competitive internationally. Yet, innovation takes place in different sectors, including services, agriculture and mining (OECD, 2010). Many opportunities for innovation have arisen in low-technology sectors with high export opportunities, e.g. the production of palm oil and derivative products in Malaysia. Also, innovation in agriculture is particularly relevant for addressing socioeconomic challenges at the same time as fostering growth. There is evidence that agricultural R&D has a greater impact on poverty reduction than most other public investments (Thirtle et al., 2003).
Types of innovation for development
Different types of innovation can play different roles at various stages of development. In earlier stages, incremental innovation is often associated with the adoption of foreign technology, and social innovation can improve the effectiveness of business and public services. High-technology, R&D-based innovation matters more at later stages of development and for the most part, in advanced businesses in developing economies, when it is both a factor of competitiveness and of learning (which allows for completing the “catch-up” process). Table 1 provides a schematic overview of various aspects of innovation.
 
Table 1. Why innovation is important for developing and emerging countries

Country category

Mechanism/objective of innovation

Type/source of innovation

Main agents involved

Evidence/example

Developing/low-income countries and emerging and middle-income countries

Adoption requires adaptation: Innovation needs to respond to specific “local” conditions for outcomes.

Incremental innovation based on foreign innovations and technologies

Universities and research institutes, leading private businesses, especially those with exposure to foreign markets and businesses

  • New plant varieties for agriculture
  • Efforts at developing new methods for mineral extraction in the Chilean copper industry to satisfy local needs

Inclusive innovation:

Innovation for/by low- and middle-income households to improve welfare and access to business opportunities.

Incremental innovation based on foreign technology and/or local, traditional knowledge generated “out of necessity”. Social innovation helping to introduce technical innovations in communities.

NGOs, small firms, public and private associations engaged in disseminating knowledge via networks, private, often large businesses

  • India (nano cars; grassroots innovation)
  •  Mobile banking services

Mainly middle-income

countries but also some

opportunities for developing /

low-income countries

Build up innovation capacities that will be key for reaching the world technological frontier in many industries, esp. relevant to avoid “middle-income traps”.

Incremental and radical innovation capacity to compete with leading world innovators.

Requires full development of innovation systems involving diasporas as a connector.

South Korea increased R&D in the 1990s.

Address environmental, health and social challenges through global innovation efforts and local efforts to address them.

Major innovations and scientific research conducted in global partner­ships but also marginal innovations to address welfare of poor people.

  •  Public and private universities and research institutions connected to global networks.
  • Major private businesses operating in these sectors.

Innovations concerning soil.

Build-up niche competencies, i.e. growth/ exports in sectors of comparative advantage.

Incremental innovations based on applying foreign innovations and technologies strategically to support industrial development.

Public institutions to address co-ordination challenges, private sector initiative including foreign companies

  • Colombian and Ecuadorian flower industry
  • Malaysia’s palm oil sector

Mainly emerging/ middle-income countries after initial progress on dimensions above

Climb the value ladder in global value chains

Incremental and radical innovation capacity to differentiate contributions

Involves private sectors with support from public agents, intermedi­aries, diasporas can play a central role, large firms can be important.

  •  Automotive industries in Malaysia and Thailand
  • India’s software industry

Keep competitiveness in frontier industries when the country is already at the frontier.

Innovation is identical to devel­oped countries exposed to develop­ments in the global market.

Involves mainly the private sector in interaction with public research institutions and universities, global partnerships often equally of rele­vance, role of large firms

Brazilian company Embraer as well as leading R&D firms from emerging economies

Source: OECD (2012), “Innovation for development: The challenges ahead”, in OECD Science, Technology and Industry Outlook 2012, OECD Publishing. http://dx.doi.org/10.1787/sti_outlook-2012-7-en
 
Depending on the support mechanisms used, the types of innovation and the main agents involved differ somewhat. With respect to the overview provided, a few observations as follows are worth pointing out:
 
  • Innovation matters even in least developed countries with backward industrial conditions. Their adoption of foreign technologies can have high payoffs, because technology adoption requires adaptation to local economic, technological or environmental conditions. This can lead to the development and accumulation of innovation capabilities. There is evidence that domestic innovation played a bigger role than imports of knowledge for the take-off of emerging Asian economies (Ang and Madsen, 2011).
  • The value of starting from imported novelties in order to advance has long been known. The notion was popularised by Gerschenkron (1962), who suggested that differences in nations’ ability to develop technology and adapt it to their particular circumstances were the primary cause of countries’ differences in per capita income and that the ability to appropriate the innovations of others was the essence of the latecomer’s advantage.
  • Incremental innovations in activities beyond “knowledge-intensive” sectors can offer substantial opportunities for success. Examples include the successful exports of fish from Uganda, wine from Argentina and Chile, and medicinal plants from India. In the initial stages, technology adoption with minor innovations can be profitable and successful (Acemoglu, Aghion and Zilibotti 2006). Korea, and China’s Taipei, Singapore and Hong Kong started from an initial stage of development based on technology learning and maintained a strong emphasis on building innovation capacity as they moved gradually towards higher and leading technologies.
  • The situation for middle-income economies is different. These countries often have an industrial base and a set of core framework conditions for innovative firms. They have often already addressed the initial challenges for adopting novel technologies, but they often face what has been called the “middle-income trap”. In order to make further progress, these countries need to raise their innovation capabilities.
 
An emphasis on innovation policies at all stages of development matters since governments must also engage in a learning process in order to build the institutions and competences needed to play their role at the core of the emerging national innovation system. The first policy implications that can be drawn from these observations is that innovation matters in all contexts, including in low-income countries, and should not be off the agendas of developing and emerging countries and donors. It is also important to adopt a more “pluralistic” view of innovation: in terms of objectives, of content or of processes, innovation is extremely varied (e.g. in connection with the level and orientation of socioeconomic development) and policies must be adapted accordingly.
A new innovation landscape offers opportunities and challenges
Several emerging economies, particularly China, have become significant actors in the global innovation system. There is evidence that R&D played a key role in the takeoff of Asian economies such as China, India and Korea (Ang and Madsen, 2011). What is more, many emerging economies have industries or firms that are at the technology frontier and need to innovate to compete. In the EU R&D Scoreboard, which lists the world’s top 1400 R&D-investing companies, more than 100 were from emerging and developing economies in 2011. Others were from Malaysia, the Russian Federation, Singapore, South Africa and Thailand (EC, 2011). Table 2 lists the top 15 firms from emerging economies based on their R&D investment.
 
Table 2. Top 15 firms from emerging economies in terms of R&D investment, 2011
Source: EC (2011), “Monitoring industrial research: the 2011 EU Industrial R&D investment Scoreboard”, European Commission, Luxembourg. StatLink:  http://dx.doi.org/10.1787/888932691137
Innovation can help address the challenge of inequalities in emerging countries
While innovation and growth are central for addressing social challenges, improving economic performance and creating jobs, the impacts are not necessarily “socially” inclusive, because they can increase inequalities in income and opportunities of different groups in society. A majority of the world’s poor now live in middle-income countries where the inequalities in income and opportunities are strikingly skewed. The realities in many emerging and developing countries are such that a small fraction of the population has access to wider resources and opportunities while a larger group lacks access to the most basic resources. At the top of many government agendas is the objective of socially inclusive development, because high levels of inequalities can negatively affect growth.
 
Innovation dynamics and policies have impacts on “industrial inclusiveness”, which is the extent to which firms differ in their innovation and productivity performance. Many emerging and developing economies have economic structures characterised by “islands of excellence”—very innovative, world-leading businesses, sectors, research institutions or universities—which coexist with a group of weak performing firms or institutions and a substantial informal economy. Industrial inclusiveness has potentially important impacts on social inclusiveness. In addition, “territorial inclusiveness”—the geographic dimensions of industrial and social inequalities—is an important facet of those inequalities.
 
Well-designed “place-based” policies seek to build on the opportunities for development based on the economic and social realities in different locations of a country, be it a capital city or a remote rural area, by ensuring the needed public goods and services are available to people and firms (OECD, 2013).
 
Thus, inclusive development is essential for innovation policy agendas in emerging countries, along with research aimed at addressing social challenges. Many examples show that innovative products, particularly in the areas of food, health and basic livelihood, can contribute substantially to improving the welfare of lower-income groups. Both private for-profit actors and not-for-profit actors have supported initiatives, with financial and other forms of aid. To serve lower-income markets, demand-side characteristics beyond high sensitivity to price, have to be addressed. Such demand-side characteristics are the need to adjust products to specific user contexts, such as lack of access to electricity, and the challenge of providing information about product purpose and use, reflecting the low human capital of most low-income groups. Entrepreneurs have used innovative pricing and financing strategies and business process innovations to serve lower-income markets profitably (OECD, 2013).
References
  • Acemoglu, D., P. Aghion and F. Zilibotti (2006), “Distance to frontier, selection, and economic growth”, Journal of the European Economic Association, Vol. 4/1, pp. 37–74.
  • Ang, J. and J. Madsen (2011), “Can second-generation endogenous growth models explain the productivity trends and knowledge production in the Asian Miracle Economics?”, The Review of Economics and Statistics, Vol. 93/4, pp. 1360–73.
  • Gerschenkron, A. (1962), Economic Backwardness in Historical Perspective, Belknap Press, Cambridge, MA.
  • OECD (2013), Innovation and Inclusive Development, OECD, Paris.
  • OECD (2011), OECD Innovation Policy Reviews: Russian Federation, OECD Publishing, Paris
  • OECD (2010), The OECD Innovation Strategy: Getting a Head Start on Tomorrow, OECD Publishing. doi: 10.1787/9789264083479-en
  • Thirtle, C., L. Lin and J. Piesse (2003), “The impact of research led agriculture productivity growth on poverty reduction in Africa, Asia and Latin America”, World Development, Vol. 31/12, pp. 1959–75.
  • Trajtenberg, M. (2005), “Innovation Policy for Development: An Overview”, Paper prepared for the LAEBA (Latin America/Caribbean and Asia/Pacific Economics and Business Association) 2005 second annual meeting, Buenos Aires, Argentina.
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