1. MEGT 9 ed. 2 June/2006 Economic integration And Technology transfer Economic Growth and Innovation Joana Fernandes Susana Serôdio Instituto Superior Técnico

2. MEGT 9 ed. 2 June/2006 2 Introduction >> Knowledge Spillovers Economic integration describes how different aspects between economies are integrated, a relationship between trade and growth. Nowadays the flows of goods, materials, capitals or persons are no longer the exclusive parameter of trade and growth among global economies, once technical knowledge is a factor that grows with capital and is itself a kind of capital good. Most developing economies rely largely on knowledge spillovers, for acquiring knowledge that allows them to improve their production processes and efficiency, positively impacting their economies. Imported technologies are a source of new productive knowledge since most research, development and innovation is undertaken in high-income countries, reserving for less developed countries the production function, dissociated from the learn by doing process.

3. MEGT 9 ed. 2 June/2006 3 Knowledge Spillovers >> International Know… Knowledge Spillovers can be defined as knowledge external to a firm, a region or a country obtained as a combination of R&D performed by other firms/regions/countries that is appropriated and induces increasing innovative productivity within the firm/region/country. Knowledge flows R&D spillovers (Mancusi, 2004) firms appropriate knowledge, learning process and develop a positive externality on their productivity diffusion of knowledge produced by an economic agent

4. MEGT 9 ed. 2 June/2006 4 Pure knowledge spillovers - positive externalities related to the spread of R&D results. The benefits of new knowledge spill over to other firms, enriching their pool of ideas. R&D activities generate Griliches Rent spillovers - positive externalities, arise when the value of an input to the firm exceeds the input cost. Private and social returns to R&D: Pure market spillover (www.atp.nist.gov)www.atp.nist.gov Knowledge Spillovers >> International Know…

5. MEGT 9 ed. 2 June/2006 5 R&D and other knowledge spillovers generate externalities, that tend to be geographically bounded within the region where the new economic knowledge was created. New economic knowledge may spill over, but the geographic extent of such knowledge spillovers is bounded. (Feldman, Audretsch, 1999) New growth economic models Effects of knowledge externalities on growth from geographical agglomeration of industries. MAR externalities model (Marshall–Arrow–Romer) Spillovers occur within industry, because knowledge accumulated by one firm tends to help the development of technologically close firms, who therefore are able to grow faster. Jacobs and Lucas Positive externalities arise from the variety of related economic activities that can be found in a city or a cluster. Knowledge spillovers between complementary industries. ( Batista, Swan, 1998) Knowledge Spillovers >> International Know…

6. MEGT 9 ed. 2 June/2006 6 describe the evolution of technology since the establishment of intellectual property rights. designed to explain why and how the advanced countries exhibit sustained growth (R&D). inventions are rented to final-product firms and their use induces growth (knowledge: input). economy has 3 sectors: a final-goods, intermediate-goods and a research sector final goods sector output Y firms hire labor/rent capital goods until the marginal product equals the wage/rental price. Recovering ROMER’s model of horizontal innovation Knowledge Spillovers >> International Know…

7. MEGT 9 ed. 2 June/2006 7 intermediate goods sector profit π research sector output: patents, P A intermediate goods sector output x Inventors are able to extract from firms their monopoly profits, and what inventors get exactly compensates them for the time they spent innovating. Recovering ROMER’s model of horizontal innovation Knowledge Spillovers >> International Know…

8. MEGT 9 ed. 2 June/2006 8 Recovering ROMER’s model of horizontal innovation Total labor is divided between research and production (L=LR+LY). Research fraction: rate of growth of the economy, with (r-n), the discount factor Other implications of the model: – economy with a larger stock of human capital will grow faster, free international trade can speed up growth – if skilled labor is too few, the economy will not grow The growth of A determines the rate of growth of output, capital and consumption: – the growth of A is determined endogenously, and is dependent on market mechanisms; – it can be affected by policy (reduce r, subsidize the accumulation of human capital) The rate of technological change is negatively sensitive to the rate of interest. Knowledge Spillovers >> International Know…

9. MEGT 9 ed. 2 June/2006 9 Extent to Romer model considering the international flows of ideas between economies. Assuming that each economy has discovered a completely different set of intermediate products prior to trade, the productivity of labor in research doubles according to: Aghion and Howitt (1996)  rate at which A (total amount of different intermediate capital goods) evolutes L 2 the labor in the research sector. Within this framework two models were presented. Opening ROMER’s model Knowledge Spillovers >> International Know…

10. MEGT 9 ed. 2 June/2006 10 First model Two effects over the economy’s rate of growth : Increase in productivity has a direct positive effect on the rate of growth of the domestic knowledge stock A The risen on the productivity of research rises the incentives to engage in research increasing the employment in R&D, L 2 This result, international trade of ideas raises the economy’s rate of growth, considers that ideas flow directly into research, serving as a base for news ideas to evolve. These effects combined promote positive effect on the economy’s rate of growth. L 2 work force in intermediate and final sectors, r discount rate  is a production parameter of the final sector  temporal rate of discount  elasticity on the final product “knowledge-driven” meaning that old knowledge gives rise to new ideas and inventions Opening ROMER’s model Knowledge Spillovers >> International Know…

11. MEGT 9 ed. 2 June/2006 11 According to Rivera-Batiz, if the technology used in research is the same used in the final sector, the intermediate inputs flow to R&D, increasing the variety of inputs possible to use research, as well as the marginal product of labour in research. Second model Two effects over the economy’s rate of growth: positive effect on the economy’s equilibrium rate of growth driven from the increase in the productivity of research indirect impact on the incentives to engage in research Economies that present higher stock of knowledge will be the responsible for the larger share of R&D, while pourer economies will spend less in R&D and focus more in the final production sector. International flows of ideas varies with the nature of the research technology and strongly depend on the process by which ideas disseminate across countries. Opening ROMER’s model Knowledge Spillovers >> International Know…

12. MEGT 9 ed. 2 June/2006 12 Benefiting from leaders knowledge and developing the production line based on their research can also be accessed as learn from learn by doing. Learn by doing involves learning from experience in production processes. Unit cost of producing manufactured goods tends to decline as more goods are produced. Learn by Doing “technical change can be ascribed to experience, and it is the very activity of production that gives rise to problems for which favorable responses are selected over time.” Arrow (1962) Knowledge Spillovers >> International Know…

13. MEGT 9 ed. 2 June/2006 13 Learn by Doing Less developed countries benefit from learn by doing and knowledge spillovers and focus their production lines in low level technological processes, lower potential for learn by doing. Firms in developed countries, positioned in the upstream sector invest in learn to design the production process. If the upstream sector is competitive the costs of research will ultimately be paid by the downstream sector, production sector. Less developed firms/countries experience a reductions in its rates of growth, while developed firms/countries benefit from the trade and experience an increase in its rate of growth and dynamic welfare gains. (Arora, Fosfuri, Gambardella, 2004) Knowledge Spillovers >> International Know…

14. MEGT 9 ed. 2 June/2006 14 Romer model of endogenous growth through increasing specialization emphasizes that the development of capacity is a fixed cost activity, while the productive application of the technological capacity is a low marginal cost activity. “ if the growth of the market in a certain country gives rise to the formation of specialized technology suppliers in that country, then, once the technology is developed, these technology suppliers can sell it to producers in other countries at a lower cost than the initial cost of developing the technology. In this way followers benefit from investments in technology by leaders.” (Arora, Fosfuri, Gambardella, 2004) The potential to transmit the benefits generated from a division of labor in one market into other markets arises not only across industries but also across countries. Specialized in the design and engineering of chemical processes firms Developed Countries Development of the chemical industry Developing Countries Upstream Sector Knowledge Spillovers >> International Know…

15. MEGT 9 ed. 2 June/2006 15 Diversity models: the importance of new economic knowledge inter-industry spillovers. Jacobs theory enhances that the variety of industries within a geographic region promotes knowledge externalities and ultimately innovative activity and economic growth. (Feldman, Audretsch, 1999) How do knowledge spillovers within a given location occur? The costs of transmitting information may be invariant to distance, but the cost of transmitting knowledge rises with distance. knowledge is inherently non-rival in nature; knowledge development for any particular application can easily spill over, knowledge can be applied to different use and applications. Specialization versus diversity Proximity matters in transmitting knowledge Knowledge Spillovers >> International Know…

16. MEGT 9 ed. 2 June/2006 16 Policy implications in terms of policies directed towards innovation and technological change. Diversity thesis - a geographic region combining a diverse set of economic activities will tend to generate greater output in terms of innovative activity. Specialization thesis - policy focus on developing a set of economic activities within a geographic region in order to yield greater innovative output. Specialization versus diversity Knowledge Spillovers >> International Know…

17. MEGT 9 ed. 2 June/2006 Knowledge spillovers are bounded within geographical limits and cross- country differences in levels of per capita income and trade patterns. Trade is not always a relevant factor for technology diffusion: Knowledge flows are industry specific; technological specialization is an important determinant. The capacity and ability of firms and countries to absorb knowledge is crucial to benefit from spillovers. Country’s educational level plays a significant role in the ability to absorb ideas. (Mansusi 2004) International Knowledge Spillovers >> Firms in Clusters

18. MEGT 9 ed. 2 June/2006 Absorptive Capacity The ability of firms or countries to exploit outside knowledge, such as basic research findings; The incidence of externalities from technological spillovers via FDI are dependent on absorptive capacity of local firms; Referred as a technology gap and evaluated in terms of productivity differentials between foreign and domestic firms; Proportion of firms that have absorbed and utilised an innovation International Knowledge Spillovers >> Firms in Clusters

19. MEGT 9 ed. 2 June/2006 Multinationals and technology diffusion The presence of MNEs can also lead to increases in the rate of technology transfer and diffusion through: introduction of new know-how by demonstrating new technologies and training employees; transfer techniques for inventory and quality control standardization to their local suppliers and distribution channels; force local firms to adopt some of the marketing techniques used by MNEs. International Knowledge Spillovers >> Firms in Clusters

20. MEGT 9 ed. 2 June/2006 A local firm improves its productivity by copying some technology used by MNEs that operate in the local market; International Knowledge Spillovers >> Firms in Clusters When a MNEs increase the competition in the host market, so that local firms are forced to use technology and other resources more efficiently; Productivity spillovers might develop when local firms engages in innovate activities in order to re-capture the market lost to MNEs’ affiliates. Productivity Spillovers It’s easy to identify threes channels of productivity spillovers:

21. MEGT 9 ed. 2 June/2006 Productivity Spillovers Productivity spillovers of FDI have positive effects for the host country: The technologies used by multinational aren’t always available in the market. Direct contact with users seems to be a crucial factor explaining technology diffusion. With the presence of MES affiliates potential adopters may enter in contact with users and information about technology is diffused. International Knowledge Spillovers >> Firms in Clusters The typical characteristic of MNEs: scale economies, high initial capital requirements and advanced technology. Since MNEs are generally well equipped to overcome those barriers, their entry into such industries may result in increasing competition in the host market.

22. MEGT 9 ed. 2 June/2006 Market access spillovers The presence of MNEs facilitates the establishment of export channels like: transport, communications and, financial services. Effects on Host countries The relationships with suppliers through different activities can contribute to raise or productivity and efficiency in their firms as they (Blostrom 1998): help prospective suppliers to set up production facilities; provide technical assistance or information; provide or assist in purchasing of raw materials and intermediaries; provide training and help in management and organization; International Knowledge Spillovers >> Firms in Clusters

23. MEGT 9 ed. 2 June/2006 Multinational contribution to productivity growth in DCs and LDCs For DCs it was considered both technological diffusion and R&D spillovers. The technological spillovers raise the annual total factor productivity growth rate (GTFP) and 40% is considered to result from technology transfer of MNEs. In LDCs, it was found that the MNEs affiliates had positive effects on the productivity growth of the host country, but no evidence was found that this increase came from technology transfer. The underlying reason is that most LDCs don’t have enough qualify human resources to attract technology-intensive MNEs and to absorb the technology diffusion. International Knowledge Spillovers >> Firms in Clusters

24. MEGT 9 ed. 2 June/2006 A geographical cluster is defined has a strong agglomeration of related companies located in the same geographical area, sometimes centred on strong part of a country’s science base (Baptista and Swann 1998). A cluster provides a set of technological knowledge inputs that that supports an infrastructure for innovative activity. These inputs can come from: competitors, firms in related industries, suppliers, Universities. Clusters are seen as mechanisms that facilitate the interchange and flow of information between firms while rivalry is still maintained. Firms in Clusters >> Technology Transfer

25. MEGT 9 ed. 2 June/2006 25 Technology transfer is the process by which knowledge, technology, or information, developed in one organization or in one area or for one purpose, is applied or used in another organization, or area, or for another purpose. (Technology Transfer Information Center, 2006) The technology transfer process involves a technical resource involved in R&D, a user of that technology and an interface that connects the two and facilitates movement of technology from one organization to the other. Steps involved in the technology transfer process Technology Transfer >> Conclusion

26. MEGT 9 ed. 2 June/2006 26 Mechanisms for technology transfer may regard: Commercial transfer: transfer of knowledge or technology from the government to commercial organizations. Exporting resources: governmental personnel provides expertise to outs organizations, e.g., collaborative agreements or volunteer services. Importing resources: governmental laboratories or agencies engage in cooperative efforts that bring outside technology into the agency to enhance their efforts. Dual use: development of technologies or products that have both commercial and government applications. The goal is the closer integration of government and commercial technology and manufacturing. Scientific dissemination— includes the traditional methods of publication, conference papers, working papers circulated among colleagues, etc. The sharing is multidirectional and involves government, industry, and academia. Technology Transfer >> Conclusion

27. MEGT 9 ed. 2 June/2006 27 Technology transfer: market pull or technology push. Market pull - a need or problem causes companies to seek R&D investigation laboratories with which they may associate and benefit, improving their production process; Technology push - innovations are used to create new markets or consumer needs. Major goal is to enhance successful technology transfer using innovative collaboration and cooperation mechanisms that facilitate government supported R&D to get into the market and promotes industrial R&D to go forward. (Technology Transfer Information Center, 2006) Technology transfer is a process beneficial to economic growth, but, applying what one has learned in one place and implementing it in another place is not costless. The cost of technology transfer depend on the nature of the knowledge inherent to the technology process, and also depend on the absorptive capacity of the receiving firm/region/country. Technology Transfer >> Conclusion

28. MEGT 9 ed. 2 June/2006 28 To be successful technology transfer costs must be substantially smaller than the costs of developing the technology and going through development phase and learn by doing. Great value is given to all the previous work of research and improvement done by leaders in the sense that all the costs of developing or inventing the technology are paid by industries or countries that emerge earlier. Technology transfer commercialization and development is essential to achieve a sustained economic growth and perpetuate the relationships with other nations. Technology Transfer >> Conclusion Benefiting from this late comers only pay the marginal cost of production. (Arora, Fosfuri, Gambardella, 2004)

29. MEGT 9 ed. 2 June/2006 29 Technology transfer plays also an essential role in the promotion of entrepreneurship in developing countries, as entrepreneurial developments are highly depend on the technological context, and on the receiving country level of economic development and absorptive capacity of local firms. Entrepreneurship is a critical factor in the social and economic development of a country, requiring special attention and perhaps programs that promote and enhance the values of entrepreneurial attitudes Technology Transfer >> Conclusion

30. MEGT 9 ed. 2 June/2006 Knowledge spillovers do not occur as an isolated phenomenon, is process that begins with the diffusion of knowledge, knowledge flows, of information produced by an economic agent, through other firms that develop a positive externality on their productivity. The capacity and ability of firms and countries to absorb knowledge is crucial for them to be able to benefit from spillovers. Technological spillovers via FDI show that the incidence of externalities is dependent on absorptive capacity of local firms. Countries try to attract foreign investment (FI) to benefit form of the various types of externalities that are often referred to as “productivity spillovers”. Conclusion

31. MEGT 9 ed. 2 June/2006 Conclusion Clusters are also significant matters in technology transfer and knowledge productivity, since they provide a set of knowledge inputs that allow a technological infrastructure that supports innovative activity. Technology transfer is a process that takes places in national spillovers as well as in international ones. It’s commercialization and development, is a pillar in the achievement of sustained economic growth and in the perpetuation of relationships with other nations.