1. ©Knowledge for Development, WBI Carl Dahlman Knowledge for Development Program March 16, 2004 Santiago, Chile Challenge of the Knowledge Economy: Towards a Pragmatic Innovation Agenda

2. Structure of Presentation 1.The Knowledge Revolution and Implications for Latin American Competitiveness 2.Objective of seminar: Towards a pragmatic innovation agenda ©Knowledge for Development, WBI

3. 1. The Knowledge Revolution Ability to create, access and use knowledge is becoming fundamental determinant of global competitiveness Seven key elements of “ Knowledge Revolution ” Increased codification of knowledge and development of new technologies Closer links with science base/increased rate of innovation/shorter product life cycles Increased importance of education & up-skilling of labor force, and life-long learning Investment in Intangibles (R&D,education, software) greater than Investments in Fixed Capital in OECD ©Knowledge for Development, WBI

4. The Knowledge Revolution -2 Greater value added now comes from investment in intangibles such as branding, marketing,distribution, information management Innovation and productivity increase more important in competitiveness & GDP growth Increased Globalization and Competition Trade/GDP from 38% in 1990 to 57% in 2001 Value added by TNCs 27% of global GDP Bottom Line: Constant Change and Competition Implies Need for Constant Restructuring and Upgrading ©Knowledge for Development, WBI

5. GDP/Capita Growth: Korea vs Argentina ©Knowledge for Development, WBI

6. Implications for Latin America With very few exceptions, Latin America’s growth performance has not been very strong over the past 20 years It is risking falling further behind because it is not successfully tapping into growing global knowledge or exploiting its potential Countries need to develop strategies to use existing and new knowledge to Improve performance in traditional sectors Exploit opportunities for leapfrogging Develop competitive new sectors Countries needs to Assess where they stand Develop concrete action plans ©Knowledge for Development, WBI

7. Shares of World GDP - Constant US$ (1960 - 2002) 0 5 10 15 20 25 30 35 40 196019651970197519801985199019952000 % East Asia & Pacific High income: OECD ex. US & Japan Japan United States Sub-Saharan Africa Middle East & North Africa (Light Blue) Latin American & Caribbean Europe & Central Asia South Asia (Grey) High Income: Non-OECD (Black)

8. East Asia and LAC: Shares of World GDP (1980 - 2002) 0.5 1 1.5 2 2.5 3 3.5 4 198019851990199520002002 % EA NIEs Brazi China Mexico Upcoming EA NIEs Other LAC

9. East Asia and LAC: Shares of World Merchandise Exports (1980 – 2002) 0 2 4 6 8 10 198019851990199520002002 % EA NIEs Upcoming EA NIEs China Other LAC Mexico Brazil

10. Selected Countries: Real GDP 2002 ©Knowledge for Development, WBI

11. Selected Countries: GDP 2002 ©Knowledge for Development, WBI

12. Benchmarking Countries  KAM: 76 structural/qualitative variables to benchmark performance on 4 pillars  Variables normalized from 0 (worst) to 10 (best) for 121 countries  www.worldbank.org/kam  Multiple modes offering wide range of graphic representations and functionalities (1995 - Most Recent, comparison options)  Aggregate Knowledge Economy Index (KEI) – average of performance in 4 pillars: economic incentive and institutional regime, education, ICT and innovation  Weighted and unweighted version – Innovation Variables ©Knowledge for Development, WBI

14. LAC and the World: Knowledge Economy Index ©Knowledge for Development, WBI

15. 2. Towards a Pragmatic Innovation Agenda What do we mean by innovation?  The diffusion of a product, process, or practice which is new in a given context (not in absolute terms).  Technological innovations often go hand in hand with organizational ones  Innovation promotion often goes with enterprise upgrading Therefore distinguish two broad types of innovation Local improvements through adoption of existing foreign technology Development of technologies new to world ©Knowledge for Development, WBI

16. Innovation in Developing Countries In developing countries the first type is the most relevant, the second is more rare, except for the most advanced developing countries Developing countries will get a bigger economic impact from raising average local practice to best world practice than from creation of their own new knowledge They will also get a bigger impact from raising average local practice to best local practice, therefore the tremendous importance of domestic diffusion

17. Sources of Domestic Innovation Imports of capital goods, components, products or services Copying or reverse engineering of foreign products and services Products and services brought to and produced in country by foreign investors Technological efforts of domestic or foreign firms, not all of which is based on formal R&D

18. Bias Towards Formal R&D Efforts Policy makers in developing countries tend to focus on formal R&D and on publicly funded research efforts They tend to focus on glamorous high technology sectors They tend to focus on industry, to a lesser extent on agriculture, and very little on services They also tend to focus on R&D inputs and outputs, not so much on entrepreneurship and management

19. Challenges But, as noted earlier, focus of policymakers are not the most important elements of the innovation system in developing countries R&D not the main source of innovation High tech sectors are tiny part of developing economies Service sector is largest share of economic activity Successfully applying knowledge requires entrepreneurship, management, organizations,and also depends on economic and institutional regime Need a better conceptual framework and policy tool kit that differentiates across countries Provides made to measure policy advice and specific project design

20. Differentiated Strategies AcquiringCreatingDisseminating Catch-Up Most critical: -lots of knowledge in pubic domain -also large stock to be purchased Therefore need good global scanning and acquisition ability Less relevant or feasible, but still need R&D capability to acquire and adapt. Critical to focus limited R&D efforts on most relevant areas Very important: -extension services -technical information -metrology, standards, testing and quality control -specialized suppliers -growth of most efficient firms Countries Nearer Frontier or with Large Critical R&D Mass Need to continue tapping global knowledge: -FDI/licensing -Strategic alliances -foreign R&D to tap knowledge Refocus public efforts on commercially relevant research Get private sector to make major effort to create new knowledge Dissemination efforts continue to be critical But also need to take knowledge to production: -technology transfer -tech parks/spinoffs -cluster development

21. National Innovation System Needs to include not just R&D institutions and universities, but most critically firms and other knowledge institutions(MSTQ, training, consulting) Needs to include attention to the broader economic incentive and institutional regime, education and skills, and ICT-hence our K4D framework

22. Challenges to Developing Countries Finding advantageous ways to plug into and compete successfully in the global system Getting into global value chains Moving up these value chains Taking advantage of global knowledge to improve welfare Preventive health Agriculture Developing differentiated advantages Building on local resources Building on culture and other intangibles Strengthening non-traded services

23. Getting rid of innovation myths About the innovation process: it is not a linear process from research to market About the source of innovation: key role of clients ’ needs, suppliers ’ ideas, etc About high tech: it is its use which matters (not its production); needs a technical culture About the innovator: it is not a single individual, but a group of people with complementary functions About the role of government: it is important (including in form of direct support) ©Knowledge for Development, WBI

24. How innovation develops Not a linear process coming from research for going to the market, but a design centered project with ideas coming from multiple sources (clients, suppliers, etc); innovation does not derive from research, but it is the reverse (particularly in developing countries) Innovation is a project brought about by group of people (not a single individual): the inventor, the entrepreneur, the godfather, the gatekeeper (Roberts, MIT) An organic not a mechanistic view; innovation is like a flower that needs gardening ©Knowledge for Development, WBI

25. Watering (finance, support to innovation projects) Removing weeds (competition, deregulation) Nurturing soil (research, education, information) Government Role – Gardening Innovation ©Knowledge for Development, WBI

26. Initiating Innovation Policies: Key Actions To ignite interest show cases abroad (study tours). To build self confidence, show local success stories; key role of media (radio/TV) Understanding issues and potentials by soft actions (cluster building) Competitive funding to stimulate local/regional interest and investment Building national and cross national innovation champion networks; getting entrepreneurs and citizens campaigning for improvement of business/governance climates ©Knowledge for Development, WBI

27. Developing national programs and institutions: main issues There are already many programs for many different purposes (SMEs, FDI, RD…) which have a crowding out effect Agencies: need to have multi function-ones, private sector-like management (Fundacion Chile); but usually state agencies are constrained by bureaucratic rules and tend to capture or defend territories Councils (model is ST policy councils of Finland): they exist in numerous countries but they are not working; problem of motivation ©Knowledge for Development, WBI

28. National Priorities Priorities: build on strengths focused on use of available resources, generate income for further investment in education, research and key technology infrastructure, etc Climb up gradually the innovation system steps corresponding to development levels and related value chains ©Knowledge for Development, WBI

29. Towards a pragmatic innovation agenda It is not about just a about high tech. Long-term agenda: Integration into global knowledge networks and value chains. Medium-term priority: promotion of inter-firm and inter- organizational linkages horizontal linkages: cluster agenda vertical: supplier and buyer development university-industry linkages Short-term priority: Articulation of vibrant and vocal innovation community in the private sector ©Knowledge for Development, WBI

30. Towards a pragmatic innovation agenda ©Knowledge for Development, WBI

31. To respond to the challenges of knowledge revolution, Latin America needs a dynamic innovation and enterprise upgrading system: a network of organizations to enhance firms’ capabilities  Led by private demand and responsive to private sector needs;  Characterized by strong academic-industry linkages;  Inserted into international knowledge networks  Providing support to technology entrepreneurs, both financial (early stage venture capital) and technical assistance; and  Characterized by continuous evaluation and monitoring.  Results of evaluation linked to financing of programs. Responding to the challenges of the knowledge revolution ©Knowledge for Development, WBI

32. 1.Focus on knowledge entrepreneurship (high-tech start-ups and spin-offs, venture capital): Israel 2.Focus on innovation strategy of a developing country that has already made transtion to being a global innovator:Korea 3.Focus on a network of private sector-led national technology transfer organizations: Chile (Fundación Chile), Mexico, Russia. These three approaches are complementary and will be considered in this seminar. Approaches to reform and enhanced national innovation and enterprise upgrading systems ©Knowledge for Development, WBI

33. Annex ©Knowledge for Development, WBI

35. Knowledge Economy Index (most recent) breakdown ©Knowledge for Development, WBI

36. Knowledge Index (most recent) breakdown ©Knowledge for Development, WBI

37. KEI data – most recent KI data - most recent ©Knowledge for Development, WBI

38. Latin America ©Knowledge for Development, WBI

39. Argentina ©Knowledge for Development, WBI

40. Chile ©Knowledge for Development, WBI

41. Mexico ©Knowledge for Development, WBI

42. Israel ©Knowledge for Development, WBI

43. Korea ©Knowledge for Development, WBI

44. Russia ©Knowledge for Development, WBI

45. LAC: Performance Variables ©Knowledge for Development, WBI

46. LAC: Economic Incentive Regime Variables ©Knowledge for Development, WBI

47. LAC: Governance Variables ©Knowledge for Development, WBI

48. LAC: Innovation Variables ©Knowledge for Development, WBI

49. LAC: Education Variables ©Knowledge for Development, WBI

50. LAC: ICT Variables ©Knowledge for Development, WBI

51. Chile: Performance Variables ©Knowledge for Development, WBI

52. Chile: Economic Regime Variables ©Knowledge for Development, WBI

53. Chile: Governance Variables ©Knowledge for Development, WBI

54. Chile: Innovation Variables ©Knowledge for Development, WBI

55. Chile: Education Variables ©Knowledge for Development, WBI

56. Chile: ICT Variables ©Knowledge for Development, WBI

57. Global R&D Effort in Comparative Perspective ©Knowledge for Development, WBI

58. R&D Expenditure, 1981-2000 ©Knowledge for Development, WBI

59. Export Structure (1965-2000)

60. Thank you! cdahlman@worldbank.org