Growth in East Asia: Innovative Firms in Dynamic Cities Shahid Yusuf World Bank DECRG February 18, 2004

Overview Many economies in East Asia have successfully completed the “catch up” phase of development A number of factors suggest that they need to diversify their sources of growth My talk focuses on innovation as a key supply side source of future growth for the smaller open economies What is needed to enhance innovation capability within a knowledge –oriented economy And the changing nature of the Bank’s operational involvement

The Foundations of Past Success Economic and political stability Investment in manufacturing capacity and infrastructure Export orientation Mobilization and channeling of savings Educated and trained low-cost labor Foreign direct investment and participation in international production networks Market institutions and economic freedoms Government guidance

Need for New Direction Decreasing returns from current resource driven, export dependent model Commoditization of main manufactured exports Shorter product life cycles, especially for many electronic and IT products Competition from China across a wide range of products and services Opening of domestic markets to competition due to WTO, bilateral FTAs Changes in the organization of global production and producer-supplier relationships Consolidation of some industries across the East Asian region—changing geography of production

Future Imperatives Open and competitive business environment Shift towards a knowledge economy within routinized innovation that promotes productivity-led growth Continuous effort to move up value chain and create profitable activities aimed at international markets Regional or global scale of operations Increase scale and scope of producer services Dynamic urban environment attractive for knowledge workers University-centered research infrastructure

Supporting Policies Macroeconomic: e.g. exchange rate, demand- related, fiscal, etc. Institutional: e.g. financial, venture capital development, regulatory and legal Technological Urban Will focus on the last two and again talk about the Bank’s contribution through triple AAA work.

Promoting Innovation Openness to new ideas Quality of tertiary level training and research institutions: experience/skills of staff, laboratory, equipment Global circulation of knowledge workers, face-to face interaction International research collaboration Strong private sector research effort Incentives for commercializing research

Promoting Innovation (cont’d) Risk capital and low entry barriers which encourage start-ups Availability of business services supporting start- ups Institutional environment and management facilitating growth of firms; exit of failing firms Continuous improvement of ICT infrastructure and services

The Future Agenda for East Asian Firms More flexible, flatter, decentralized organizational structure giving more incentives to innovate and pursue disruptive innovations Emergence of larger companies with international brand names and global presence Greater investment in R&D, collaboration, and networking with universities and other firms. Investment in overseas laboratories, and promising foreign firms. Streamline product mix and attain higher volume Achieve first-tier supplier status in production networks and responsibility for design/delivery of major parts and modules Build own regional (and global) production networks

The Future Action Agenda for East Asian Firms and Cities (cont’d) Parallel upgrading of logistics and supply-chain management that fully harnesses IT advances Effort to maximize innovativeness of traditional manufacturing industries by incrementally improving production processes, emphasizing design, new materials and associated development of production equipment

Urban Crucibles of Innovation Large cities with substantial agglomeration effects—particularly urbanization economies Cities with efficient infrastructure and services Presence of universities and research institutes that generate skills area foci for research and can serve as the core of clusters Quality of physical environment and personal security

Urban Crucibles of Innovation (cont’d) Urban amenities: recreational and cultural Open environment, social diversity, and international links Strong business services sector

Evolving the East Asian Model From factor-intensive to productivity-driven growth From imitative to innovative growth From reliance on markets in a few industrialized countries to greater reliance on domestic and regional markets

Requires Retaining strengths of the past Overcoming the remaining weaknesses of the present Anticipating/and overcoming challenges