Europe and Central Asia Region Globalization and Technology Absorption in Eastern Europe and the Former Soviet Union Pradeep Mitra Chief Economist Europe and Central Asia Region World Bank Presentation at the plenary session of the conference on “Economic Modernization and Globalization” at the State University Higher School of Economics Moscow, April 1, 2008

Technological progress is at the heart of income growth and poverty reduction Average annual per capita income and total factor productivity growth,1990-2005 Per capita income growth TFP growth First, an obvious point but essential point. We are interested in technology because of the central role it plays in spurring income growth and reducing poverty. Here we see that technological progress (measured indirectly by total factor productivity growth) is the main factor that distinguishes between the fast growing economies of the developing world and the slower growing ones – between those that have have made great strides in reducing poverty and those that have been less successful. These results are fully consistent with the findings of Easterly and Levine 2001) that long-term development is driven mostly by productivity growth, rather than capital accumulation. According to this measure, technological progress since the early 1990s has been strongest in East Asia, South Asia and developing Europe and much weaker in Latin America, the Middle-East and Africa. * Data for Europe & Central Asia cover period 2005/1995 Source: World Bank, Poncet 2006

Technology gap: narrowing but still wide Index of technological achievement 1990s 2000s A second critical result, is that notwithstanding the rapid pace of technological progress, the gap between high-income and developing countries remains wide. Levels of technological achievement in high-income countries are more than twice those in upper-middle income countries, which are, in turn, more than twice as high as in low-income countries. Source: World Bank, Global Economic Prospects (2008)

Diffusion across countries has accelerated but penetration within countries remains weak Years to diffuse, % countries at 25% threshold Source: World Bank using CHAT database (Comin & Hobijn, 2004)

Exposure to foreign technology Technological progress Technological progress in developing and transition countries is mainly about absorbing and adopting technologies developed elsewhere. Trade, FDI and international co-invention are channels for innovation and knowledge absorption. Exposure to foreign technology + Capacity to absorb = In trying to understand these results and the process by which some developing countries achieve rapid technological progress while others have been more stagnate, we created the following schematic. It characterizes the process of technological progress as one where a developing country is first exposed to foreign technologies either through foreign trade, foreign investment or contact with the outside world and here national emigrant populations can play a critical role (the upper third of the figure). The more exposed an economy is to these technologies the better the chance that they will be absorbed in the domestic economy. But, how well that absorption occurs depends on a wide-range of domestic or “behind-the-border” factors that can either facilitate the transmission and absorption of foreign technologies or may block their absorption (the multi-ringed drum in the middle of the figure). These include: the macroeconomic conditions, governance structure and investment climate, The ability of the population to master new technologies (basic and advanced technical literacy), The extent government policy and private institutions succeed in financing innovative firms, Of course the existence of pro-active policies to stimulate dissemination. Finally dynamic factors including increasing returns to scale and spillover effects can under certain conditions magnify the domestic impact of those initial flows. Technological progress Source: Globalization and Knowledge Absorption in ECA (World Bank, 2008), Global Economic Prospects (World Bank, 2008)

Foreign Direct Investment Helped EU New Member States Participate in Producer-driven Global Commodity Chains and Export Skilled Labor and Capital-Intensive Products. Source: UN COMTRADE and IMF International Financial Statistics Database.

The structure of finance for fixed investment reflects greater reliance on retained earnings and banks at the expense of family/informal and other sources – a maturation of the business and financial sectors in the transition economies. The Structure of Finance for Fixed Investment Is Maturing but Has Not Converged to That in Developed Economies Source: Mitra, Muravyev, and Schaffer 2008, “Convergence in Institutions and Market Outcomes: Cross-country and Time-series Evidence from the BEEPS Surveys in Transition Countries.” World Bank, Washington, D.C.

Scores in science and mathematics in PISA 2006 were comparable to the OECD average in the countries that acceded to the European Union in 2004 and lower elsewhere. Source: OECD PISA 2006

Inventions in the ECA 7 countries received more U. S Inventions in the ECA 7 countries received more U.S. patent grants than did investors in China and India until the most recent years. However, there is a clear acceleration in India and China-based patenting in recent years. U.S. Patent Grants for the ECA7 vs. China and India Source: Authors’ calculations based on the U.S. Patent and Trademark Office CASSIS CD-ROM, December 2006 version. The graph compares counts of patents in which at least one inventor is based in one of seven ECA countries, India, or the People’s Republic of China. The ECA 7 are Russia, Hungary, Poland, Slovenia, the Czech Republic, Bulgaria, and the Ukraine.

International co-invention (ECA 7 patent grants generated by international teams of inventors) has expanded greatly compared to purely indigenous patents (ECA 7 patent grants generated by inventors based within a single country). Indigenous Patents and Co-Inventions in the ECA 7, 1993-2006 Source: Authors’ calculations based on the U.S. Patent and Trademark Office CASSIS CD-ROM, December 2006 version. The ECA 7 are Russia, Hungary, Poland, Slovenia, the Czech Republic, Bulgaria, and the Ukraine.

Conclusions Trade, foreign direct investment and international co-invention are channels for innovation and knowledge absorption in the global economy; The effectiveness of those channels depends on a country’s business environment, viz., the state of competition, financial depth, governance, skills and infrastructure; The EU new member states are deeply integrated into FDI-enabled network trade; The structure of finance is maturing in Eastern Europe and the former Soviet Union. Countries which joined the EU in 2004 scored near the OECD average in the 2006 PISA in science and mathematics but other transition countries are doing less well; Patents granted through international co-inventions have become increasingly important compared to purely indigenous patents and are more connected to global R&D trends.