4th PH.D. SCHOOL ON INNOVATION AND ECONOMIC DEVELOPMENT GLOBELICS ACADEMY, LISBON, 2007 THE ROLE OF NATIONAL SYSTEMS OF INNOVATION FOR FDI IN DEVELOPING COUNTRIES CHIARA FRANCO Ph.D. in Law and Economics, University of Bologna

AIM OF THE PAPER ANALYSIS OF THE WAY NSI IN A DEVELOPING CONTEXT PLAY A ROLE IN ATTRACTING FDI AND ABSORBING THEIR SPILLOVER EFFECTS

METHOD SPECIFIC RESEARCH QUESTION WHAT ARE THE INSTITUTIONS AND ORGANIZATIONS THAT INSIDE THE NSI FRAMEWORK ARE THE MOST IMPORTANT FOR THE INFLUENCE OF THE FDI INFLOWS, THE AMOUNT OF TECHNOLOGY TRANSFERRED AND THE ABSORPTION OF THEIR INDIRECT EFFECTS (SPILLOVER)?  REVIEW OF THE LITERATURE ON NSI IN DEVELOPING COUNTRIES AND ON THE RELATIONSHIP BETWEEN FDI AND INSTITUTIONS  EMPIRICAL APPLICATION THROUGH WORLDBANK DATABASE (KAM)

EXTERNAL SOURCES: FDI FDI inflows towards developing countries are regularly rising Source: World Investment Report (2006)

EXTERNAL SOURCES: FDI/2 Relevant economic weight for their economies (FDI stock as % of GDP) Source: World Investment Report (2006)

STRUCTURE OF THE PAPER 1. CRITICAL REVIEW OF SOME PAPERS WHERE THE CONCEPT OF NSI IS APPLIED TO A DEVELOPING CONTEXT 2. SUMMARY OF THE MAIN RESULTS OF THE FDI SPILLOVER LITERATURE FOCUSING THE ATTENTION ON THE INSTITUTIONAL CONTEXT 3. IDENTIFICATION OF INSTITUTIONS AND ORGANIZATIONS (INSIDE THE FRAMEWORK OF NSI) THAT ARE CRUCIAL FOR FDI 4. EMPIRICAL APPLICATION

1.NSI IN DEVELOPING COUNTRIES A.THEORETICAL AND METHODOLOGICAL ISSUES OF NSI LITERATURE RELEVANT FOR DEVELOPING COUNTRIES B.CRITICAL REVIEW OF STUDIES RELATED TO THE CONCEPT OF NSI IN DEVELOPING COUNTRIES AIM: FIND OUT WHETHER IN WHAT WAY THE ROLE PLAYED BY FOREIGN SOURCES IS TAKEN INTO ACCOUNT

A. METHODOLOGICAL AND THEORETICAL ISSUES  NSI literature adopts a SYSTEMIC APPROACH towards innovation  A lot of definitions: Freeman (1987), Lundvall (1992), Nelson and Rosenberg (1993), Metcalfe (1995)…. COMMON POINTS: Innovation process in a developed context Important role given to linkages Identification of the main functions: produce, use and diffuse innovations Firms do not innovate alone but they are part of a complex environment where institutions and organizations shape and guide their innovative efforts (Edquist 2004; Narula 2004)

Innovation in developing countries is of different nature Both institutions and organizations can be missing or inappropriate and the interactions with firms may be missing as well Absorption function RELEVANCE FOR DEVELOPING COUNTRIES

B. CRITICAL REVIEW OF STUDIES RELATED TO THE CONCEPT OF NSI IN DEVELOPING COUNTRIES COMMON POINTS - Broad approach adopted - NSI as an ex-ante concept - Importance of firm interaction with other non firm actors (universities, standard setting agencies, research institutes, private foundations, financing organisations, schools, government agencies) - Importance of the effectiveness in learning (Viotti, 2001;Mathews 2001; Wong 1999; Lall and Pietrobelli 2003; Arocena and Sutz 1999; Gu 1999; Edquist 2001; Oyelaran- Oyeyinka 2005; Intarakamnerd 2002)

Absorption of foreign sources of technology: function and the institutional set up concerned with this function not properly identified Exceptions: Lall and Pietrobelli (2003): Sub-Saharan Africa; “Even countries that import all their technology have to undertake significant, costly and risky effort to use the technology efficiently (National Technological System)” Viotti (2001): comparison between Brazil and South Korea; “National Learning Systems should be centered in the activities, institutions, and relationships, associated to learning, rather than to innovation. Absorption and incremental innovation should, therefore, be the main focuses of studies of NLS” Edquist (2001): System of Innovation for Development; “for developing countries the generation of technological capability is primarily a matter of absorbing products and processes developed in other countries and deepening their knowledge about them over time”

2. FDI AND PROCESS 2. FDI AND SPILLOVER PROCESS A. SUMMARY OF THE RESULTS OF SPILLOVER LITERATURE B. FOCUS ON THE RELATIONSHIP BETWEEN FDI AND INSTITUTIONS AIM: FIND OUT WHETHER AND IN WHAT WAY THE INSTITUTIONAL CONTEXT IS TAKEN INTO ACCOUNT IN THE FDI LITERATURE

RESULTS OF THE EMPIRICAL LITERATURE ARE MIXED BUT: FOR DEVELOPING COUNTRIES INTERINDUSTRY SPILLOVER ARE USUALLY GREATER THAN INTRAINDUSTRYSPILLOVER (BLALOCK 2004, SMARZYNSKA 2002, KUGLER 2006) BECAUSE OF THE BACKWARD LINKAGE EFFECTS HOWEVER ALSO IN THIS CASE THERE CAN BE NEGATIVE RESULTS: Yudeva et al. (2003) for Russia Merlevede and Schoors (2005) for Romania Sasidharan (2006) for India A. SUMMARY OF THE RESULTS OF THE FDI SPILLOVER LITERATURE

It is due to the fact that the positive results are not automatic consequences of the presence of Multinational Enterprises (MNEs) but they have to be accompanied by significant efforts of local firms in term of ABSORPTIVE CAPACITIES. LITERATURE GAP: ROLE OF INSTITUTIONS MY PERSPECTIVE: THEY ARE IMPORTANT IN AN INDIRECT WAY BY HELPING FIRMS IN BUILDING GREATER ABSORPTIVE CAPACITIES HIGHER POSSIBILITY TO QUALIFY AS A SUPPLIER, HIGHER AMOUNT OF FDI INFLOWS HIGHER POSSIBILITY TO TAKE ADVANTAGE OF FDI SPILLOVER WHATEVER IS THE CHANNEL CONSIDERED

NON FIRM SECTOR IMPORTANT FOR TWO REASONS (Narula 2004): TO PROVIDE SKILLED AND EDUCATED WORKFORCE TO PROVIDE A SORT OF R&D INFRASTRUCTURE (UNIVERSITIES, PUBLIC RESEARCH INSTITUTE) TO DIRECT TECHNOLOGY STRATEGY EDUCATION R&D CAPABILITIES

B. FDI AND INSTITUTIONS IN THE LITERATURE (SEE BLONIGEN 2005 FOR A SURVEY) CONSIDERED ONLY: LEGAL AND POLITICAL INFRASTRUCTURE OR MACROECONOMIC ENVIRONMENT (tax systems, trade protection, easiness to create a company, lack of corruption, security of property rights, transparency, contract law) ANALYSIS WITH RESPECT TO LOCATION CHOICE NOT LINKED WITH THE TYPE OF FDI AND MOTIVATIONS

LITERATURE GAP NOT CONSIDERED THOSE INSTITUTIONS THAT CAN STRENGTHEN THE INNOVATIVE CAPACITY AT THE FIRM AND AT THE COUNTRY LEVEL This may influence the flow of FDI and the amount of technology transferred. Exception: IPR regimeInfluence the composition of FDI Maskus (2004), Smarzynska (2004) Lall (2003): the need of a proper IPR regime varies by level of development

3. NSI FRAMEWORK (broad definition) Oyelaran-Oyeyinka (2005) Political and legal structures Political and legal structures Basic and high-tech infrastructure Basic and high-tech infrastructure Science and technological knowledge base Science and technological knowledge base Financial and incentive structure Financial and incentive structure

R&D CAPABILITIES EDUCATION IPR REGIME

4. EMPIRICAL APPLICATION DATABASE USED: Knowledge Assessment Methodology DATABASE (WORLD BANK) DATABASE USED: Knowledge Assessment Methodology DATABASE (WORLD BANK) AIM: TO FIND OUT WHETHER AND TO WHAT EXTENT THE INSTITUTION AND ORGANIZATIONS IDENTIFIED IN THE PREVIOUS SECTIONS FULFIL THEIR FUNCTION (QUANTIFICATION OF NSI) ANALYSIS OF CORRELATION MATRIX

30 COUNTRIES SELECTED BY GEOGRAPHICAL AREA SOUTH AMERICA Argentina Brazil Bolivia Chile Colombia Ecuador Paraguay Perù Uruguay Venezuela SUB-SAHARAN AFRICA Angola Botswana Cameroon Cote d’Ivore Ghana Kenya Sierra Leone Uganda Tanzania Zimbabwe ASIA Bangladesh China Hong Kong India Malaysia Pakistan Singapore Thailand Vietnam

Political and legal infrastructure Intellectual Property Protection, 2006 Regulatory Quality, 2005 Rule of Law, 2005 Government Effectiveness, 2005 Control of Corruption, 2005 Scientific and technological knowledge base Researchers in R&D, 2004 Science and Engineering Enrollment Ratio, 2004 Science Enrollment Ratio, 2004 Gross tertiary enrollment, 2004 Professional and Technical Workers as % of the Labor Force, 2004 Total Expenditure for R&D as % of GDP, 2004 Scientific and Technical Journal Articles, 2003 Patent Applications Granted by the USPTO, average for High-Technology Exports as % of Manufactured Exports, 2004 Financial and incentive infrastrucuture Intensity of Local Competition, 2006 Domestic Credit to Private Sector (% of GDP), 2005 Cost to register a business % of GNI per capita, 2005 Availability of Venture Capital, 2006 Basic and high-tech infrastructure Telephone Mainlines Per 1,000 People, 2004 Internet Users Per 1,000 people, 2004 ICT Expenditure as % of GDP 32 VARIABLES SELECTED ACCORDING TO THE NSI FRAMEWORK

ANALYSIS OF THE CORRELATION MATRIX (FDI INFLOWS AS %GDP, AVERAGE) Political and legal infrastructure Intellectual Property Protection (2006) 0,35 Regulatory Quality, ,86 Rule of Law, ,853 Government Effectiveness, ,917 Control of Corruption, ,82 Scientific and technological knowledge base Researchers in R&D, ,09 Science and Engineering Enrollment Ratio, ,1 Science Enrollment Ratio, Gross tertiary enrollment, ,04 Total Expenditure for R&D as % of GDP, ,403 Scientific and Technical Journal Articles, 2003, 0,53 Patent Applications Granted by the USPTO, average for ,241 Public Spending on Education as % of GDP, ,04 Financial and incentive infrastrucuture Intensity of Local Competition, ,13 Domestic Credit to Private Sector (% of GDP), ,33 Cost to register a business % of GNI per capita, ,18 Availability of Venture Capital, 2006, 0,33 Basic and high-tech infrastructure Telephone Mainlines Per 1,000 People, ,55 Internet Users Per 1,000 people, 2004, 0,43 ICT Expenditure as % of GDP 0,24

RESULTS LOW CORRELATION WITH: R&D RESEARCHERS GROSS TERTIARY ENROLLMENT SCIENCE AND ENGINEERING ENROLLMENT RATIO PUBLIC SPENDING ON EDUCATION ICT EXPENDITURE FDI MOTIVATIONS INSTITUTIONS AND ORGANIZATIONS OF NSI NOT EFFECTIVE FIRM LEVEL TECHNOLOGY ABSORPTION (0,12)

ANALYSIS OF THE CORRELATION MATRIX BY COUNTRY GROUPINGS SUB-SAHARAN AFRICA NEGATIVE CORRELATION WITH ALL VARIABLES ONLY SIGNIFICANT CORRELATION ARE WITH: BASIC INFRASTRUCTURE POLITICAL AND LEGAL INFRASTRUCTURE BUT NOT IPR (-0,35) SOUTH AMERICA HIGH POSITIVE CORRELATION WITH: POLITICAL AND LEGAL INFRASTRUCTURE BUT NOT IPR (-0,002) BASIC INFRASTRUCTURE BUT NOT HIGH-TECH POSITIVE WITH SCIENTIFIC AND TECHNOLOGICAL BASE BUT NOT RESEARCHERS IN R&D AND SCIENTIFIC AND TECHNICAL JOURNAL ASIA HIGH POSITIVE CORRELATION WITH ALL VARIABLE ESPECIALLY IPR (0,7) SCIENTIFIC AND TECHNICAL JOURNAL (0,8)

ANALYSIS OF THE CORRELATION MATRIX (FIRM LEVEL TECHNOLOGY ABSORPTION, 2004) Political and legal infrastructure Intellectual Property Protection (2006) 0,72 Regulatory Quality, ,58 Rule of Law, ,133 Government Effectiveness, ,432 Control of Corruption, ,193 Scientific and technological knowledge base Researchers in R&D, ,66 Science and Engineering Enrollment Ratio, ,42 Science Enrollment Ratio, ,16 Gross tertiary enrollment, ,322 Professional and Technical Workers as % of the Labor Force -0,13 Total Expenditure for R&D as % of GDP, ,577 Scientific and Technical Journal Articles, 2003, 0,67 Patent Applications Granted by the USPTO, average for ,57 Public Spending on Education as % of GDP, ,269 Prof. And tech. Workforce as % of Labour Force, ,13 Financial and incentive infrastrucuture Intensity of Local Competition, ,78 Domestic Credit to Private Sector (% of GDP), ,33 Cost to register a business % of GNI per capita 2005, -0,46 Availability of Venture Capital, 2006, 0,81 University company collaboration,2006 0,85

ANALYSIS OF THE CORRELATION MATRIX BY COUNTRY GROUPINGS MORE SIMILARITIES THAN DATA RELATIVE TO FDI INFLOWS HIGH CORRELATION WITH UNIVERSITY COMPANY COLLABORATION RESEARCHERS IN R&D BUT EXCEPT FOR AFRICA TOTAL EXPENDITURE FOR R&D AS % OF GDP SCIENTIFIC AND TECHNICAL JOURNAL PATENT APPLICATIONS GRANTED BY THE USPTO SCIENCE AND ENGINEERING ENROLLMENT RATIO GROSS TERTIARY ENROLLMENT IPR PROTECTION R&D CAPABILITIES AND EDUCATION ARE IMPORTANT (SUB SAHARAN AFRICA HAS THE LOWEST VALUES)

CORRELATION FDI INFLOWS – FIRM LEVEL TECHNOLOGY ABSORPTION ALL COUNTRIES: 0,12 ASIA: 0,46 SUB-SAHARAN AFRICA: -0,67 SOUTH AMERICA: 0,20 GREATER POSSIBILITY OF BACKWARD LINKAGES GREATER SPILLOVER POTENTIAL

MISMATCH BETWEEN NSI COMPONENTS ATTRACTING FDI AND THOSE NEEDED TO BUILDING ABSORPTIVE CAPACITY ESPECIALLY FOR SOUTH AMERICA AND SUB -SAHARAN AFRICA DIFFERENT FDI MOTIVATIONS DIFFERENT DEGREE AND AMOUNT OF TECHNOLOGY TRANSFER (SPILLOVER POTENTIAL) NOT EFFECTIVENESS OF NSI IN FULFILLING THE FUNCTION OF ATTRACTING AND ABSORBING EXTERNALITIES COMING FROM FDI

THANK YOU!