1 Keun Lee Prof. of Economics, Seoul Nat’l University Director, Center for Economic Catch-up Technology Policy for a Detour to Escape the Middle Income Trap: Schumpeterian Reflections on the Asian experience

2 Motivating Question : Why Catching up rare and not sustained? -> Middle Income country Trap?

Income Groups Annual growth Low Income9581, High Income Upper Middle Income Lower Middle Income9581, Middle income country trap: Per capita in 2000 Dollars, Asian 4: Korea, Taiwan, Hong Kong, and Singapore

Why the Middle Trap important? To give hope for the Low incomers who are trapped with the adding-up problem. Eg) China needs to go beyond the low-end goods based growth, so that it may leave rooms for other low income countries

Solution for the Middle Trap = Detour rather than direct emulation or static specialization

Straight Road: but traffic jam (adding-up problem) Detour: No jam but rough & winding road -> need skill (tech. capability) Can take a Detour if you have a high driving skill, when the straight road is jammed

7 Trend of the Income Levels as Percentage of that of Japan:  Korea, Taiwan: No catching up in 60s, 70s:-> only from 1980s:  what happened? Just more R&D, in which sector?

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detour: short cycle technology sectors 9 Cycle time = speed of change in the knowledge base of a technology Short cycle tech = old knowledge quickly obsolete/useless + new knowledge tend to emerge more often -> less disadvantageous for the latecomers => technological sectors with less reliance on the old technologies but with greater opportunity for emergence of new technologies, Measured by the mean citation lag = the time difference between the application year of the citing patent and that of the cited patents (Jaffe and Trajtenberg, 2002).

10 Intra-national Citation in Patents (~self-citation)

11 Criterion for Technological Specialization

12 Catching-up (Korean) vs. Mature (US) firms: The former in short cycle technologies

13 Catching-up (Korean) vs. Mature (US) firms: The former in low self-citation (localization) USA Firms

Regressing growth onto National Innovation systems: Asian 4 as benchmark Asian 4High Incomemiddle Inc.World Tech cycle time (-)* (+)* Localization of knowledge + (+)* + Originality HH: inventor concentration (-)* Asian 4 Dummy (+)* Controls: Initial income, Population, Investment, secondary enrollment Similar Results with Firm-Level Data

15 Detour => short cut Cycle Time of Korea & Taiwan Patents getting longer recently

16 From Trade Specialization to Technology Specialization StagesLow or low middle income Upper middle income toward high income Type of specialization Trade specializationTechnology specialization Source of specialization Comparative advantages from resource endowment Absorption/design capability from learning/R&D effort Type of sector Labor intensive/resource industries Short cycle/emerging technologies End goalcompetitive export industries Indigenous knowledge creation & diffusion Background theory Product life cycle (inheriting)Catch-up cycle (leapfrogging) How: From Middle to High Income Countries

Now, How to drive the Detour: Implementation Strategies The detour is not just smooth and easy; -> requires certain level of absorption and technology capacity, not only firm-level but also at the national-level

3 Steps along the Detour 1)Acquiring Design Capability (to move beyond OEM/assembly) 2) Targeting/Entering the mature /low-end segment of short cycle Sectors 3) Leapfrogging into New/Emerging Technologies in the Short-cycle Sectors

a. Hyundai's development of engine as Mitsubish refuse to transfer its latest engine technology (from 1984 to 1992) -- Co-dev’t contract with a specialized R&D firms, Ricardo Co. UK. tried more than 1,000 proto types until success after 7 years. b. 256 K to 64 M Dram by Samsung -- Samsung chose to develop its own design technology for 256 or higher K Dram as it was not easy to buy the design -- overseas R&D outposts in Silicon Valley and reverse brain drain c. Taiwan: electronic calculator in mid 1980s : went around the world to study LSI applications, and combined what they saw and what they learned from Japanese suppliers. => Policy Tools: Tariffs and under-valuation important. Stage 1: Acquiring Design Capability:

Government: R&D by Public labs (ETRI in Korea) Private: Manufacturing (private Co ’ s: Samsung, LG in Korea) Government: Market protection or Procurement ( local telephone authorities) Stage 2 Entering Mature Segment of Short cycle Sectors By public-private partnership (PPP): eg) Telephone switch development in Korea & China India & Brazil had the same development but not sustained without initial protection; => Infant protection still matters, together with joint PP R&D

G: R&D by Private & public labs P: Manufacturing G: Procurement or Standard Policy Stage 3: Leapfrogging into Emerging Technologies eg) Korea: Digital TV, mobile phones (CDMA) ; China: 3G TD-SCDMA, Photovoltaic; electric vehicles Policy tools: Standards policy matter, eg), exclusive standards in wireless.

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Learning Objects operational skills production/ process technology design technology Product Development technology Stages of Knowledge Learning/ Creation and Catch-up Learning Learning by by producing/ in-house R&D Co-development Mechanism doing organizing Overseas R&D strategic alliance following foreign P&P R&D designs

Three Patterns of Technological Catch-up (Lee & Lim 2001) Path of the Forerunner : stage A --> stage B --> stage C --> stage D Path-Following Catch-up : stage A --> stage B --> stage C --> stage D eg. PC, some consumer goods, and Machine Tools Stage-skipping Catch-up (leap-frogging I) : stage A > stage C --> stage D eg. Hyunda's fuel-injection engine (cf. carburetor engine) Samsung' 64 K D-Ram production technology; 256 K D-ram design technology T lephone switch in in China Path-Creating Catch-up (leap-frogging II) stage A --> stage B --> stage C' --> stage D' eg. CDMA development, digital TV ( Notes: C and C', represent competin technologies.)

1)Late Entry: Entering Mature Segment of Short cycle Sectors: eg) High speed Train in China, India’s IT service, Middle sized Jets by Brazil Entry into notebooks by P-P in Taiwan Suggestion: Nigeria can build oil refinery, rather than keep exporting crude oils 2)Leapfrogging into New/Emerging Segments of Shorter-cycle Sectors: eg) Photovoltaic industry in China, Electric Vehicles by China Ethanole or Biofuels in Brazil More Examples

Average Cycle Time of China’s top 30 class US patents = 8.1 years ( yrs) Cf) Korea and Taiwan = 7.7 yrs (avg of ) Brazil & Argentina = 9.3 yrs (avg )  China more similar to Korea & Taiwan than to Brazil and Argentina China and the Middle Trap?

In concluding Government activism for 2 reasons 1) to handle not market failure but capability failure in R&D, 2)because they are below the frontier, and less uncertainty with targeting

Market failure: more or less R&D than optimal (assumption = latecomers are capable of doing R&D) Capability failure = afraid of R&D = zero R&D  Need not only the provision of R&D money but also various ways to cultivate R&D capability itself, eg) joint public-private R&D consortium Not market failure but Capability failure in R&D

latecomers are not on the technology frontier but have clearly defined (existing) technologies or projects to emulate, -> better chance of success if they mobilize all public and private resources Assumption behind the caution or warning against technological targeting is that countries are on the frontier. However, many latecomers rely on imported technologies, but they are often charged with monopoly prices. Eg) Telephone switches in Korea & China high speed train by China When not on the frontier, less uncertainty of targeting

In concluding Should allow ‘detour’ for latecomers! cf) than forcing direct replication of the developed 30 1)Korea used to be more protective; but now most open with FTAs with US: 2) Lowest protection of IPRs in Korea, Taiwan but one of the highest level of IPR protection 3 ) Big Bang vs. Gradualism in system transition Detour -> capability up -> can afford to open cf) no detour -> no capability up -> cannot open

31 Tariffs in Korea and of Asymmetric Opening (Source: Shin 2011).

Composition of Major Export Items, (% in total Exports)

Successive Entries: Composition of sales in Samsung Source : Chang (2003), Notes: numbers are share percentages in sales

34 Gracias! Meu Amigo! Obrigado! Thank you! 謝謝大家 감사합니다

35 References ( Lee, Keun, 2012, a book manuscript, “Knowledge and Detour for Sustained Catch-up: Schumpeterian Recipe to escape the Middle income trap.” Lee, Keun, Chaisung Lim, and Wichin Song (2005), "Digital Technology as a Window of Opportunity and Technological Leapfrogging: Catch-up in Digital TV by the Korean Firms ”, Inter.J. of Tech. Management, Vol. 29, 1/2, pp Lee, Keun, “ Making a technological Catchup. ” Asian J.of Tech. Innovation, Mu, Qing, and Keun Lee (2005), “ Knowledge Diffusion, Market Segmentation and Technological Catch-up: The Case of Telecommunication Industry in China ”, Research Policy.

36 G5ClassClass Name Patent count 1514Drug, Bio-Affecting and Body Treating Compositions Stock Material or Miscellaneous Articles Measuring and Testing Internal-Combustion Engines Drug, Bio-Affecting and Body Treating Compositions Liquid Purification or Separation Chemistry: Molecular Biology and Microbiology Radiant Energy Plastic & Nonmetallic Article Shaping or Treating Electricity: Measuring and Testing2325 Top 10 Classes in Patenting by G5 vs Korea-Taiwan Korea- Taiwan ClassClass Name Patent count 1438Semiconductor Device Manufacturing: Process Television Electrical Connectors Active Solid-State Devices ( Transistors, Solid-State Diodes) Illumination Land Vehicles Static Information Storage and Retrieval Locks Dynamic Magnetic Information Storage or Retrieval Exercise Devices311

37 G5ClassClass Name Patent count 1514Drug, Bio-Affecting and Body Treating Compositions Stock Material or Miscellaneous Articles Measuring and Testing Internal-Combustion Engines Drug, Bio-Affecting and Body Treating Compositions Liquid Purification or Separation Chemistry: Molecular Biology and Microbiology Radiant Energy Plastic & Nonmetallic Article Shaping or Treating Electricity: Measuring and Testing mid income's ClassClass Name Patent count 1514Drug, Bio-Affecting and Body Treating Compositions Drug, Bio-Affecting and Body Treating Compositions Chemistry: Molecular Biology and Microbiology54 475Metallurgical Compositions, Metal Mixtures52 565Glass Manufacturing Surgery Liquid Purification or Separation Chemistry of Inorganic Compounds Catalyst, Solid Sorbent or Product Internal-Combustion Engines38 Top 10 Classes in Patenting by G5 vs 8 middle-income countries

38 Knowledge and firm performance III: with 3 variables together US firms DependentGROWTHROAROSSALES/EMPTOBINQ H-H Index(+)*(-)(+)(-)**(-) Originality(+) (+)**(+) Self-citation(+)+(-) (+)*(+)+ No. of workers(+)(-)+(-)(-)**(-)+ Investment Propensity(+)** (-)**(+)** Debt to Equity Ratio(-) (+) Capital Labor Ratio(-)** (+)**(-)** Obs Korea firms DependentGROWTHROAROSSALES/EMPTOBINQ H-H Index(-)(+) (-)+(-) Originality(-)(+)(+)+(-)(+) Tech. Cycle(+)(-)* (+)(-) No. of workers(-) (+)(-) Investment propensity(+)+(-)+(+)(-) Debt to Equity Ratio(+)(-)** (-)+(+) Capital Labor Ratio(+)(-)+(-)**(-)(-)+ Obs

Every country for IT’s? Another Adding-up? 39 Analogous to the adding-up problem or risk of specialization in labor-intensives by all low-income countries. Big difference: 1) specialization based on factor endowments : fixed with few opportunities for change, 2) specialization in short-cycle technologies : no fixed list of technologies but rather specializing in a field or sector where new technologies always emerge to replace old ones, as existing technologies become obsolete soon.

40 Three Alternatives for Development: Low, Middle and High Roads Strategy Cycle time of technology. Origina lity Value Segmentation Example Countries Low Road Existing comparative Advantage LongLow Low-end eg) apparel, footwear Typical low-incomes: Bangladesh; Sri lanka Korea & Taiwan in 60s, 70s China in early 1980s High Road Direct Replication LongHigh High-end eg) fabrics; materials; machineries, tools Medicines Some middle incomes: Brazil, Argentina in the 1980s, 90s Middle Road DetourShortLow Middle/High end eg ) high end consume r electronics Successful Middle Incomes: Korea; Taiwan since 1980s China now *Best Scenario: Low Road-> Middle Detour -> High Road *Muddling through the Middle Road: eg, 2 nd tier Asian countries, eg. Malaysia, Thailand

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