Science Technology as the Main Drivers of Global Competition: Main Trends and Players Carl Dahlman World Bank Institute Presentation at IV World Knowledge Forum Seoul October 17, 2003

Structure of Presentation Knowledge and Growth in Historical Perspective High Growth Performance and Knowledge Strategies Implications for Developing Country Strategies A Broader Look: The Knowledge Revolution and GDP Main Country Players R&D Inputs R&D Outputs MNCs as Main Players Key Trends in R&D and Innovation Implications for Country Strategies © Knowledge for Development, WBI

World GDP/Capita and Population

Growing Differences in GDP/Capita

Shares of World GDP - Constant US$ ( ) % 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)

Few Countries Have Sustained High Growth Rates over Long Periods Most of these countries are or were until recently developing countries They have followed successful knowledge strategies Key elements of those strategies, in addition to appropriate macroeconomic management and good economic incentive regimes have been: Massively tapping into global knowledge Investing strongly in education And now investing heavily in ICT

©Knowledge for Development, WBI Eight Fastest Growing Economies (constant 1995 US$)

©Knowledge for Development, WBI Average GDP/Capita Growth Rates

Growth Depends on Successful Knowledge Strategies At lower level of development (and S&T capability) it depends largely on effectively tapping into global knowledge (playing rapid catch-up) At higher levels of development (and S&T capability) it also depends critically on own innovative effort Korea and Taiwan have already made the transition from being primarily catch-up economies to becoming innovating economies

GDP/Capita Growth: Korea vs Ghana ©Knowledge for Development, WBI

Implications for Developing Countries The knowledge revolution is being led by the industrialized countries Developing countries run risk of being left further behind. There is also trend towards rising inequality with-in both developed and developing countries Developing countries need to develop explicit strategies to take advantage of knowledge revolution to: Improve performance of traditional sectors Leapfrog technologies Develop new sectors Address problems of increasing internal inequalities

New Growth Patterns In last decade there has been renewed interest in growth because: Micro level evidence of increasing importance of new technologies ICT revolution Increased share of high tech products in exports Managerial and organizational changes Macro level evidence of changes of patterns and nature of growth among OECD countries Surprisingly strong growth of US economy Reversal of trend towards convergence of per capita income among OECD countries. This has lead to focus on “ new economy ” to understand what is going on

The Knowledge Revolution and “ The New Economy ” 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 half of machinery & equipment investments in OECD. © Knowledge for Development, WBI

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 52% in 1999 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

Investment in Knowledge vs Machinery & Equipment Selected OECD Countries 1998 as % GDP CountryKnowledge*Machinery & Equipment Sweden United States Korea Finland Switzerland Canada Japan OECD average *Knowledge = investments in R&D, software, and higher education. Investments in knowledge would exceed av in machinery & equipment if total investment in education were included.

Some Implications of Knowledge Revolution We are moving towards more diversification in products and services as well from the world of tangible products to that of intangibles This is reflected in changing structure of global production and trade

Changing Structure of Manufactured Exports Products in OECD High technology industries increased from 18.8% in 1990 to 25.3% in 1999 Medium high technology industries increased from 38.7% to 39.1% Medium low technology industries decreased from 17.9% to 14.1% and Low technology industries decreased from 24.3% to 21.3% Therefore roughly 2/3rds of manufactured exports from the OECD countries is high or medium technology

Increasing Share of GDP is Knowledge Based OECD defines knowledge based industries as: High technology industries (R&D/output 8-14%) Medium technology industries(R&D/output 2-4%) Posts and telecommunication services Finance and insurance services Business services (excluding real estate activities) Education and health By this measure 30%-40% of value added in OECD economies is knowledge based

Most Knowledge Intensive OECD Economies: Share of Knowledge Industries in GDP (1998) COUNTRYKnowledge Industries* Education & Health Total US Germany UK France Holland Euro Union Hungary Korea *Knowledge Industries=high and medium tech, post and telecom, finance and insurance, business services (excluding real estate activities)

Increasing Importance of Science and Technology The ability to harness science and technology has become a major source of competitive advantage There is mounting evidence that higher levels of R&D intensity are correlated with higher levels of economic performance, particularly in economies that are becoming more knowledge based (OECD, Science Technology and Industry Outlook 2001 )

Global R&D Spending is roughly US $650 Billion (2001) United States was about $263 Billion or roughly 40% of global, which is larger than its 31% share of global value added. Japan ’ s was about $134 billion or roughly 21% of total, larger than its roughly 14% share of global value added. However there are other significant players, including some developing countries

% United Kingdom Germany France Canada Italy Russia Australia India China South Korea Taiwan Brazil

World Shares of USPTO Patent Count ( ) excluding US and Japan % Germany Taiwan Germany France United Kingdom South Korea Sweden Netherlands

Key Trends in Global R&D In OECD spending on R&D as share of GDP has increased over past 20 years, with acceleration since mid 1990s (mostly in US and Japan), in spite of falling share of defense R&D Business sector now major source of R&D financing in OECD countries: Business sector share increased from 57% to 67% in US over last decade Remained stable at about 72% in Japan, Increased from 52% to 58% in EU Most OECD countries are spending higher share of GDP on basic research in than in early 1980s

TOP 10 R&D Spending Corporations in US COMPANYSPENDING (million) General Motors7,900 Ford6,300 IBM4,466 Lucent3,678 Hewlett Packard3,355 Motorola2,893 Intel2,509 Microsoft2,502 Pfizer2,279 Johnson & Johnson2,269

Innovation Increasingly Relies on Cooperation Among Firms, Universities, and R&D labs Collaboration between business and universities and government R&D labs is becoming more common as business seek to exploit research by the later and the later seek funding for their research activities Share of R&D performed by universities or govt. labs, but funded by business was 6.1% and 4.1% respectively in OECD in 1998 According to OECD innovation surveys from mid 1990s, firms with co-operation arrangements for innovation with universities or government accounted on average for 10% of of total employment in OECD countries

Production of Scientific Research and Technological Know-how is Increasingly Globalized In mid 1990s 27% of scientific publications in OECD area were work of multi-national teams Ranged from highs of over 50% in smaller economies such as Hungary, Portugal, Switzerland, Belgium to Lows of less than 20% for large economies such as US and Japan (were it was only 15%) An increasing share of European Patent Office applications involves inventors with different countries of residence Averaged 7% for OECD but Ranged from high of more than 35% for Luxemburg and Poland to Lows of less than 5 for Korea and Japan

Internationalization of Industrial R&D There has been increased internationalization of industrial R&D due to: Increase in number of R&D laboratories located abroad Increased number of international networks of cooperation agreements or strategic alliances between firms or between firms and government or university R&D units The share of foreign affiliates in industrial R&D varies from less than 5% in Japan to over 70% in Hungary and Ireland Total R&D expenditures under foreign control in manufacturing sectors in selected OECD countries has increased from $24 billion in 1993 to $ 46 billion in 1999 Nearly half of this is in the US The US is responsible for the largest amount of R&D abroad

Industrial R&D spending of U.S. and foreign affiliates, by world region: 1998

Implications for Country Strategies There are significant economies of scale in the creation and exploitation of knowledge. These favor very large economies like the US. However, some small advanced economies such as Finland, Sweden, Switzerland, have managed to become very competitive in innovation too. This has been the result of their own effective strategies, built largely on developing specific industrial clusters. But as the innovation process becomes more global, national innovation systems need to draw increasingly on international pools of knowledge So openness to international flows of knowledge is becoming more important National policies need to both strengthen the domestic R&D base to augment absorptive capacity as well as to develop international linkages.

Specific S&T Policies Increasing public R&D funding, and encouraging private sector to increase its own R&D effort Allocating public funding more effectively Getting more spin-offs from public R&D efforts Encouraging greater interaction among three key domestic actors: public R&D institutes, universities and productive sector Encouraging greater interactions between domestic actors and foreign knowledge actors Encouraging brain circulation rather than brain drain Encouraging the development of regional knowledge clusters

Education and Training Policies Increasing average educational attainment of labor force Increasing higher education enrollment rates as it is now more important to make effective use of knowledge as well as to create new knowledge Strengthening the research capability of universities and their interaction with firms and research institutes Developing life long learning opportunities in order to facilitate continuous learning and re- skilling

While the general economic and institutional framework and broad policies towards science and technology and education, are very important, innovation happens at the local level Therefore governments also have to stimulate development of regional innovation clusters. This involves developing stronger interactions among firms, universities and research institutions through formal and informal processes The other presentations in this session will develop this in more detail

Developing Innovation Clusters While the general economic and institutional framework and broad policies towards science and technology and education, are very important, innovation happens at the local level Therefore governments also have to stimulate development of regional innovation clusters. This involves developing stronger interactions among firms, universities and research institutions through formal and informal processes The other presentations in this session will develop this in more detail

THANK YOU! Carl Dahlman

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