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 ANALYSIS OF THE WAY NSI IN A DEVELOPING CONTEXT PLAY A ROLE IN DEVELOPING CONTEXT PLAY A ROLE IN ATTRACTING FDI AND ABSORBING THEIR ATTRACTING FDI AND ABSORBING THEIR SPILLOVER EFFECTSSPILLOVER 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 REVIEW OF THE LITERATURE ON NSI IN DEVELOPING COUNTRIES AND ON THE RELATIONSHIP BETWEEN FDI AND INSTITUTIONSAND ON THE RELATIONSHIP BETWEEN FDI AND INSTITUTIONS
EMPIRICAL APPLICATION THROUGH WORLDBANK DATABASE (KAM)EMPIRICAL APPLICATION THROUGH WORLDBANK DATABASE (KAM)
EXTERNAL SOURCES: FDIEXTERNAL SOURCES: FDI
FDI inflows towards developing countries are regularly FDI inflows towards developing countries are regularly
risingrising
Source: World Investment Report (2006)
-
100 000
200 000
300 000
400 000
500 000
600 000
700 000
800 000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
North America
Europe
Developing economies
Japan
EXTERNAL SOURCES: FDI/2EXTERNAL SOURCES: FDI/2Relevant economic weight for their economies (FDI stock as % of GDP)Relevant economic weight for their economies (FDI stock as % of GDP)
Source: World Investment Report (2006)0,00
5,00
10,00
15,00
20,00
25,00
30,00
35,00
40,00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Europe
North America
Japan
Developing economies
STRUCTURE OF THE PAPERSTRUCTURE OF THE PAPER
1.1. CRITICAL REVIEW OF SOME PAPERS WHERE THE CRITICAL REVIEW OF SOME PAPERS WHERE THE CONCEPT OF NSI IS APPLIED TO A DEVELOPING CONCEPT OF NSI IS APPLIED TO A DEVELOPING CONTEXTCONTEXT
2.2. SUMMARY OF THE MAIN RESULTS OF THE FDI SUMMARY OF THE MAIN RESULTS OF THE FDI SPILLOVER LITERATURE FOCUSING THE SPILLOVER LITERATURE FOCUSING THE ATTENTION ON THE INSTITUTIONAL CONTEXTATTENTION ON THE INSTITUTIONAL CONTEXT
3.3. IDENTIFICATION OF INSTITUTIONS AND IDENTIFICATION OF INSTITUTIONS AND ORGANIZATIONS (INSIDE THE FRAMEWORK OF ORGANIZATIONS (INSIDE THE FRAMEWORK OF NSI) THAT ARE CRUCIAL FOR FDINSI) THAT ARE CRUCIAL FOR FDI
4.4. EMPIRICAL APPLICATION EMPIRICAL APPLICATION
1.NSI IN DEVELOPING COUNTRIES1.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 2. FDI AND SPILLOVER
PROCESSPROCESS
A.A. SUMMARY OF THE RESULTS OF SPILLOVER SUMMARY OF THE RESULTS OF SPILLOVER LITERATURELITERATURE
B.B. FOCUS ON THE RELATIONSHIP BETWEEN FDI FOCUS ON THE RELATIONSHIP BETWEEN FDI AND INSTITUTIONSAND 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 regime
Influence the composition of FDI
Maskus (2004), Smarzynska (2004)
Lall (2003): the need of a proper IPR regime varies by level of development
3.3. NSI FRAMEWORK (broad NSI FRAMEWORK (broad definition)definition)
Oyelaran-Oyeyinka (2005)Oyelaran-Oyeyinka (2005) • Political and legal structuresPolitical and legal structures
• Basic and high-tech infrastructureBasic and high-tech infrastructure
• Science and technological knowledge Science and technological knowledge basebase
• Financial and incentive structureFinancial and incentive structure
SCIENCE ANDTECHNOLOGICAL
KNOWLEDGE BASE
FINANCIAL AND INCENTIVE
INFRASTRUCUTRE
BASIC ANDHIGH TECH
INFRASTRUCTURE
POLITICAL AND LEGAL
INFRASTRUCTURE
FIRM
R&D CAPABILITIES
EDUCATION
IPR REGIME
4. EMPIRICAL APPLICATION4. EMPIRICAL APPLICATION
DATABASE USED: Knowledge Assessment DATABASE USED: Knowledge Assessment Methodology DATABASE (WORLD BANK)Methodology DATABASE (WORLD BANK)
AIM: TO FIND OUT WHETHER AND TO WHAT EXTENT AIM: TO FIND OUT WHETHER AND TO WHAT EXTENT THE INSTITUTION AND ORGANIZATIONS IDENTIFIED THE INSTITUTION AND ORGANIZATIONS IDENTIFIED IN THE PREVIOUS SECTIONS FULFIL THEIR FUNCTION IN THE PREVIOUS SECTIONS FULFIL THEIR FUNCTION (QUANTIFICATION OF NSI)(QUANTIFICATION OF NSI)
ANALYSIS OF CORRELATION MATRIX
30 COUNTRIES SELECTED BY GEOGRAPHICAL AREA30 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 2001-05
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,2000-2004 AVERAGE)
Political and legal infrastructure
Intellectual Property Protection (2006) 0,35
Regulatory Quality, 2005 0,86
Rule of Law, 2005 0,853
Government Effectiveness, 2005 0,917
Control of Corruption, 2005 0,82
Scientific and technological knowledge base
Researchers in R&D, 2004 -0,09
Science and Engineering Enrollment Ratio, 2004 0,1
Science Enrollment Ratio, 2004 -0.02
Gross tertiary enrollment, 2004 0,04
Total Expenditure for R&D as % of GDP, 2004 0,403
Scientific and Technical Journal Articles, 2003, 0,53
Patent Applications Granted by the USPTO, average for 2001-05 0,241
Public Spending on Education as % of GDP, 2003 0,04
Financial and incentive infrastrucuture
Intensity of Local Competition, 2006 0,13
Domestic Credit to Private Sector (% of GDP), 2005 0,33
Cost to register a business % of GNI per capita, 2005 -0,18
Availability of Venture Capital, 2006, 0,33
Basic and high-tech infrastructure
Telephone Mainlines Per 1,000 People, 2004 0,55
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, 2005 0,58
Rule of Law, 2005 0,133
Government Effectiveness, 2005 0,432
Control of Corruption, 2005 0,193
Scientific and technological knowledge base
Researchers in R&D, 2004 0,66
Science and Engineering Enrollment Ratio, 2004 0,42
Science Enrollment Ratio, 2004 0,16
Gross tertiary enrollment, 2004 0,322
Professional and Technical Workers as % of the Labor Force -0,13
Total Expenditure for R&D as % of GDP, 2004 0,577
Scientific and Technical Journal Articles, 2003, 0,67
Patent Applications Granted by the USPTO, average for 2001-05 0,57
Public Spending on Education as % of GDP, 2003 0,269
Prof. And tech. Workforce as % of Labour Force, 2004
- 0,13
Financial and incentive infrastrucuture
Intensity of Local Competition, 2006 0,78
Domestic Credit to Private Sector (% of GDP), 2005 0,33
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 MOTIVATIONSDIFFERENT DEGREE AND AMOUNT OF TECHNOLOGY TRANSFER (SPILLOVER POTENTIAL)
NOT EFFECTIVENESS OF NSI IN FULFILLING THE FUNCTION OF ATTRACTING AND ABSORBING EXTERNALITIES COMING FROM FDI