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  • I~ L4L' a of

    INDUSTRY AND ENERGY DEPARTMENT WORKING PAPER INDUSTRY SERIES PAPER No. 12

    Impact of Technological Change on Industrial Prospects for the LDCs

    ~ .

    June 1989

    Report No. 10437

    The World Bank Industry and Energy Department, PPR

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  • INDUSTRY AND ENERGY DEPARTMENT WORKING PAPER INDUSTRY SERIES PAPER NO. 12

    Impact of Technological Change on Industrial Prospects for the LDCs

    June 1989

    The World Bank Industry and Energy Department, PRE

  • IMPACT OF TECHNOLOGICAL CHANGE ON

    INDUSTRIAL PROSPECTS FOR THE LDCs

    Carl Dahiman

    June 1989

    The views expressed in this paper are those of the author and should not be attributed to the World Bank or its affiliates.

  • IMPACT OF TECHNOLOGICAL CHANGE ON INDUSTRIAL PROSPECTS FOR THE LDC'S

    by

    Carl J. Dahlman Industrial Development Division Industry and Energy Department

    The rate of technical change, having speeded up in the last few years, has implications for ,.he industrial prospects of the LDC's as well as for the World Bank. This paper covers three topics--a brief summary of the main trends in technological change in industry, implications of those trends for LDCs, and implications for the Bank. As other papers at this seminar address r;rends in technological change in greater depth, this one focuses more on the implications of those trends.

    Two clarifications need to be made at the outset. The first is that this paper defines technology quite broadly as technological knowledge. procedural methods. and organizational modes used to transform inputs into outputs. Thus it is not so much just hardware as knowledge, organization, and methods that structure the activities for carrying out the transformations. This is important because it means that technology is to a large extent embodied in people and institutions, not just in physical objects, and that acquiring technological capability is therefore mostly a matter of building up skills and institutions, not buying hardware.

    The second clarification is that technical change offers both a potential and a threat to developing countries. This will be developed further in Section II.

    I. TRENDS IN TECHNOLOGICAL CHANGE IN INDUSTRY

    Although there are many trends, the main ones may be summarized under the seven headings below. So far they are evident mostly in the industrialized countries, but they are also appearin among the more advanced developing countries, and have implications for all._/

    A. Increased rate of innovation

    Although as recently as 15 years ago, talk was of a slowdown in the rate of innovation, in the last decade a tremendous acceleration has actually bean occurring. Much of this has affected primarily microelectronics, biotechnology, and new materials. The accelerating trend in technical change is related to two factors. On the supply side, it has been pushed by a series of advances in material sciences, solid state and plasma physics, genetic engineering, and substantial improvements in scientific

    ./ For more information on the various trends, see the references at the end o. this paper, farticularly OECD (appendix 2 to chapter 6) and OTA.

  • -2-

    instrumentation. On the demand side, the economic multipolarization and intense competition for world markets has stimulated technological rivalry among nations and industrial firms. As a corollary to this trend, in the last decade there has been an increase in R&D expenditures as a perc3ntage of GNP among the industrialized economies and the most rnpidly industrializing developing economies in East Asia. Table 1 shows this increasing trend in R&D expenditures fcr the U.S., Japan, and some key East Asian developing economies.

  • TABLE 1: R&D EXPENDITURE AS X OF GNP

    1965 1970 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

    qrazfi - - - 0.70 0.60 - - - 0.60 - - - -

    Mexico 0.20 - - - - 0.39 0.51 0.52 0.46 0.32 0.56 0.34 0.30

    Korea - 0.39 0.42 0." 0.60 0.63 0.56 0.58 0.65 0.90 1.05 1.26 1.59

    Singapore - - 0.00 - 0.2D - 0.20 0.30 - - 0.60 - 0.90

    Taiwan - - - - 0.66 0.84 0.72 0.94 0.91 0.94 0.99 1.06 1.04

    Japan 1.93 2.22 2.40 2.37 2.35 2.36 2.52 2.63 2.87 3.01 3.15 3.29 3.49 -

    United States 3.09 2.82 2.45 2.43 2.38 2.36 2.44 2.57 2.64 2.83 2.88 2.89 3.06

    Sources: Japan and United States: Japan - Ministry of Scif-ce & Technology, Indicators of Science, Korea: Republic of Korea - Ministry of Science & Technology, Science and Technology Han Taiwan: Taiwan, Repub(ic of China, Taiwan Statisticel Data Book, 1987. w

    Notes: t-) indicates data not available. Taiwan's data for 1984 and 1985 includes humanities and social sciences.

  • -4°

    B. Broader applicability of new technologies

    The most dramatic changes so far have been occurring in the areas of electronics and telecommunications. The changes have been not only in the processes and products within the electronics and telecommunication sectors themselves, but also in their applications to a wide range of other sectors. These include process control in continuous industries such as steel and petrochemicals; automation in assembly-type industries such as automobiles and other consumer durables; and automated data processing and communications in service industries such as banking, insurance, and others that require recording and tracking large numbers of transactions. For example, although sales by information technology industries only accounted for between .9% and 2.3% of GNP in 1984 in the United Kingdom, France, Germany, and Japan, estimates for the same year indicate between 60% and 65% of manufacturing firms in those countrias adopted some form of microelectronics technology.:/

    C. Shorter life cycles and greater flexibility in resgonse to customer's needs

    In the industrial sector, especially in manufacturing, a conse- quence of the above two trends has been a shortening of the life cycles of technological processes and especially of products. With new ele'.tronics- based technologies for computer aided design (CAD), numerically controlled machine tools (NCMT), industrial robots, automatic guided vehicles (AGVs), computer-aided manufacturing (CAM), automated warehouses, and automated order and distribu-ion systems, a move to computer integrated manufacturing (CIM) is underway. This innovation permits a very short period of time between new product design and production. It also permits rapid response and flexibility in relation to the specifications of different customers. As a result there is an important trend toward more product diversificati.on and more competition in design, distribution, and service in addition to actual production activities.

    Further, the rapidity of technological change, an increase in the number of participants, and acceleration in the diffusion of technology have also led to shorter technological life cycles. This has meant more pressure to cash in on technological rents as quickly as possible biefore each innova- tion becomes obsolete. This is leading to greater internationalization of technological development among industrial countries and new competitive strategies among major players, including the formation of strategic alliances. For example, of 974 international cooperation agreements among firms between 1982 and 1985, 28% were for distribution and marketing, 26% for integration of R&D activities, 17% for technology transfer, 16% for integra- tion of production, 6% for supply and 7% for other./

    2/ OECD [1988] p. 254 and ff 29.

    2/ OECD [1988] p. 255. See also Mody [1988] for a recent analysis of trends in technology alliances between firms.

  • -5-

    D. Increased automation. smaller role for unskilled labor

    Increased automation and the greater emphasis on product design, development, and marketing mean that being a low-cost producer relying on cheap labor is no longer a sufficient condition for competitiveness. Competitive advantage in many se cors now depends less on lower production costs than on speedy and reiiablu delivery, high quality, and the ability to expand the range of products and services to fit customers' changing needs. On one hand, this trend tends tc work against LDC's whose most abundant resource is cheap unskilled labor. On the other hand, the development of automated technologies such as NCMTs, CAD, automated accounting and management systems, and expert intelligence systems are also substituting for skilled labor, and even for white collar professionals in business and technical fields such as architecture and medicine. This could relieve some of the technical skill constraints that handicap m-ny LDC's. However, adoption of these technologies will require a new set of operational and maintenance skills. As a result, a different skill profile, with a more flexible labor force is required.

    E. C.hanges in. ise of inputs

    Inci d process control is leading to increased energy efficien- cy in energy-ir: e process industries such as steel and cement. Better integration betweei Xcign and production and new optimization techniques are leading to material savintgs. The development of synthetic and new composite materials is also substitating for man

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