Innovation, Technology, and Knowledge Management
Series Editor Elias G. Carayannis, George Washington University, Washington D.C., USA
For further volumes: http://www.springer.com/series/8124
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Vivienne Wang • Elias G. Carayannis
Promoting Balanced Competitiveness Strategies of Firms in Developing Countries
Vivienne Wang UNDP/UNFPA, New York NY 10158, USA
[email protected] Elias G. Carayannis School of Business George Washington University Washington, DC 20052, USA
[email protected] ISBN 978-1-4614-1274-8 e-ISBN 978-1-4614-1275-5 DOI 10.1007/978-1-4614-1275-5 Springer New York Dordrecht Heidelberg London Library of Congress Control Number: 2011936002 © Springer Science+Business Media, LLC 2012 All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)
Series Foreword
The Springer book series Innovation, Technology, and Knowledge Management was launched in March 2008 as a forum and intellectual, scholarly “podium” for global/ local, transdisciplinary, transsectoral, public–private, and leading/“bleeding”-edge ideas, theories, and perspectives on these topics. The book series is accompanied by the Springer Journal of the Knowledge Economy, which was launched in 2009 with the same editorial leadership. The series showcases provocative views that diverge from the current “conventional wisdom,” that are properly grounded in theory and practice and that consider the concepts of robust competitiveness,1 sustainable entrepreneurship,2 and democratic capitalism,3 central to its philosophy and objectives. More specifically, the aim of this series is to highlight emerging research and practice at the dynamic intersection of these fields, where individuals, organizations, industries, regions, and nations are harnessing creativity and invention to achieve and sustain growth. Books that are part of the series explore the impact of innovation at the “macro” (economies, markets), “meso” (industries, firms), and “micro” levels 1
We define sustainable entrepreneurship as the creation of viable, profitable, and scalable firms. Such firms engender the formation of self-replicating and mutually enhancing innovation networks and knowledge clusters (innovation ecosystems), leading toward robust competitiveness (E.G. Carayannis, International Journal of Innovation and Regional Development 1(3), 235–254, 2009). 2 We understand robust competitiveness to be a state of economic being and becoming that avails systematic and defensible “unfair advantages” to the entities that are part of the economy. Such competitiveness is built on mutually complementary and reinforcing low-, medium-, and hightechnology and public and private sector entities (government agencies, private firms, universities, and nongovernmental organizations) (E.G. Carayannis, International Journal of Innovation and Regional Development 1(3), 235–254, 2009). 3 The concepts of robust competitiveness and sustainable entrepreneurship are pillars of a regime that we call “democratic capitalism” (as opposed to “popular or casino capitalism”), in which real opportunities for education and economic prosperity are available to all, especially – but not only – younger people. These are the direct derivative of a collection of top–down policies as well as bottom–up initiatives (including strong research and development policies and funding, but going beyond these to include the development of innovation networks and knowledge clusters across regions and sectors) (E.G. Carayannis and A. Kaloudis, Japan Economic Currents, January 2009, pp. 6–10). v
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(teams, individuals), drawing from such related disciplines as finance, organizational psychology, research and development, science policy, information systems, and strategy, with the underlying theme that for innovation to be useful it must involve the sharing and application of knowledge. Some of the key anchoring concepts of the series are outlined in the figure below and the definitions that follow (all definitions are from E.G. Carayannis and D.F.J. Campbell, International Journal of Technology Management, 46, 3–4, 2009).
• The “Mode 3” Systems Approach for Knowledge Creation, Diffusion, and Use: “Mode 3” is a multilateral, multinodal, multimodal, and multilevel systems approach to the conceptualization, design, and management of real and virtual, “knowledge stock” and “knowledge flow,” modalities that catalyze, accelerate, and support the creation, diffusion, sharing, absorption, and use of cospecialized knowledge assets. “Mode 3” is based on a system-theoretic perspective of socioeconomic, political, technological, and cultural trends and conditions that shape the coevolution of knowledge with the “knowledge-based and knowledge-driven, global/local economy and society.” • Quadruple Helix: Quadruple helix, in this context, means to add to the triple helix of government, university, and industry a “fourth helix” that we identify as the “media-based and culture-based public.” This fourth helix associates with “media,” “creative industries,” “culture,” “values,” “life styles,” “art,” and perhaps also the notion of the “creative class.” • Innovation Networks: Innovation networks are real and virtual infrastructures and infratechnologies that serve to nurture creativity, trigger invention, and catalyze innovation in a public and/or private domain context (e.g., government–university–industry public–private research and technology development coopetitive partnerships).
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• Knowledge Clusters: Knowledge clusters are agglomerations of cospecialized, mutually complementary, and reinforcing knowledge assets in the form of “knowledge stocks” and “knowledge flows” that exhibit self-organizing, learning-driven, dynamically adaptive competences and trends in the context of an open systems perspective. • Twenty-First Century Innovation Ecosystem: A twenty-first century innovation ecosystem is a multilevel, multimodal, multinodal, and multiagent system of systems. The constituent systems consist of innovation metanetworks (networks of innovation networks and knowledge clusters) and knowledge metaclusters (clusters of innovation networks and knowledge clusters) as building blocks and organized in a self-referential or chaotic fractal knowledge and innovation architecture (Carayannis 2001), which in turn constitute agglomerations of human, social, intellectual, and financial capital stocks and flows as well as cultural and technological artifacts and modalities, continually coevolving, cospecializing, and cooperating. These innovation networks and knowledge clusters also form, reform, and dissolve within diverse institutional, political, technological, and socioeconomic domains, including government, university, industry, and nongovernmental organizations and involving information and communication technologies, biotechnologies, advanced materials, nanotechnologies, and next-generation energy technologies. Who is this book series published for? The book series addresses a diversity of audiences in different settings: 1. Academic communities: Academic communities worldwide represent a core group of readers. This follows from the theoretical/conceptual interest of the book series to influence academic discourses in the fields of knowledge, also carried by the claim of a certain saturation of academia with the current concepts and the postulate of a window of opportunity for new or at least additional concepts. Thus, it represents a key challenge for the series to exercise a certain impact on discourses in academia. In principle, all academic communities that are interested in knowledge (knowledge and innovation) could be tackled by the book series. The interdisciplinary (transdisciplinary) nature of the book series underscores that the scope of the book series is not limited a priori to a specific basket of disciplines. From a radical viewpoint, one could create the hypothesis that there is no discipline where knowledge is of no importance. 2. Decision makers – private/academic entrepreneurs and public (governmental, subgovernmental) actors: Two different groups of decision makers are being addressed simultaneously: (1) private entrepreneurs (firms, commercial firms, academic firms) and academic entrepreneurs (universities), interested in optimizing knowledge management and in developing heterogeneously composed knowledge-based research networks and (2) public (governmental, subgovernmental) actors that are interested in optimizing and further developing their policies and policy strategies that target knowledge and innovation. One purpose of public knowledge and innovation policy is to enhance the performance and competitiveness of advanced economies.
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3. Decision makers in general: Decision makers are systematically being supplied with crucial information, for how to optimize knowledge-referring and knowledge-enhancing decision making. The nature of this “crucial information” is conceptual as well as empirical (case-study-based). Empirical information highlights practical examples and points toward practical solutions (perhaps remedies), conceptual information offers the advantage of further-driving and further-carrying tools of understanding. Different groups of addressed decision makers could be decision makers in private firms and multinational corporations, responsible for the knowledge portfolio of companies; knowledge and knowledge management consultants; globalization experts, focusing on the internationalization of research and development, science and technology, and innovation; experts in university/business research networks; and political scientists, economists, and business professionals. 4. Interested global readership: Finally, the Springer book series addresses a whole global readership, composed of members who are generally interested in knowledge and innovation. The global readership could partially coincide with the communities as described above (“academic communities,” “decision makers”), but could also refer to other constituencies and groups. Washington, DC, USA
Elias G. Carayannis
Preface
Since Schumpeter (1942), it has been assumed that innovations typically play a key role in building firms’ competitiveness (Ayyagari et al. 2006). This assumption has been applied to firms both in developed and developing countries. However, the innovative capacities and business environments of firms in developing countries are fundamentally different from those of firms in developed countries. It stands to reason that innovation and competitiveness models based on developed countries may not apply to developing countries. Thus, understanding the role of innovations in developing countries can have two main benefits. First, it can help firms to develop business strategies. In addition, it can help national governments to improve innovation policies. Conventionally, innovation is typically measured by R&D expenditures and patents applied/granted. These, however, originate only from a handful of developed countries. Firms in developing countries are far behind the technological frontier and their innovation activities are insufficiently captured by these conventional measurements. Meanwhile technology does not always advance at a uniform pattern in developing countries. Therefore, it will be useful both theoretically and practically to explore how firms’ competitive positions are shaped by the level of innovation and by different national innovation policies. This research also intends to test key relationships of competitiveness model in developing countries to complement Porter’s Competitive Advantage Model (Porter 1990). It looks into the essential elements of Malerba’s innovation system approach (Malerba 2004). Most research has focused on innovations in developed countries and newly industrialized countries. Recently, there has been increased interest in how firms in developing countries adopt and advance foreign and domestic technologies. Except in a few studies,1 innovation outputs are measured by new to the world patents.
1 Ayyagari et al. (2006) studied the relations of governance and finance and firms’ incremental and adoptive innovations in emerging markets. Gorodnichenko et al. (2007) tested the effects of competition and foreign direct investment on domestic firms’ adoptive innovations.
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Incremental and adaptive innovations of firms in developing countries, therefore, emerge as an area worthy of further research. Redefining innovation in developing countries may bring new insights. THE PRIMARY QUESTION of this study is: Do innovations advance the competitive positions of manufacturing firms in developing countries? Does the pace of innovation matter? Innovations are deeply rooted in a national innovation system. However, this relationship in developing countries is still unclear. A firm’s access to modern technologies both through clusters and networks, imitation and adaptive innovations in achieving competitiveness is a key dimension in this research. As distinguished from the previous research, this study focuses on how national innovation systems of different countries affect firms’ innovation commitments and competitive position. The SECOND RESEARCH QUESTION is: To what extent do a firm’s innovation commitments correlate with the protection of intellectual property rights? As AN EXTENSION to the questions above, this research moves further to revise Porter Competitive Advantage Model. Porter’s competitiveness model is mainly based on the experiences of developed and newly industrialized countries in the 1990s. His model emphasizes the importance of the competitive environment within a home country. Porter’s competitive innovation is defined as moving beyond best practice and shaping best practice. This concept may not be useful in researching innovation in developing countries. The competitive position model for developing countries, therefore, is developed. The manufacturing sector takes the lead role in modernization and serves as the key source of knowledge and technology spillover in developing countries (Tybout 2000). It is also the most active and intensive area of international cooperation and competition (Tybout 2000). Thus, this research selects manufacturing firms in developing countries for empirical testing. To achieve the objectives above, this study examines a firm’s innovation from a system perspective, which includes: • Innovation enablers: human capital, technology base, and R&D investment • Innovation processes: technology creation, upgrading, acquisition, networking, and utilization • Innovation outputs that are pertinent to developing countries: new or improved product, process, and improved organizations • Innovation driving forces: domestic and foreign business competitors, customers, suppliers, as well as clusters and network • Innovation environments: intellectual property rights (IPR) protection, patent applications filed by residents and nonresidents A two-layer model is used for statistical testing. In addition, lessons will also be drawn from reviews of experiences and case studies of a handful of developing countries, with a special focus on China. Based on the statistical findings and case studies, this research has developed a double-diamond competitiveness framework.
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This research is the first attempt to develop a competitive position model for developing counties, to help transform firms’ innovative capabilities into their competitive positions in both the domestic and global markets. The study also provides suggestions for a balanced development strategy for firms in developing countries. • The firms are important actors in developing countries in building up the countries’ competitive capacities. Their innovative commitments not only directly lead to new product line development and cost reductions, but also become conductive channels to turn the formal R&D results of both foreign and domestic origins into market applications. • The conventional framework of science, technology, and innovation including formal national R&D investment and the number of patents applied/granted are important macrofactors contributing to the competitiveness of a country and its firms. It is equally important to foster and support the firm’s R&D capacity building. • Foreign and domestic competitions have different impacts on firms’ competitive position. A higher competitive firm has a strong relationship with local clusters and global networks. These are becoming a critical factor for advancing a firm’s competitive positions in the global economy. This book reflects the generous encouragements, guidance, and support from faculty members and staff at the George Washington University. Special thanks go to Professor Scheherazade S. Rehman, Professor Robert Rycroft, Dr. HaiYan Shi, Dr. Jeffrey Alexander, and Dr. Elisabeth Huff. New York, NY Washington, DC
Vivienne W. L. Wang Elias G. Carayannis
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Contents
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Introduction ............................................................................................. 1.1 Rational for the Study ...................................................................... 1.1.1 Origination of the Competitive Position .............................. 1.1.2 Innovation in Developing Countries .................................... 1.1.3 National Innovation Systems of Developing Countries ....... 1.2 Research Framework........................................................................ 1.3 Limitations ....................................................................................... 1.3.1 Purpose of the Research ....................................................... 1.3.2 Prediction Model .................................................................. 1.3.3 Measurement of Variables.................................................... 1.3.4 Use of Enterprise Survey Data ............................................. 1.3.5 The World Bank’s BE-ES Survey Data................................ 1.4 Expected Contributions .................................................................... 1.5 Nature of Order of the Book ............................................................
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Theoritical and Empirical Literature Review ...................................... 2.1 Innovation Model ............................................................................. 2.2 Incremental–Radical Dichotomy ..................................................... 2.3 Henderson: Clark Model .................................................................. 2.4 The S-Curve Framework .................................................................. 2.5 Teece’s Innovation Model ................................................................ 2.6 Innovation Novelty Matrix ............................................................... 2.7 Technological Catch-Up .................................................................. 2.7.1 Comparative and Competitive Advantage ........................... 2.8 Comparative Advantage ................................................................... 2.9 Competitive Advantages ..................................................................
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2.10 Dynamic Comparative Advantage Model and the New Dilemma.................................................................... 2.10.1 Dynamic Comparative Advantage and FDI ................... 2.10.2 Dynamic Comparative Advantage and Globalization ........................................................... 2.10.3 Dynamic Comparative Advantage and Technology....... 2.10.4 Comparative Disadvantage ............................................ 2.10.5 Sectoral Innovation System............................................ 2.10.6 National Innovation System: IPR Protection ................. 2.10.7 Protection of IPR and FDI ............................................. 2.10.8 Protection of IPR and Domestic Innovative Activities ........................................................................ 2.10.9 Impacts of IPR Protection .............................................. 2.10.10 Summary ........................................................................
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Hypotheses, Models, Data, and Methodology ...................................... 3.1 Research Framework...................................................................... Research Question I ....................................................................... Research Question II ...................................................................... Research Question III .................................................................... 3.2 Model Specifications...................................................................... 3.2.1 Model Specification for Research Question I ................ 3.2.2 Model Specification for Research Question II ............... 3.2.3 Model Specification for Research Question III.............. 3.2.4 Innovation–Technology–Productivity Model ................ 3.3 Research Data ................................................................................ 3.3.1 Time Fame of the Study: 1998–2005 ............................. 3.3.2 Data and Sampling ......................................................... 3.3.3 Variables .........................................................................
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Results ...................................................................................................... 4.1 Model Estimating the Impacts of R&D Investment on Innovation Outcomes ................................................................ 4.2 Estimating Impacts of Local and Foreign Competitions/ Suppliers/Customers on Firms’ Commitment to Innovation ......... 4.3 Estimate the Impacts of Intellectual Property Rights Protection on Innovation and Competitiveness.............................. 4.4 Summary ........................................................................................ 4.4.1 Firm’s R&D Investment ................................................. 4.4.2 Technological Base ........................................................ 4.4.3 Competitors .................................................................... 4.4.4 Clusters and Networks ................................................... 4.4.5 IPR Protection ................................................................ 4.5 A Special Case Study: Innovation in China ................................... 4.5.1 Changes of the Innovation Landscapes in China ........... 4.5.2 Innovation and Competitiveness at the National Level ..............................................................................
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4.5.3 4.5.4 4.5.5 5
Innovations at the Firm Level ............................................ IPR Protection in China ..................................................... The Role of Foreign Direct Investment..............................
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Conclusion and Implications.................................................................. 5.1 Conclusions and Discussions ........................................................... 5.2 Limitations of the Study................................................................... 5.2.1 The Scope of the Study ...................................................... 5.2.2 Purpose of This Research................................................... 5.2.3 Networking Effects ............................................................ 5.2.4 Regional Level Factors....................................................... 5.2.5 Sector and Industry Factors................................................ 5.2.6 Cluster Effects .................................................................... 5.2.7 Prediction Model ................................................................ 5.2.8 Measurement of Variables.................................................. 5.2.9 Use of Enterprise Survey Data ........................................... 5.2.10 The World Bank’s BE–ES Survey Data ............................. 5.2.11 The Speed of Innovation .................................................... 5.3 Areas for Further Research .............................................................. 5.4 Policy Recommendations.................................................................
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Appendix .......................................................................................................... 101 References ........................................................................................................ 109 Index ................................................................................................................. 125
Chapter 1
Introduction
Existing models of competitiveness that are mainly based on experiences of developed countries tend to focus on radical innovations (e.g., Porter 1990). Most previous research assumes that firms in developing countries can follow the same technological paths to achieve competitive advantage. The assumption, thus, became the key point of debate between Justin Lin, the Chief Economist and Senior Vice President of The World Bank, and Ha-Joon Chang, Faculty of Economics, University of Cambridge (Lin and Chang 2009). However, firms in developing countries engage mainly in incremental and adaptive innovations. Only a small proportion of patent originates from emerging economies. Considering the combined disadvantages in human resources and financial capitals, should manufacturing firms in developing countries invest in R&D? Is it realistic for firms in developing countries to set a goal to have their innovative capacities catch-up with their counterparts in developed countries? Does the pace of innovation matter? Does faster innovator win? The answers to these questions will be useful for governments to develop innovation policies and for the firms to develop their business strategies. The key objective of this research, therefore, is to contribute to a better understanding of the relationships between firms’ innovation commitments and their competitive positions in developing countries. It is essential to capture the incremental and adaptive innovations that are conducted by manufacturing firms in developing countries. These firms are far behind the technological frontier. The conventional concept of innovations largely fails to capture the impacts of these types of innovation activities. This study aims to examine the effects of innovation in developing countries from a broader point of view. It attempts to address: • The extent to which innovations help firms to increase their competitive positions. • The extent to which business relationships with global and local competitor, suppliers, and customers, global network and local clusters act as catalysts for innovation to firms in developing countries.
V. Wang and E.G. Carayannis, Promoting Balanced Competitiveness Strategies of Firms in Developing Countries, Innovation, Technology, and Knowledge Management 12, DOI 10.1007/978-1-4614-1275-5_1, © Springer Science+Business Media, LLC 2012
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• The extent to which protection of intellectual property rights (IPR) affects innovation commitment and helps transform of innovation efforts into stronger competitive position. Based on the findings from the above investigations and from the reviews of empirical cases, this research makes an effort to formulate, for the first time, a competitive position model for developing countries. To provide insights into innovation and competitive position in developing countries, this research adopts two concepts that have largely been neglected in mainstream economics: competitive position and innovations in developing countries. In addition, innovation network and knowledge cluster (Carayannis and Wang 2004, 2008) will be applied in this research. Competitive position is a unique niche that a domestic firm in a developing country has achieved or aims to achieve through effectively exploring its accessible and affordable internal and external resources under its national innovation system. Carayannis (2001) as well as Gorodnichenko et al. (2007) also used similar terminology in their studies. But they do not make explicit definitions. There are two types of competitiveness based on the major ways in archiving it: • Resource-led competitiveness is the model of development that higher productivity is obtained through the lower cost of natural resources or lower cost of unskilled labor force or both. The firms have no ownership and control of the core technology. • Innovation-led competitiveness is the model in which the higher productivity is achieved through higher efficiency that is based on knowledge and innovation. The firms have capacity to identify, negotiate, network with, and further improve the existing domestic and/or foreign technologies. Innovation is the use of new knowledge to offer a new product or service that customers want. Innovation includes both invention and commercialization. Essentially, innovation is the adoption of ideas that are new to the adopting organization. There are two different ways in defining innovation (Zhang et al. 2009). It is commonly defined as the creation of new to the world products or processes. In recent year, it has been broadly defined as the results and processes of adoption or adaptation of new technology (Nelson and Rosenberg 1993; Zhang et al. 2009). This book takes the broad approach. That is a firm’s innovation can be a radical or adaptive. It can be of three types: First, it can be an innovation that is new to the firm; or it can be something new to the nation. Finally, it can be something that is new to the world. In addition, technology, in this study, is used in a broad sense of the knowledge and skills used by an organization to transform inputs into outputs. Technology is art of science and science of art.1
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Cited from Professor Carayannis’ lecture in Class, in 2004.
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Research on business strategies in developing countries has mostly focused on the learning curves (Chudnovsky et al. 2006). In part, this is because research has focused primarily on high-end innovation, as reflected by patents. It is certainly important for firms to adopt and master foreign technologies. It may become even more vital for them to make adaptive and incremental innovations. Innovations in developing countries have not been sufficiently studied. The World Bank Business Environmental Survey, however, now makes possible the study of more subtle forms of innovations in development countries. The present study will construct new indicators that measure innovative activities and outputs both quantitatively and qualitatively, based on the survey data and good practices in constructing science, technology, and innovation (STI) indicators from surveys. The present study goes beyond the theoretical frameworks of comparative and competitive advantage. It draws on developments from theories of internalization, resource-based perspectives, product life cycle, technological gap, evolutionary development theories, and sectoral innovation system. This investigation also looks at recent studies of technological catch-up, indigenous knowledge, comparative disadvantages, and studies on innovation speed. Innovations in developing countries are largely incremental, gradual, and context-specific improvements based on previous technologies originating in developed countries (Srholec 2008). Therefore, this research tests its hypotheses using multilevel models, containing both firm, firm’s relationship with national and international actors, and national level data. A dynamic technological cost model is also posited to integrate the key factors of competitive position of firms in developing countries into one model. As with any other empirical study attempting to explain complex phenomena, this study cannot test all contributing factors. It uses Porter’s competitiveness diamond as the main frame of references and attempts to modify Porter’s model to apply it to developing countries. It also draws the references from the sectoral innovation system. This is not to say that Porter’s model is the only one or the optimal one. This research is constrained by the availability, reliability, and validity of the data. For example, the intensity of innovative activities varies by industry (Hippel 1988). However, the data collected by the World Bank is not categorized by industry. To overcome this limitation, this research includes only data of manufacturing firms in developing countries. This study adapted the sector innovation approach. The available data, however, does not allow the study to separate the regional and sectoral effects from the global effects. Another concern is that The World Bank’s Business Environment and Enterprise Surveys (BE-ES) collects R&D investment data only one period at a time. The longterm impacts are not fully captured. The current research uses the panel data in an attempt to capture some long-term impacts. Data from the World Trade Organization (WTO) on patent statistics and United States Patent and Trademark Office (USPTO) on patent citations will also be used, to capture the new to the world innovations, explicit knowledge network, and knowledge transfer. Innovative output in this research is measured by whether a firm has successfully developed a new product line or updated an existing product line. It does not capture
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the magnitude of this new development. In an effort to address this issue, this research also uses weighted data to capture its general magnitude. The data also does not allow this research to map the patents applied, if any, to the firms that are included in the survey. Monopolists have an incentive to suppress subsequent innovations by other firms (Weinberg 1992; Tang 2006). Firms from developed countries may make it difficult to imitate their product, by dividing their manufacturing process across different countries, or impose high licensing fee for technology from developed countries. These are likely to further compromise the capability of firms in developing countries to invest in R&D and in other types of innovative activities.
1.1
Rational for the Study
Along with the developed countries, developing countries today have attempted to participate in the global value chain. However, this pattern of developing countries of today differs from the one followed by developing countries in the past (Weber and Zysman 2002; Barma 2005). In the past, the emphasis was on developing competitive capacity locally. Today, globalization provides new opportunities and challenges for firms in developing countries to leverage their competitive advantages and mitigate their competitive disadvantages (Barma 2005). However, there is no universal consensus on how firms in developing countries move up the competitive ladder (Eaton and Kortum 1997). The very persuasive comparative advantage and competitiveness model goes back to Adam Smith in 1776. It has been further enriched by Porter (1990) and beyond. Curiously, this model explicitly claims that the critical sources of competitive advantage are home-based (Moon et al. 1998). This model is mainly based on the experiences of countries that became industrialized prior to the globalization that began in the 1980s (Grant 1991). It is, therefore, not surprising that this model does not fit well with the current situation in developing countries. Porter’s competitive advantage theory puts innovation as a driving force for competitiveness, but it overlooked adaptive and incremental innovations if they are simply new to the firm or the nation, but not to the world. Malerba’s (2004, 2005) sectoral systems of innovation argue that innovation in a sector is considered to be affected by three groups of variables: (1) knowledge and technologies, (2) actors and networks, and (3) institutions. Building on Porter’s model and Malerba’s system approach, this research further examines how the strength of local and global market demands, the availability of both domestic and foreign supporting industries, and the presence of competitors, global network and local cluster, foreign direct investment correlate with innovation and competitive position of firms in countries that are still developing. Since the first publication of Porter’s competitive diamond, the dynamic competitive advantage model has been criticized and enriched (e.g., Rugman and Verbeke 1990; Downes 1997; Dunning 1998; Wignaraja 2003). However, no sound model of competitive advantage has emerged for firms and industries in developing countries.
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Rational for the Study
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There are many obstacles in creating a competitive position model for developing countries. First, the data and information are not systematically collected about firms and industries in developing countries (Sadowsky 1989). The available indicators do not adequately measure STI input, process and output of firms, and industries in developing countries (Filippov and Saebi 2008). Second, developing countries have typically been classified as followers and imitators of advanced technologies (Ernst 2003). They are criticized for merely imitating and inadequate protection of IPR. Their contributions to the world knowledge and technology are underestimated and not sufficiently acknowledged (Chudnovsky et al. 2006). Third, mainstream economists tend to believe that access to foreign technologies will be a solution for development. There is an undeclared assumption that firms and industries can and should follow the path of success in building up their competitiveness of the industrialized countries (Chobanyan and Leigh 2006). Is it a valid assumption? Realizing the limitations of Porter’s externally oriented approach of firms, the resource-based model or resource-based view developed in the1980s attempted to take into account the internal capacity of each firm to achieve competitive advantages (Wernerfelt 1984; Mahoney and Pandian 1992; Peteraf 2006). Porter’s model focuses on a firm’s external competitive environment. By contrast, the resource-based perspective highlights the need for a firm’s internal capabilities to operate effectively. The resource-based view has challenged two fundamental assumptions of the comparative and competitive advantage models. One is homogeneity of resources and opportunities among firms in the same industry (Calcagno 1996). The other one is perfect resource mobility (Calcagno 1996). However, as Calcagno (1996) pointed out, the resource-based view does not adequately take into account of a firm’s external environment. In contrast with Porter’s home-based perspective, the theory of internalization and Dunning’s eclectic theory claim that access to foreign knowledge and technology is vital factor of a firm and an industry to improve its competitive position in a developing country (Chandra and Styles 2004; Mtigwe 2006). Foreign direct investment and globalization provide increased opportunities for firms in developing countries to access foreign knowledge and technology. There are, however, only a few successful cases mainly in East Asia. The technological gaps between developed and developing countries are largely unchanged (James 2003). Among other factors of production, innovation is a particularly interesting one. In Porter’s view, innovative capacity is the key for productivity and competitiveness. However, Porter defines the innovation as “capacity to move beyond current ways of doing things and current ways of operating companies, to move beyond ‘best practice’ to shape best practice” (Porter 1999). Is this a realistic target for firms in developing countries? If not, what is the rationale for firms to invest in innovation in developing countries? In an attempt to answer this question, this research has reviewed the concepts of comparative and competitive advantages. To appropriately reflect competitiveness in developing countries, this study uses the term of competitive position, being better than a firm’s direct competitors, regardless of how far the firm’s technology is from the cutting edge.
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1
Introduction
In contrast to Porter’s innovation concept, absorptive capacity has been claimed as an important factor for competitiveness in developing countries. Absorptive capacity refers to a firm’s ability to identify, assimilate, and exploit external knowledge (Cohen and Levinthal 1989, 1990). Some firms with strong capabilities will capture diverse ideas and frontier technologies. These firms will respond to the knowledge quickly and will commercialize the technology efficiently (Teece et al. 1997). These firms may have a higher potential to achieve competitiveness. Understanding how firms in developing countries having effectively harnessed global technological resources, at the same time promote domestic innovations, may be interesting to study. Importing foreign technology may be necessary for a firm in a developing country to improve competitive positions. However, it may also create dependency. This study also examines whether innovation will reduce such dependency. Since 2000, all but the least-developed countries have been required to comply with the Trade-Related Aspects of Intellectual Property Rights (TRIPs) by the WTO (Lerner 2001). IPR protection creates temporary monopoly for the owner(s) of a new technology (Allred and Park 2007a). The impacts of IPR protection on economic development have been disputed (Kim 2003). Stronger IPR protection may be against a developing country’s economic interests (Lanjuw 1997; McCalman 2001; Konan et al. 2005). There is no conclusive agreement on the implications of strong IPR protection to innovation in developing countries (Chen 2002; Allred and Park 2007a). Strong IPR protection can help emerging economies to attract inflows of foreign technology and investments (e.g., Gould and Gruben 1996; Smith 2001; OECD 2003). The protection may also stimulate domestic innovation activities (e.g., Lo 2005; Chen and Puttitanum 2005). Strong IPR protection, however, is not always better at stimulating innovation (Hofmann 2004). It may also reduce access to modern technologies by domestic firms in developing countries (Lanjuw 1997; McCalman 2001). There are some who favor a loose IPR protection in the earlier stage of development in order to foster domestic innovative capacities (Kim 2003). Some has claimed that lenient IPR protection has accelerated the technological sophistication in developing countries such as China and India. Empirical evidences remain limited and inconclusive on whether IPR protection promotes innovation in developing countries (e.g., Kumar 2002; Kim 2003). Innovative activities of firms in developing countries are underestimated by conventional measures and inadequately supported by their national innovation system (UN 2003; Arocena and Sutz 2005a, b). Most previous empirical studies used two common innovation indicators: R&D expenditure for inputs and patents for outputs of innovations (Carayannis and Wang 2008). However, firms in developing countries engage mainly in incremental and adaptive innovations (Barma 2005). This has comprised researchers’ ability to find linkages between these firms’ innovation activities and competitiveness (Carayannis and Wang 2008). This research measures innovation activities that capture these types of incremental and adaptive innovations in developing countries. Data from Business Environment and Enterprise Survey of The World Bank will be used. In this study, a firm’s innovative activities involve spending on R&D. This includes expenditures for personnel, materials, education, and subcontracting.
1.1
Rational for the Study
7
In the present investigation, innovation activities also include: 1. 2. 3. 4.
Learning that takes place when new equipment is acquired Hiring personnel with needed expertise Licensing or utilizing a turnkey operation from international or domestic sources Extending an existing technology within the firm; and adopting technology from universities or other public institutions
The remainder of this section summarizes concepts of competitiveness, innovation, and national innovation system in developing countries.
1.1.1
Origination of the Competitive Position
Conventional competitive advantages refer to a firm’s ability to use most effectively and efficiently the factor endowments to achieve high productivity (Porter 1990). This concept works from a perspective of firms in developed countries. It is vague in its interpretations of competitiveness in a developing country. This research has adapted a term of competitive position, inspired by the research findings of Massini et al. (2005). They argued that a firm’s speed in creating and adapting technological and organizational innovation is affected by the reference group that the firm has chosen. This proposition is consistent with mimetic behavior theory and evolutionary economics (e.g., Rogers 1983). Changes more likely result from feedback about comparative performance (e.g., Nelson and Winter 1982). A firm is more likely to make changes when its nearby competitors or supporting firms have changed. Building upon the previous studies, the current research posits that a firm’s decision on technology and innovation is affected by the firm’s technological distance from its own reference group. Competitive position was used as an economic term by Carayannis (2001). Gorodnichenko et al. (2007) also used this concept to examine the impact of competition and foreign direct investment on innovation efforts made by domestic firms. Thus, in the present research, a firm’s competitive position is measured by a firm’s rank relative to its main rivals of the technology sophistication. This definition integrates both comparative and competitive advantage models. It will facilitate the study of unique innovative activities and business strategies of firms in developing countries.
1.1.2
Innovation in Developing Countries
Innovation as a driving force in Porter’s competitive advantage model (1988, 1990) has become quite popular in recent decades. Firms are advised to explore internal and external technological sources to obtain and sustain competitive advantages (Teece 1997). However, these recommendations have been primarily for firms in developed countries. In recent years, there has been increased interest in studying firms in developing countries (e.g., Reddy 2005; Ayyagari et al. 2006; Chudnovsky et al. 2006).
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1
Introduction
Technology Push Basic Science
Technology Development
Technology Applications
Production and Market
Market Pull Market Demands
Technology Development/Application
Production and Market
Fig. 1.1 Technology push and market pull innovation model
Studies of innovation, however, remain inadequate and inconclusive. This limitation can partially be explained by the shortcomings of conventional statistical measurement of STI. This research posits that STI plays a central role in enabling a firm from a developing country to advance its competitive position. Understanding the nature of innovation in developing countries is the first step in conducting the present research. Innovations in developing countries are qualitatively different from those in developed countries (Hobday 1995, 2000; Hu and Mathews 2005). Fundamentally, underlying STI models for developing countries are different from those of developed countries. The process of innovation in a developed country can generally be defined as a “Push and Pull” model (Zmud 1984). As Fig. 1.1 illustrates, in the “technology push” model, basic research leads to invention. Successful implementation of the invention results in commercialization of the new technology. In the “market pull” model, market demands spur technological development, which enables mass production. Innovation is a dynamic process of “market pull” and “technology push” (e.g., Rycroft and Kash 1994; Carayannis and Roy 2000). Market pull accommodates market demands, while “technology push” stimulates market demands (Carayannis and Roy 2000). The dynamic balancing between technology push and market pull affects the speed and acceleration of technological innovation (Carayannis and Roy 2000). The current research further examines enablers and inhibitors of innovation of firms in developing countries. It is inspired in part by previous research into small satellite industries of Carayannis and Roy (2000). The process of innovation in developing countries is represented by an “Access and Adaptation” model (Fig. 1.2). The essential ingredients of incremental and adaptive innovation are awareness of existing knowledge, availability of complementary assets, accessibility to advanced technology and markets, and affordability of conducting innovation (Carayannis 2009). Innovation in developing countries also involves accelerating of technology diffusion (Sharif 1993a, b; Hu and Mathews 2005). Recent developments of the product life cycle model also enrich the innovation theories in developing countries. Hobday (1995, 2000) pointed out that innovation does not always follow the completed product life cycle. For example, some East
1.1
Rational for the Study
9
State of the Art in Technology and Production
Access global new/existing technology
Knowledge/technology absorption and Indigenous knowledge
Adaptive/in cremental Innovation
Production & Market
Needs of the society and the markets
Fig. 1.2 Access and Adaptation innovation model
Asian countries started at a mature stage of a product life cycle. First, firms follow standardized production, then in order to adapt to a specific market, they introduce incremental innovation. Finally, some firms may invest more heavily in R&D. This is what Hobday has named as a “backward” product life cycle. The current research agrees with Hobday’s claim that firms in developing countries generally start from a mature stage of an existing technology. But this research also agrees with Carayannis and Wang (2008) that innovative firms in developing countries would experience the same but shorter and “forward” product life cycles that may be embedded in the mature stage (Fig. 1.3) of the product life cycle.
1.1.3
National Innovation Systems of Developing Countries
Scholars have conceptualized national innovation systems in a various ways, from economic, social, and political perspectives (e.g., Freeman 1987; Lundvall 1992; Nelson 1993; Patel and Pavitt 1994). Metcalfe (2005) has summarized that a national innovative system is a “set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process.” Freeman (1995) defines a national innovation system as a meta-system or a network that consists of a knowledge creation system, a technology invention system, and a know-how communication and innovation system. IPR protection operates within this system. IPR protection affects firms’ willingness to commit and ability to profit from innovations (Teece 1986a, b). Park (2008) further claimed that technology advances by innovative and imitative activities. Changes in IPR protection levels would result in resource redistribution between these activities (Keller 2004). The present research further examines impacts of IPR protection on innovation in developing countries. There are different ways of measuring degrees of IPR protection. In the past, researchers looked at a few features of national patent systems (Park 2008). Patent duration and novelty were used by Bosworth (1980), membership in an international
10
1
Introduction
Growth
Introduction
Maturity
Production life cycle of developed countries Production life cycle of developing countries
Fig. 1.3 The product life cycle in the world economy
patent treaty was adopted by Ferrantino (1993), and some other features were introduced by Rapp and Rozek (1990). Opinion and experience surveys were used by Mansfield’s (1994), by Sherwood’s (1997), and by the World Economic Forum. Ginarate and Park (1997) constructed a Patent Rights Index for 110 countries in 5-year increments from 1960 to 1990 and updated through 2000. The advantage of this index is that it covers all five key elements of IPR protection: extent of coverage, membership in international treaties, loss of patent rights, enforcement provisions, and duration of protection (Park 2008). Park (2008) also constructed an index of enforcement effectiveness. It takes into the consideration of how effectively the laws are enforced. The Agreement on TRIPs required that almost all developing countries complete implementation by a deadline of January 1, 2000. The gap between countries with strong and weak patent rights protection has fallen since 1995 (Park 2008). However, it is still wider than that of the period 1960–1990 (Park 2008). Studying the impacts of IPR protection, thus, remain worthwhile. Developed and developing countries have fundamentally different motivations for IPR protection (Diwan and Rodrik 1991). With strong IPR protection, foreign firms tend to import and license their advanced technologies to domestic firms in developing countries (Mansfield 2000). This gives better technological access to domestic firms. When foreign firms with technology compete with each other in a developing country, this may lead to more affordable and widespread licensing. With weak IPR protection, foreign firms may be reluctant to transfer their advanced technology to a developing country. They may also take extra measures to
1.2
Research Framework
11
Table 1.1 IPR protections and technological strategies of domestic and foreign firms IPR protection
High
Low
Foreign firms • Licensing • Advanced technology transfer • Competition between foreign firms • FDI • Less-advanced technology transfer • Contention between foreign and domestic firms
Domestic firms • Honest learning • Incremental/ adaptive/ experimental innovations
• •
Reverse engineering Low-cost imitations
Active
Tech-strategy
Passive
protect their ownership (Mansfield 2000). As a result, the cost of doing business in the host countries may increase, and conflict between foreign and domestic firms may intensify (Table 1.1). Technology inflows are the key source for knowledge acquisition in developing countries (Evenson and Westphal 1995; OECD 2003). Foreign firms favor countries with a high standard of IPR protection (Nelson and Pack 1999). In recent years, some developing countries have been rapidly growing in the global economy. With the increased access to global advanced technology and increasingly sophisticated customers and suppliers, these firms begin to exercise their own power in innovation (Mahmood and Singh 2003). Their commitment to innovation may result in advancing of their competitive positions.
1.2
Research Framework
With the exception of Allred and Park (2007b), a few studies have examined the relationships between patent protection and firms’ innovation in developing countries. Allred and Park (2007b), however, used patent data that reflects only high-level innovations. The present research goes beyond this conventional measurement. It investigates how firms in developing countries commit to adaptive and incremental innovations. The present research predicts that, in developing countries: 1. A firm’s competitive position is a function of its innovation commitments. 2. A firm’s innovation is a function of its operational environment (competitors, suppliers, and customers of both domestic and global origins). 3. Hypotheses (1) and (2) are affected by IPR protection.
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1
Introduction
After testing the hypotheses, this research further proposes a competitive position model for developing countries. Accordingly, three research models will be built. The first model predicts the variances in innovative productivity according to the type, intensity, and technological sources of a firm’s innovations. The second model predicts the propensity to conduct innovation, based on a firm’s environmental variables (domestic vs. foreign competitors, suppliers, and customers). The third model predicts the variances in a firm’s competitive position according to the type and intensity of innovations and according to the degree of patent protection. A firm may be more likely to invest in R&D and become more competitive through its innovation efforts in a country with stronger IPR protection. R&D can both lead to direct innovation and also enhance a firm’s absorptive and innovative capacity. This study draws its data from the Business Environment and Enterprise Survey of The World Bank. It uses the Patent Rights Index of 2000 developed by Park (2008), to reflect the degree of IPR protection. Panel data on R&D expenditures during 1998–2002 and 2003–2005 will also be used for capturing, in part, some longer-term impacts of R&D on a firm’s innovation and competitive position.
1.3
Limitations
At the outset, this research has noted that its quantitative framework is constrained in several important respects. To help answer the research questions, this research focuses on firms in developing countries where data is available. It is hoping that the experiences of those countries will be useful to firms in developing countries in general. However, caution may be warranted as firms without data may systematically differ from the firms included in this research. The research is also aware of the difference between developing countries as a group on one side, and the status and the changes of status of individual country on the other side. The individual countries are a large diversity. Some of them may move out and other developed countries may move back into the group from a long-term perspective.
1.3.1
Purpose of the Research
Innovation and competitiveness in developed countries have been amply studied. However, they still have not been sufficiently studied in developing countries. This research proposes a competitive position model for developing countries. This model is based on Porter’s competitive advantage diamond. It may overlook other factors that exercise as much or even more influence over innovation and competitiveness in developing countries. Some examples of such factors include industries, sectors, regional level characteristics, cluster dynamics, social and financial capitals that may affect and moderate the relationships of these variables under the study.
1.3
Limitations
1.3.2
13
Prediction Model
As with other empirical studies of complex business events, this research can test only a limited number of factors contributing to the outcomes. For example, the relationship between innovation commitments and profitable commercial outputs varies by industry. This research only looks at manufacturing firms in developing countries. However, cross-industry heterogeneity of these manufacturing firms cannot fully be avoided. The second potential limitation may lie in multicollinearity. In the datatesting stage, this research will examine multicollinearity, but to the extent possible. The innovation speed is an important area of study. Its complicated relationships with other factors, however, may not be easily fitted into the modeling in this study.
1.3.3
Measurement of Variables
Innovation output is measured by whether a firm has successfully developed a new product line or has updated an existing one. It does not fully capture the value of the innovation. To address this limitation, the data is weighted by the importance of the innovation perceived by the respondents to the survey. Another challenge is how to capture the long-term impacts of a firm’s R&D investment. This research uses the panel data of 1998–2002 and 2003–2005 to address this challenge. The patent rights protection index has merits in reliability and comparability across countries. However, the impact of patent rights protection varies significantly across industries (Allred and Park 2007b).
1.3.4
Use of Enterprise Survey Data
The available survey data does not provide sufficient information for this research. Potential shortcomings and sources of bias may appear in the following ways: • The survey is not designed to measure innovation of firms in developing countries. The current research must utilize measurements, according to the availability of data. • There is no dataset comparable to The World Bank Business Environment and Enterprises Survey. Therefore, it is impossible to cross-check the data. • There may be a bias resulting from the fact that not all the firms survived throughout both periods of 1998–2002 and 2003–2005. In other words, conclusions of this study can reflect the impacts of R&D only on the growth of a firm. This study can offer no conclusion on survival rate. • The limited information about each firm prevents the study from mapping the patent data to the individual firm. There are merits, nevertheless, to such a large-scale enterprise survey in developing countries, despite the limitations
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1.3.5
1
Introduction
The World Bank’s BE-ES Survey Data
Information collected in the World Bank Business Environment and Enterprises Survey was self-reported by a manager in each firm. The data quality depends on the respondent’s familiarity with the firm, and on willingness to provide accurate information. Source of inaccuracy may stem from poor recall by the respondent, lack of information, or even intentionally misreporting of some information. There are only a limited numbers of firms that have licensed technology from foreign firms. This may prevent the present research from detecting whether technology transferred from foreign sources suppress local innovation.
1.4
Expected Contributions
The present study investigates the extent to which incremental and adaptive innovation of firms in developing countries substantially influence their ability, willingness, and opportunity to advance in competitive positions. Prior research in innovation mainly focused on high-end innovations, as measured by patent and R&D expenditures. Since Schumpeter (1942), little attention has been paid to understanding innovative activities of firms in developing countries. It is true that a few scholars, such as Gorodnichenko et al. (2007), have studied incremental and adaptive innovation. They looked at development of new product, adoption of new technologies, or acquisition of licensure and quality certification. By examining the driving forces and impacts of innovation on competitive positions of firms in developing countries, this research attempts to extend Schumpeter’s innovation theory, Porter’s comparative advantage diamond, and technology life cycle theory. After a developing country has gained sufficient innovative capacity, welldeveloped IPR protection will stimulate high-level innovation (e.g., Allred and Park 2004, 2007a, b; Chen and Puttitanum 2005). However, whether IPR protection will stimulate incremental and adaptive innovation activities in developing countries has not been adequately studied. To extend the previous studies, this research attempts to investigate the impacts of strong IPR protection on domestic innovation in developing countries. Porter’s competitive advantage model cannot be easily applied to firms in developing countries. This research develops a competitive position model that applies to developing countries. It complements Porter’s competitive advantage model by adding the following dimensions. 1. The core competitiveness of a developing country lies in its technological absorptive and innovative capability. These innovations may be new to the firm, new to the nation, or new to the world. 2. Firms in developing countries need to target both domestic and foreign markets. 3. Firms in developing countries need to seek global resources to mitigate domestic comparative disadvantages.
1.5 Nature of Order of the Book
15
4. Firms in developing countries may benefit from competition not only domestically, but also globally. 5. When Porter wrote in the late 1980s, he noticed that factor endowments, such as financial capital, technology, and human resources moved locally. In the present decade, any model must acknowledge that these factors move regionally and globally. 6. The landscape of today’s business world is a dynamically linked global network that connects Porter’s clusters. 7. In this competitive position model, the goal of a firm in developing country is to become better than the competitors or peers that the firm has chosen. 8. The role of governments in Porter’s model is to stimulate local rivalry and early demand. In the new model, the governments’ role is to bridge international connections. The governments can accelerate inflows of global moveable factors, stimulate domestic innovation capacity, and promote access to regional and global markets.
1.5
Nature of Order of the Book
In presenting the current research, six chapters are developed. These are Preface, Introduction, Literature Review, Methodology and Data, Results, and Discussion. Chapter 1 introduces the research questions. They are followed by the rationale of the research, a summary of research methodologies and data, a statement of limitations, and a list of expected contributions. In this section, an effort is made also to redefine the concepts of competitive position, innovation in developing countries, and national innovation systems. Chapter 2 lays out theoretical framework of this research. This framework is based on various theories and empirical findings, and extension of these previous theories and findings. A special discussion on innovation theories and models is also presented. Chapter 3 presents the specific research methodologies and date used. It also discusses limitations. Chapter 4 summarizes the empirical findings and focuses on statistical results. Chapter 5 covers a discussion of the results and conclusions that may be drawn from them both theoretically and practically. It also provides suggestions for areas of future research.
Chapter 2
Theoritical and Empirical Literature Review
The role of conventional innovation in achieving competitive advantage has been examined from the views of comparative and competitive advantage model, resource-based perspective, product life cycle, and internalization theories, such as transaction cost in developed countries (Chudnovsky et al. 2006). However, the relevance of incremental and adaptive innovation in escalating competitive position of a firm in a developing country has not been adequately studied (Chudnovsky et al. 2006). To develop the research framework, this study draws mainly from two interrelated fields: innovation model and comparative and competitive advantage model. It also derives relevant aspects from technological cycle, resource-based perspective, path-dependency theory, and sectoral innovation system.
2.1
Innovation Model
The term of innovation derives from the Latin phrase “innovation” that means the creation of something new (Weiermair 2004). Schumpeter (1942) has made distinctions between invention, innovation, imitation, and diffusion. But Schumpeter’s approach overwhelmingly emphasizes on innovation (Andersen 2003). Schumpeter’s definition of innovation includes five areas: new or improved product generation, new production process generation, new market development, new supply chain, and reorganization (Ruttan 1959). This definition clearly indicates that a successful innovation will produce certain value-added results by improving product quality or by lowering production cost (Heskett 1986). To examine innovations in developing countries, the following literature review is summarized below.
V. Wang and E.G. Carayannis, Promoting Balanced Competitiveness Strategies of Firms in Developing Countries, Innovation, Technology, and Knowledge Management 12, DOI 10.1007/978-1-4614-1275-5_2, © Springer Science+Business Media, LLC 2012
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2.2
2 Theoritical and Empirical Literature Review
Incremental–Radical Dichotomy
The incremental and radical model is distinguished in two dimensions: the type of knowledge sources involved in an innovation process and the distance between technology changes (Weiermair 2004). From knowledge source perspective, an incremental innovation is built upon existing knowledge and technological knowhow from both internal and external accessible sources. A radical innovation is developed from knowledge advances. From technology advancing view, an incremental innovation will lead to a low or modest technological change of an existing products and process. A radical innovation results in considerable technological advancement, which results in an existing product or production process out of market. According to incremental–radical dichotomy, a firm in a developing country is most likely to position itself for incremental innovation. They may use existing external knowledge and resources and base on their own comparative advantages to achieve cost efficiency or become a niche player. In East Asia, some firms have managed to inroad into the global market through incremental innovations (Asian Development Bank 2003).
2.3
Henderson: Clark Model
Incremental–radical dichotomy alone may not be able to sufficiently explain the roles of innovation in a developing country. Why some firms have successfully advanced their technologies while many firms fail to do so? A useful framework derived from Henderson and Clark (1990) divides technological advances into two dimensions: component and architectural knowledge. This research applies Henderson and Clark’s framework to investigate how firms in developing countries, with limited financial resource and technological capacities, participate in technological advancement.
2.4
The S-Curve Framework
A main reason in adopting the S-curve framework in this research is that innovation activities differ across technology phases (Kaplan 2007). Under the S-curve framework, this research attempts to examine how a firm in a developing country can more strategically mobilize their indigenous knowledge in production, marketing, and service, more efficiently utilize their external knowledge and technology. The S-curve approach also appears in studies of technological catch-up practices of later comers in the global economy (e.g., Utterback and Abernathy 1975; Lall 1980, 1982; Dahlman et al. 1985; Hobday 1995).
2.5
Teece’s Innovation Model
19
Fig. 2.1 Innovation life cycle [adapted from Kaplan (2007)]
Particularly, relevant to the present research is the reverse S-curve, which explains the pattern of technological practices of late adopters. However, the reverse S-curve alone is not enough in explaining variances of innovations in developing countries (Lee and Lim 2001). It cannot explain why some firms become earlier followers, and the others do not. The innovation S-curve describes an innovation upgrading process in the order of introduction, growth, and maturation. Innovation in developing countries usually starts from getting access to an existing technology at its mature stage, during which, a relatively small increment will result in performance gain or product/ service differentiation. These incremental and adaptive innovations constitute subS-curves (Fig. 2.1). Unlike radical innovation, incremental and adaptive innovation thrives through continuous product and process improvements. Furthermore, Park and Lee (2006) found that catch-up is more likely to happen when a technology has shorter life cycle and higher initial knowledge stock. Different statistical parameters, therefore, are needed to capture the incremental and adaptive innovation processes in developing countries.
2.5
Teece’s Innovation Model
David Teece claimed that two factors – imitability and complementary assets – will have a strong influence in determining who will ultimately profit from an innovation. Imitability refers to how easily a competitor can copy or duplicate the technology or process that a firm possesses. Firms use various measures to protect their technologies from imitation, such as intellectual property rights (IPR) protection, complex internal routines, and increased tactic knowledge protection.
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2 Theoritical and Empirical Literature Review
Table 2.1 Innovation matrix in developing countries Complementary asset Yes Imitation asset Easy Adaptive innovation Difficult Incremental innovation
No Imitative innovation Formal R&D inputs
Teece’s Model has been used in previous research of conventional innovation (e.g., Lyytinen and Rose 2003; Chen 2007). Based on Teece’s innovation model, this research created an innovation matrix demonstrated above (Table 2.1). It assumes that when a firm in a developing country has high imitability and holds complementary assets, the firm is more likely to conduct incremental innovations. When a firm in a developing country has no complementary asset and imitability is high, the firm may conduct product imitation or imitative innovations. When imitability is low, and a firm in a developing country has complementary assets, cooperative innovations would benefit both domestic and foreign firms in a developing country. When a firm has no complementary assets, innovation is less likely to happen. Formal R&D investment may be required to build up strong innovation capacities first. This matrix helps the current study to capture different innovative activities in developing countries and their impacts on firms’ competitive positions. Abernathy and Utterback (1978) introduced interactions of innovation with its environmental factors. They argued “characteristics of the innovative process and of a firm’s innovation attempts will vary systematically with differences in the firm’s environment and its strategy for competition and growth, and with the state of development of process technology used by a firm and by its competitors.” Abernathy–Utterback’s perspective is used as part of theoretical base of the current research in introducing IPR protection, and national knowledge stock into the competitive position model proposed.
2.6
Innovation Novelty Matrix
Although different research has different ways in classifying innovation, the levels of innovation can be generally categorized into new-to-the-world product, line extension, me-too-product, or product modification (Morley and Pugh 1987; Slusher and Ebert 1992; Heany 1983; Olson et al. 2005) (Table 2.2). Heany’s (1983) innovation matrix has provided a step-by-step worksheet. According to Utterback and Abernathy (1975)’s innovation and development stage model, both process and product innovations will eventually reduce product cost or serve a specific group of customers. The difference can be explained by the observation that rapid economic growth at an early stage results from massive entries and imitations of simple technologies, while the sustained economic growth in later phases is provided by innovation and subsequent imitation, as well as exit of
2.6
Innovation Novelty Matrix
Table 2.2 Degrees of innovation [adapted from Heany (1983)] What is the design Is the market Is the business Do customers for product already serving know functions effort? established? the market? and features? Product Process Yes Yes Yes Minor Nil Yes Yes Yes Significant Minor Yes Yes Yes Minor Minor Yes Yes Yes Minor Major Yes No Yes Minor Major No No No Minor Major
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Then innovation is a: Style change Product line extension Product improvement New product Start-up business Major innovation
Fig. 2.2 Stage of product development [adapted from Utterback and Abernathy (1975)]
inefficient firms (Yamamura et al. 2005). This finding is based on a case study of the motorcycle industry in Japan from 1948 to 1964 (Fig. 2.2). Recognizing and redefining innovation in developing countries is the first step of this research. First, when a firm in a developing country adapts an existing technology into its local business, it may go beyond and even far beyond simply operating or copying foreign equipments. Second, some initial attempts to master a new technology or imitate an innovation are quite demanding in human and financial resources. There isn’t always a clear cut between innovation, and imitation and diffusion (Pollock 2006). Innovative activities may not become sufficiently profitable before the change becomes a matter of routine. Thus, there is a need for a more radical rethinking in modeling innovation in developing countries. Even within
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2 Theoritical and Empirical Literature Review
developed countries, small- and medium-sized enterprises (SMEs) may be mainly the contributors to incremental innovations. For example, a web-based survey conducted by Oke et al. (2007) indicated that SMEs tend to focus more on incremental than radical innovations; and this focus is related to growth in sales turnover in the UK. Incremental innovation can also be embodied in a firm’s routine operational activities. Wamae (2006) pointed out that majority of technological advances in firms from developing countries come from their efforts in dealing with surviving and competitions rather than pursuing of advancing technology to the frontier. It is also hard to attribute the technological advances to an isolated innovation commitment (Wamae 2006). By examining R&D investment and innovation in forms of new products or processes, Micheline et al. (2006) found these variables did not produce any significant impacts on firms’ productivity in Tanzanian manufacturing firms. The present research is to extend the scope of innovations of firms in developing countries to overcome the limitations of the previous research.
2.7
Technological Catch-Up
A firm’s cumulative innovative efforts are likely to turn into sources for technological advances. The recent research also makes an attempt to understand the unique technological development paths of firms in developing countries. Kim (1997) divided technological development into stages of duplicative imitation, creative imitation, and innovation. Another approach of classification is expressed as: original equipment manufacturing, original design manufacturing, and own brands manufacturing. The previous research indicated that original equipment manufacturing and original design manufacturing might be in different order (e.g., Mathews 2002a, b, 2003; Lee and Lim 2001; Lee 2005). The interesting finding from Lee and Lim (2001) is that domestic firms in developing countries follow a pattern of: assembly of imported parts for final goods, manufacturing and development of low- to high-tech parts, adaptive innovation or modification, and then incremental innovation of products. This process can be seen as a reversed innovation process. A typical innovation of firm in developed country starts from a new concept, product design, manufacturing parts, and finally assembly. Lee (2005) integrated catch-up pattern and technological development stage in Table 2.3. According to Lee (2005), during the first stage of technological development and catch-up, a domestic firm learns skills or operational know-how (tactic knowledge) during the assembling process. Technological capacity is mainly built upon learning by doing. In the second stage, the domestic firm acquires processing technology while produces goods according to designs and requirements from a foreign firm. The imitative innovation capacity may be developed in this stage (Kim 1997). With increased technologic capacities, a domestic firm may also become more capable to learn from licensing, literature, or other forms of knowledge.
Table 2.3 Patterns of catching-ups and stages of technological development [adapted from Lee (2005)] Stage I Stage II Stage III Stages in catch-up Duplicative imitation Duplicative imitation Creative imitation Patterns of catch-up Path-following Path-following Stage-skipping Stage-skipping Learning object Operational skills Process technologies Design technology (for existing products) Learning mechanism Learning by doing Learning by doing How to learn? (crisis and switches (production following (production following to in-house R&D, R&D consortium, manuals and guidelines) product design) and overseas R&D outposts)
Stage IV Real innovation Path-leading Path-creating New products development technology Co-development strategic alliances
2.7 Technological Catch-Up 23
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It is important to note that a catch-up is not only based on foreign knowledge, but also depends upon indigenous knowledge (Lee 2005). Indigenous knowledge serves as complementary assets to foreign technology. The accumulated capabilities in the process will reduce knowledge gaps between foreign technology and domestic innovative capacities. The possibility of a catch-up is, to a large degree, determined by a firm’s access and ability to apply internal and external knowledge efficiently. Hu and Jaffe (2003) argued that developing countries are constrained by the lack of access to advanced knowledge and low abilities to absorb and utilize new knowledge. One of the assumptions that directly triggered the present research was made by Amsden and Chu (2003) that most domestic firms’ catch-ups are not through applying the world most advanced knowledge for product innovation, but through incremental and niche innovations. Absorption capacity and complementary assets or capabilities of a firm in a developing country determine the possibility, speed, and patterns of its catch-up in innovation capabilities (Lee 2005). The existing technological capability of a domestic firm, thus, matters, since it may also affect terms and conditions of its contract with the technology owner(s). A firm with strong technological capacity has a better chance to compete in the higher end of technological applications and to joint global R&D ventures. Building upon the previous research on local existing knowledge and technological gaps (e.g., Fagerberg and Verspagena 2002; Papageorgiou 2002), the present study further examines the role of innovation that occurred along with a firm’s catch-up process in a developing country. Studies on innovation in developing countries have largely limited to cases in China, India, Ireland, and Brazil (e.g., Tseng 2006; Athreye and Cantwell 2007; Li and Kozhikode 2008). By analyzing firm-level data in Tanzania, Goedhuys (2007a, b) also found that differences exist between innovation strategies of foreign and domestic firms. Foreign firms take advantages in vertical linkages with other foreign firms. They invest more likely in human and physical capital. In contrast, domestic firms use their strengths of being deeply embedded in local industry structure and market, and collaborate with other local firms and even through outward foreign direct investment (FDI) to access global advanced technologies. The landscape of technologies in developing countries provides an opportunity to study the causes and consequences of innovation. A number of countries are still relying on their natural resources; the majority of developing countries are still in complementary model in which manufacturing and service are feeding supply chains of firms in developed countries; a handful of developing countries are moving toward a substitute model in which domestic firms compete with foreign firms in the global markets (Goedhuys 2007a, b). To better capture innovation activities and understand the roles of innovation in developing countries, this research, thus, adopts the concept of innovation developed by Chudnovsky et al. (2006), which states “innovation is considered as a process, which is carried out with specific inputs (R&D activities and acquisition of embodied and disembodied technologies, among others) and by interacting with other firms and institutions.”
2.8
Comparative Advantage
2.7.1
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Comparative and Competitive Advantage
Innovation is one of the contributing factors in achieving and sustaining comparative and competitive advantages, as illustrated by Porter (1988, 1990) and Teece (1997). This research reviews and analyzes theoretical development trajectories of the comparative and competitive advantage models.
2.8
Comparative Advantage
One of the most important theories in international business is comparative advantage model (Suranovic 2007). The theory foundation goes up to Adam Smith (Maneschi 1998), a Scottish economist. In his book, Wealth of Nations (1776), he argued that trade is not a zero-sum game. He illustrated how both parties can benefit from trading. His argument is labeled as the absolute advantage theory. The logic of absolute advantage is simple and intuitive. If country X can produce a set of goods with lower costs or higher productivity than country Y, and meanwhile, country Y can produce another set of goods with lower costs or higher productivity than country X, the trade of these goods benefit both country X and country Y. But what if a country has all or none absolute advantages in all sets of goods? Thus, Adam Smith’s absolute advantage theory was superseded by the comparative advantage theory in the 1800s. David Ricardo was credited for this commonly named comparative advantage model, although he may not be the first economist who came up with this concept (Cho and Moon 2002). Colonel Robert Torrens’ note on the concept of comparative advantage in his third edition of “An Essay on the External Corn Trade” (1815) claimed that his own writing influenced Ricardo’s understanding of comparative advantage (Maneschi 1998; Rose 2001). Ricardo’s formation of this concept is more explicit and influential in his book published in 1817, On the Principles of Political Economy and Taxation, using an example involving England and Portugal (Maneschi 1998). However, not until the publication of John Stuart Mill’s Principles of Political Economy in 1848 (Suranovic 2007), the concept of comparative advantage was widely used in international trade theories. According to the comparative advantage theory, even a country does not have any absolute advantage, the country can still benefit from international trade. While an absolute advantage can be only obtained when a country can produce a set of goods at a lower cost; a comparative advantage can be achieved when a country can produce a set of goods at a lower opportunity cost relative to another country. In fact, the comparative advantage theory does not completely replace the absolute advantage theory; rather enriches it from a different perspective. Both absolute and comparative advantages are necessary for international trade: a country can achieve absolute advantage when it creates more products with the same cost; a country is also able to achieve comparative advantage when its opportunity cost is lower than its trade partners.
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However, Ricardo’s comparative advantage theory cannot sufficiently explain why comparative advantages are different in different countries (Moon and Cho 2002). Heckscher and Ohlin, two Swedish economists, explained comparative advantage resulted from the differences in factor endowments. Factors in Ohlin’s explanation include land, labor, natural resources, and capital (Ohlin 1933). Paul Samuelson also made several elaborations to the model, so it was also called the Heckscher–Ohlin–Samuelson Model (HOS) after the 1930s (Suranovic 2007). Paul Samuelson (1947), an American economist, formulated a factor-price equalization theorem, on the basis of the Heckscher–Ohlin trade theory. Later, in the 1950s and 1960s, Jaroslav Vanek also made noteworthy extensions to the model (Suranovic 2007). He viewed international trade of goods as an indirect means of trading factors or factor services embodied in goods (Vanek 1968). In the Heckscher–Ohlin model, also called factor proportion model, a country can achieve advantages when it is richly endowed with a particular factor, such as low-cost labor or natural resource. Factor endowments are intuitive and virtually self-evident (Moon and Cho 2002). This model was much advanced by incorporating a number of factors needed to produce goods and services, as compared to the original Richardian Model. However, the Heckscher–Ohlin model is still not sufficient in explaining why countries with similar factor endowments have been engaged in trading with each others, especially among advanced industries. According to the Heckscher–Ohlin model, a capital-abundant country will export capital-intensive goods and services; while a labor-abundant country will export labor-intensive goods and services. But the global trade patterns have demonstrated many well-known cases of exceptions. In 1954, a Russian-born American economist, Wassily Leontief, examined the US foreign trade pattern and developed the Leontief’s paradox in economics to flag the issue that the US, a capital-abundant country, exported labor-intensive commodities and imported capital-intensive commodities, which is contradicted to the Heckscher– Ohlin model. The key challenge to the factor-based model above is that some countries with poor factor endowments have also achieved comparative advantages. International trade can also take place between countries with similar factors endowments. In addition, globalization has greatly increased the volumes of exports and imports between subsidiaries of a multinational firm located in different countries. One explanation to the paradox lies in what is so-called economies of scale. Economies of scale refer to a production process, in which through increase in the scale of the production, a firm can reduce average unit cost. It is also called increasing returns to scale. A firm that is able to capture the economies of scale would have a cost advantage over its competitors. Unlike Heckscher–Ohlin model, economies of scale do not take factor endowments as preconditions for international trade. This helps explain why trading between developed countries accounts for a large share of the world trade in total. The failure of the comparative advantage model was due to it is assumption of market perfection (Hunt and Morgan 1995). By admitting imperfect competition into economic equation, the economics of scale gain the ground in international trade theories and go beyond traditional comparative advantage (Tybout 1993).
2.9
Competitive Advantages
27
Economies of scale establish a new basis for gaining from specialization. This explains why countries with similar technologies and factors for production would gain from international trade. The goods would be produced more efficiently with specializations among the trading partners. Large domestic market, thus, can be a competitive advantage. When production costs per unit fall along with the increase in market size, the advantages are obvious. In the context of market imperfection, economics of scale can also be a rationale for trade of similar goods, even when there is no difference in factor endowments among trading partners. Technology gap theory provides another logic expansion to the international trade theories. According to technology gap model (Wells 1972; Verspagen 1991; Fagerberg 1987, 1994), a country will export products in which the country is the leader of a technology. Exports will fall when the technology has diffused, which narrows the gap between the leaders and followers. Innovation leads to intellectual ownership that can be legally protected. The intellectual property holders therefore gain temporary monopoly. Technology transfer and diffusion would eventually weaken the monopoly position of the technology holders. Then, how did technology gap emerge at the first place? Raymond Vernon explained the phenomena in1966. Vernon’s product life cycle emphasized less on factor endowments than Ricardian theory; instead, it stressed the timing of innovation and commercialization. The product life cycle can explain why the USA was a leader in many advanced products. American firms could export during the early phases of a product life cycle. When the technology started diffusing, these firms would lose their export market shares. At the later stages, economies of scale and product standardization play important roles. Developing countries may possess comparative advantages at the later stages of technology life cycle given their lowcost labor force and burgeoning local market demands. However, the question remains: whether innovative commitments made by firms in developing countries can accelerate their improvement of competitive positions on the ladder of a global value chain. The key challenge to the series of comparative advantage models is that these theories focus on macroeconomics. However, under the same macroeconomic environment, firms are so different in their productivity. This has led to recognition of the role of microeconomics. Although a variety of approaches have evolved in the field of microeconomics since the late 1950s, it is in 1960s that the competitive advantage concept has been systematically analyzed (Calcagno 1996).
2.9
Competitive Advantages
In competitive advantage model, firms have been put at the center of all actors. A firm has competitive advantages if it can obtain same profits at lower costs or achieve higher profits than its competitors. To be competitive, macro- and microfactors are equally important in obtaining a competitive position. These include both conventional factor endowments in these traditional comparative
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Chance Firm Strategy, Structure, and Rivalry
Demand Conditions
Factor Conditions
Related and Supporting Industries Government
Fig. 2.3 The determinants of national competitive advantage [adapted from Porter (1990)]
advantage models and factors at the firm level. These factors together help a firm to create and sustain its successful positions (Calcagno 1996). The microapproach emerged first from Harvard University, which focused on influence of a firm’s external factors. However, the Harvard approach cannot explain the diversity in firms’ productivity (Calcagno 1996). A firm’s success is a result of the firm’s ability to respond to threats and opportunities existing in its specific operating environment. The relationship between a firm and its business environment is critical for achieving competitive advantage (Calcagno 1996). In 1980s, Porter further developed the Harvard School’s approach into his five competitive forces: competitors, new entrants, substitute producers, demands, and suppliers. In explaining his competitive advantage theory, Porter introduced the concept of “value chain.” In his view, “competitive advantage results from a firm’s ability to perform the required activities at a collectively lower cost than rivals, or create higher value at a premium price” (Porter 1991). Porter’s competitive advantage theory linked innovation and technology, market demand, competition and supporting industries into one system. After having analyzed the inadequacy of the classical theories on comparative advantages, Michael Porter (1990) argued that a nation can create new advanced factor endowments of skilled labor, knowledge, culture, and institutions. Competitiveness is defined as the productivity with which a nation utilizes its human, capital, and natural resources (Porter 1990). Based on his in-depth analysis of the leading manufacturing and service industries in ten nations, Porter formulated his competitiveness model in the later 1980s. This model answered how and why some nations compete more effectively in international markets than others and what constitute competitiveness. Porter’s Diamond of National Competitiveness (Fig. 2.3) visualizes his four key attributes of a nation’s competitiveness. It becomes a tool in understanding and analyzing how countries establish their business climates in which firms can thrive. Porter’s advantage model is essentially based on the experience of developed countries and mainly applicable to developed countries. This paper extends his systematic approach to developing countries, and explicitly put firms at the center of competitiveness.
2.9
Competitive Advantages
29
According to Porter (1990), the Factors Conditions include “the nation’s factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry.” Porter grouped the factors of production into five categories. • Human resources: the quality, skills, and cost of labor force. • Physical resources: the abundance, quality, accessibility and cost of a nation’s land, and other physical traits such as hydroelectric power sources, water, mineral, etc. Climate condition is also part of physical resources. Location, relative to other nations, is viewed as a physical factor that affects the ease of cultural and business interchanges. • Knowledge resources: the nation’s stock of scientific, technical, and market knowledge. • Capital resources: the amount and cost of capital available to finance industry. FDI makes the capital flows between nations more frequently, but the gaps in capital among the nations remain substantial. • Infrastructure: the type, quality, and user cost of infrastructure. These factors are not necessarily inherited (Porter 1990): a country can even further develop new factors, enhance existing factors, or change its factor conditions. For example, improved technological and managerial progress, high-volume return of well-educated labor force from developed countries to home countries, and significant inward FDI can dramatically change a nation’s factor conditions. The factor conditions provide comparative advantages. The extent to which a nation can gain competitive advantages from factor endowments depend on the extent of efficiency and effectiveness of these factors being exploited (Porter 1990). Porter (1990) also argued “the stock of factors at any particular time is less important than the rate at which they are created, upgraded, and made more specialized to particular industries.” Any single factor cannot become the element of competitive advantage unless the factor has been effectively exploited into production. He also argued that an abundance of factors may undermine, instead of enhance competitive advantages. On the other hand, some disadvantages in factors can become contributing factors to achieving competitive advantages. The Demand Conditions are defined as “the nature of home market demand for the industry’s product or service” (Porter 1990). Domestic buyers’ needs directly impact a firm’s ability to perceive, interpret, and respond to domestic and global markets as well. Porter (1990) states that home demand is determined by three major forces: the mixture of home demands, especially the sophisticated high-end demands, the size and escalating speeds, and the influences of domestic consummation styles to foreign consumers. Large home market size can lead to competitive advantages, as explained by the economies of scale. Porter also stated that large home demand is not an advantage, unless it is for the segments that are demanded in other countries (Porter 1990). High rate of growth of home demand can foster the growth of human factors, Science and Technology (S&T) development, and innovations. Early home demand helps local firms to move earlier than its foreign competitors.
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Related and supporting industries refers to “the presence or absence in the nation of supply industries and other related industries that are international competitive” (Porter 1990). The presence of capable suppliers can enable a firm to successfully operate its business. Whether a firm can realize the factor endowments and achieve competitive advantages relies on its effectiveness of utilizing the resources. Competitive supply industries can also stimulate and reinforce a firm’s innovation culture and activities. The related industries can bring a firm into a value chain and provide it with complementary knowledge, technologies, and products. Firms’ strategy, structure, and rivalry are the conditions in a nation that govern how companies are created, organized, and managed, as well as the nature of domestic rivalry. Domestic competition spurs firms in the same industry to increase its product quality and reduce its business costs, to invest in new product development and market its products and services effectively. However, given the differences between the factor conditions, fierce competition among firms may become either advantages or disadvantages for particular industries in different countries. Porter’s framework is largely home-based. This research extends Porter’s basic framework to also include internal capability development in innovation, which largely draws from the foundation of resources-based theories. During 1980s, another approach was also developed in competitive advantage studies, the resource-based model or view. Michael Porter’s five-force model focused on the company’s external competitive environment. The theory of internalization assumes that competitive advantages also come from maintaining control over technology and management. Dunning’s eclectic theory combined three types of advantages: ownership advantage, internalization advantage, and location advantage. In contrast to Porter’s competitive advantage model, the resource-based perspective highlights the need for a firm’s internal capabilities to effectively operate in its external market context. It challenges two fundamental assumptions of environment-based models: homogeneity of resources and opportunities among firms in the same industry, and perfect resource mobility (Calcagno 1996). The resource-based perspective claims that competitive advantage is achieved through a firm’s continuous effective mobilization of the existing and creating new resources and capabilities in response to rapidly changing competition conditions. The resource-based view, however, does not take into considerations of industrial context and is unable to identify the causal factors in creating sustainable competitive advantages (Calcagno 1996). Therefore, integration of competitive advantage model and resource-based model is the main theoretical framework for this research. In summary, absolute advantage model, developed by Adam Smith, emphasizes “invisible hand” of supply, demand, and free trade. David Ricardo’s On the Principles of Political Economy and Taxation, serves as the principles of comparative advantage. Classical economics tends to stress the benefits of trade, analyze natural price of commodities, cost of production, or labor value. In modern days, technology gap, product life cycle, and sectoral innovation system have been added to the original model.
2.10 Dynamic Comparative Advantage Model and the New Dilemma
2.10
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Dynamic Comparative Advantage Model and the New Dilemma
Introduced by Porter (1990), the dynamic comparative advantage model features the stages in the development hierarch. According to Porter, there are four distinct stages: (1) factor-driven, (2) investment-driven, (3) innovation-driven, and (4) wealth-driven (Porter 1990). In the factor-driven stage, similar to Smith’s absolute advantage, economic activity is based on natural resource and unskilled labor forces. Most, if not all, least developing countries are still in the factor-driven stage (Ozawa 1992). In the investment-driven stage, similar to Ricardo’s comparative advantage, the major economic activities are manufacturing of intermediate goods with a lower costs. Some developing countries are already in the investment-driven stage (Ozawa 1992). The innovation-driven stage can be more clearly explained by the technology gap and the product cycle model, as well as the comparative advantage theories. The economic activities are based on human capital, innovation, and technological know-how. The industrialized countries are mostly in this stage. Few newly industrialized countries may approach this stage (Ozawa 1992). Ozawa (1992) further built up linkages of the development stages with the comparative advantage patterns: • The factor-driven stage is related to factor-based trade stage with primary goods or labor-intensive goods. • The investment-driven stage is related to the scale-based advantages with largescale and capital-intensive goods. • The innovation-driven stage is related to the R&D-based advantages with hightech manufacturing. Moreover, Ozawa (1992) also linked both inward and outward FDI with the stages in development and the patterns of the comparative advantages • Countries in the factor-driven stage attract resource-seeking or low-cost-laborseeking inward FDI. • Countries in transition to the investment-drive stage generate outward investments to the countries in the factor-driven stages for resource-based or laborintensive productions; meanwhile, these countries also attract inward investments for capital and intermediate productions. • Countries in the innovation-driven stage provide outward investment for intermediate productions and bring in inward investment in technology intensive products. In the dynamic comparative advantage model, the value of factor endowments changes according to the stages of development. The factors range from natural resources, unskilled labor, and physical capital to skilled labor force, financial and intellectual capital.
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The critical difference between the traditional and dynamic comparative models is that factor mobility is admitted in the dynamic comparative advantage model. In Ricardian doctrine, countries would benefit when they export goods based on their comparative advantages, and import goods to make up for their comparative disadvantages. In the dynamic comparative advantage model, the role of technology or intangible assets may change the pattern. A country can gain significantly from international trade, when the country holds the ownership of main intangible assets (Kojima 1975). Recklies (2001) argued that Porter’s ideas become more and more subject of critiques under the new information economy. Recklies reasoned that Porter’s theories are based on the economies in the 1980s, which was characterized by relative stable market and cyclic development. Porter’s model cannot be easily applied to today’s economic environment. Downes (1997) further claimed that Porter’s assumptions are no longer viable. Instead, he identified three new driving forces: digitalization, globalization, and deregulation. Downes, in fact, looked at new enabling factors. Information technology enables a firm from outside the industry to change the base of competition. Globalization enables businesses to operate in a larger value chain, even if they do not export or import themselves. He claimed that the competitive advantages emerge from lasting relationships to global customers and business partners for mutual advantages. Downes has enriched Porter’s competitive advantage model with new elements. The present research takes these new developments also into considerations. The economic landscape today is significantly different from the one from which Porter’s competitive advantages model was drawn (Ganesshan 2003). The new economic landscape gives firms in developing countries new opportunities to access global technologies, capitals, and markets. Meanwhile, these firms are facing increased competitions in domestic markets with importers and multinational companies (MNCs). Such competition may further be intensified by firms from other developing countries (Ganesshan 2003). However, Ganesshan’s also assumes that the lack of technologies as well as limited domestic markets pose less constraints to developing countries, as they can directly link up with foreign buyers and technological owners, which can make up for the limits.
2.10.1
Dynamic Comparative Advantage and FDI
The theory of FDI is built most extensively on industrial organization economics (Ozawa 1992). In fact, FDI is a dynamic comparative advantage, as Dunning explained in his eclectic paradigm, in the way that FDI facilitates structural upgrading in host countries (Dunning 1998). The competitiveness is a function of primary factors in the comparative advantage model. The competitive theory did not sufficiently anticipate the rapid development of technology and the internationalization of information, knowledge, and industry standardization. Smith’s doctrine of absolute advantage, Ricardo’s theory of comparative advantage, and Heckscher–Ohlin theory on uneven distribution of factors of production
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33
assumed that a country’s factor endowments are immovable. This implies that the differences in factors of production among countries, to a large degree, determine their productivity, and therefore availability and price of commodities. The increase of FDI in the last three decades has greatly challenged the assumption of immobility of factor endowments. FDI can be seen as international movement of financial capital, knowledge, and technology. Countries with scarcity in capital can gain capital advantage through inward FDI. Meanwhile, countries with plenty capital may experience a large volume of outward FDI. Furthermore, comparative advantage model mainly focuses on the macrofactors, while the differences among firms in a country are not sufficiently considered. In other words, comparative advantage theory assumes a perfect competition. It is country-specific advantages largely determine the commodity prices or productivity. On the other hand, FDI is not a simple country-to-country financial transfer decision. The firm-specific advantages also play an important role. FDI decision reflects both firm-specific and country level variables (Krugman 1990). Raymond Vernon’s product life cycle theory adds the fourth dimension to FDI. A new product that is initially introduced in developed countries would eventually spread to developing countries (Vernon 1966). The diffusion in technology and technological standardization also change the host country’s factors of production. FDI is a process of deploying dynamic model of comparative advantages. In the dynamic process, technology transfer and standardization of production, and vertical and horizontal global product chains interweave together. In this process, FDI has duel effects on firms’ competitiveness: it brings financial capital and technology into a developing country; it also presents strong competition to domestic firms. In such a circumstance, would domestic firms in developing countries benefit from their own innovative commitments?
2.10.2
Dynamic Comparative Advantage and Globalization
Globalization is a very broad concept that subjects to different interpretations (Scholte 2002). Although people may define globalization from different perspectives, the increasing connectivity of economic activities is a common element of globalization. As explained in Stolper–Samuelson-like approach, globalization has been flatting the factor prices of the countries as trading partners. It leads to diverging paths of relative factor endowments, and increases the degrees of specialization (Cunat and Maffezzoli 2007). Factor accumulation further leads to new distributions of factor endowments across countries. The development of modern technology makes immovable factors much easier to move across the borders. Porter (1990) also explained the dynamic nature of certain factors of production, such as skilled labor force, transportation, and telecommunications. He observed that the USA is not unique in these factors. Many other industrialized nations and even some emerging economics have greatly improved in infrastructure, including transportation, information, and telecommunications, and highly educated labor
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force. Therefore, the factor advantages that traditionally belong to the technological advanced countries have been diminishing in recent years, along with the globalization and technological diffusion. It is clear that during the last decade, there has been a strong wave of firms in developing countries pursuing competitive advantages (Aulakh et al. 2000). It has been argued that local knowledge and human capital are crucial to MNCs in developing countries to help global firms penetrate into these markets (Chen 2005). Inward foreign financial capital and technological flows are particularly important to domestic firms in these markets (Javorcik 2002). Then, how domestic firms in developing countries develop their own strong immovable factors to capture and utilize the inflows of these movable factors is the main theme of the present research.
2.10.3
Dynamic Comparative Advantage and Technology
The power of technology can circumvent the scarce factors and also diminish the value or advantages of some factor abundance in a country (Porter 1990). Some nations with greater innovative incentives are under higher competition pressures, factor disadvantages, domestic demanding, and rivalry (Porter 1990). Dynamic comparative advantage model is characterized by the neo-technology theories, including technology gap model and product life cycle models. Technology can lead to permanent improvements in production efficiency (Porter 1990). Application of modern technologies has greatly challenged the role of traditional factors (Porter 1990; Powell and Dent-Micallef 1999). Although public knowledge is nonrivalry and nonexcludability, IPR protection creates temporary technology monopolies. This research also includes this factor in the research model in complementing to Porter’s Model. The technology gap model is a dynamic model of innovation, monopoly, and imitation, which explains the benefits received by technological owners, pioneers, early followers, and later followers. Imitation activities occur in both developed and developing countries (e.g., Lee and Lim 2001; Mathews 2006a, b; Hu 2008). Are later comers merely passive followers? Innovation creates a temporary “technological gap,” which generates monopoly profits as long as it can be maintained. Imitation by rivals erodes this competitive advantage (Lee et al. 1999). Technology gap approach also argues that because of “knowledge stickiness,” knowledge developed in a particular sector and country would induce trade flows from that country (Laursen and Meliciani 1999). Protection of IPR affects a country’s inward technology flows and firms’ corresponding innovation strategies. The quality of labor force, knowledge absorptive capacity, and innovative commitment of a developing country determine its capacities in narrowing technological gaps from developed countries (Bartel and Lichtenberg 1987). Technology plays duet roles for firms in developing countries (Carayannis and Samanta 2000). On the one hand, it acts as the catalyst in changing the relative
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importance of the factors of productions. Accumulation of knowledge leads to increasing in technological competency (Carayannis and Samanta 2000), which, in developing countries adds a new dimension to international comparative advantage model. The long-term profitability depends upon continued innovation (Carayannis and Samanta 2000). On the other hand, technology acts also as catalyst in changing the price of other factors of production. Complementary capacity is critical to competitive success (Chen 2005). High knowledge intensive and use of knowledge further enhance technological competency (Wamae 2006). This research focuses on the role of a firm’s innovative commitment in advancing its technological competency. Acquisition of foreign technology may become essential to improve a firm’s competitive positions. But the role of a firm’ own innovative commitments is still unclear. What drives a firm to invest in innovation in developing countries? For developed countries, demand influences market size of a particular technology, and hence the demand for the technology (Schmookler 1966; Nelson and Winter’s 1982). Mowery and Rosenberg (1979) expended Schmookler demand-driven approach. They pointed out that a successful innovation requires both demand and supply incentives. From a view of FDI and globalization, foreign competition would bring pressure to a domestic firm to update its technology. The global value chain also enables a firm to gain certain capacities in upgrading its technology and access to global markets. Is Porter’s claim of domestic competition and local market demand out of date? Wamae (2006) argued that the impacts of both market demand and availability of technological opportunities on innovation is still unclear. Pavitt (1971) found a weak impact of size and sophistication of national markets on innovation performance, but supplying has a strong impact on innovative performance. Diffusion theories suggest that capacity and commitment to generate or adapt innovation determine the order of commercialization of an invention and technology (Roger 1983; Massini et al. 2005). Technological changes in developing countries may be originated from both foreign and domestic resources. The abilities of a firm to exploit its external technological resources affect the possibility and time of the firm’s technological catch-up (Katz 1987). Meanwhile, given the wide gaps in technological capacities, globalization may also increase a firm’s dependency on foreign technologies. By analyzing empirical cluster data of Nigeria, Amakom (2006) found a significant correlation between firm-level technological capacities and external knowledge networks. For firms in developing countries, is importing foreign technology a shortcut or a pitfall? Particular interesting studies by Lewin and Massini (2003) and Massini et al. (2005) provide some conceptual directions on this subject. Massini et al. (2005) argued that firms’ innovative rates vary greatly, in part, due to their choice of their reference group. Innovating firms and the early followers compare themselves with or compete with other innovating firms and early followers. In summary, the business environment of a firm in developing countries has been changed since 1990s. These changes include significantly increased technological intensity of products and services, increased complexities of global competition, and shortened life cycle of products. The changes make technology become a key factor of competitiveness (UNCTAD 2005).
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2.10.4
2 Theoritical and Empirical Literature Review
Comparative Disadvantage
Contrary to competitive and comparative advantage paradigms, the recent developments in competitiveness introduced the comparative disadvantage concept (e.g., Filippov and Saebi 2008). This concept indicates that comparative disadvantages at a home market have driven firms’ operating in the global market. Unlike Dunning’s perspective that outward FDI is mainly from developed countries to developing countries, to seek low-cost labor force, markets, and natural resources, the comparative disadvantage concept argues that the outward FDI and multinational companies from developing countries are to seek the access to advanced technologies in developed countries (Filippov and Saebi 2008). In both the comparative advantage and disadvantage models, FDI can be seen as two-way transactions. Developing countries can attract inward FDI to upgrade their domestic technological and managerial capabilities, and also support its firms’ outward FDI to directly access advanced technologies resided in developed countries (UNCTAD 2006). South–south cooperation may benefit both sides in technological capacity development. Are competitiveness and comparative advantages home-based? Particularly in developing countries, evolutionary economics provides useful insights for the present research. Evolutionary economics (Nelson and Winter 1982; Montgomery and Cynthia 1995; Barney 2001) emphasizes the role of innovation (Nelson and Winter 2002). Teece et al. (1997) argued that due to firms’ differences in innovative activities, their development paths vary accordingly. A firm needs to exploit their internal and external resources and build its technological capabilities for future development. Dierickx and Cool (1989) argued that it takes time to build up these capabilities. Does innovation have decisive impacts on firms’ competitiveness? If yes, is the same logic hold true in developing countries?
2.10.5
Sectoral Innovation System
While Porter’s competitive advantage diamond model has been very influential, and also widely criticized, the sectoral innovation system has emerged as one of the widely used sectoral economic models (Mehrizi and Pakeneiat 2008). Innovation and technological changes are at different rates, through different types and with different trajectories, depending on the sector in which they take place (Malerba 2004). The model is rooted mainly in evolutionary economics and innovation system (Malerba 2004). There groups of variables are listed in the system: (1) knowledge and technologies, (2) actors and networks, and (3) institutions in Malerba’s sectoral innovation system (Malerba 2004). These actors of the system are connected by market and nonmarket factors, under the common knowledge base (Malerba 2004). One of the advantages of the sectoral innovation system is that it takes into the considerations of innovation capacity development which is critical to firms in
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developing countries. The system approach is also compatible with the new phenomena of globalizations such as global value chain and FDI. However, the qualitative indicators are weakly introduced in the system. Mehrizi and Pakeneiat (2008) summarized the comparisons between Porter’s competitive diamond and the sectoral innovation system (Table 2.4). This research takes into full considerations of the advantages and merits of both systems that are more suitable and applicable to the settings of developing countries. The current study will incorporate the sectoral innovation system approach. However, as Mehrizi and Pakeneiat (2008) indicated, the approach may overlook the special position and importance of governments. More generally, the national innovation system, especially the IPR protection system, has its special influence on innovation.
2.10.6
National Innovation System: IPR Protection
National innovation system is an important environmental factor in global economy. Among the factors of national innovation system, the impact of IPR protection on innovation and competitiveness is still very controversial (Allred and Park 2007a, b). IPR protection is intended to promote market exchanges of protected knowledge and create incentives for innovation (Kanwar and Evenson 2003). It can stimulate or reduce technology transfers across countries (Gould and Gruben 1996; Thompson and Rushing 1996, 1999; Park 1999; Falvey et al. 2004). In principle, IPR protection has inherited tradeoff effects on a nation’s innovation (Mazzoleni et al. 1998; Cooroochurn and Hanlry 2007). Innovation and commercialization are determined by the incentive of commitment to innovation and exchange of technology and knowledge (Park 1999; Kumar 2001; Kanwar and Evenson 2003). This implies that IPR protection cannot be neglected in studying innovation activities. Dougherty (1997) found that developing countries are more likely to benefit from higher quality and diversity of foreign technology inflows. In a developing country, absorptive and innovative capacity may be as important as transferring foreign technology into the country, so was referred as spillover effects. The technological spillover covers a broad range of activities such as awareness of the leading products or process, access to the related technology, absorption of the imbedded knowledge, imitation of advanced technology, and innovation of improved or customized technologies. The IPR protection’s role in this process is to balance the incentive of a property holder to expose technologies to a country or business entities, and the incentive of domestic entities to learn from the technologies through various innovation efforts. A firm may take advantages of imitation and reverse engineer process to gain technological know-how and make profits from the knowledge with weak IPR protection. But weak IPR protection may also limit the quality and amount of knowledge and technology that are accessible to the firms in the country. It may even
Is determined by “common knowledge base” No assumption Firms are different based on their knowledge base and how firm accumulated knowledge and capability over time
Evolutionary economics and innovation system
Assumptions about the context of industry The role of government An active actor which evolves such as other actors with its own limitations of capabilities tries to compensate system failures Information symmetry By considering the importance of the role of “tacit” knowledge, this model does not rely on this assumption Rationality of actors Emphasizes on “bounded” rationality Openness of national economy No assumption
Assumptions about the industry The boundary of industry The size of industry Differences between firms
Preassumptions of model Theoretical origin
Almost assumes complete rationality Assumes
This assumption is the case in this model
Government should take role as facilitator and challenger and tries to compensate market failures
Is determined by common products? Industry is of noticeable share of local demand Firms are different in terms of their different “strategies”
Main-stream economics and management theories
Table 2.4 Comparative analysis of sectoral innovation system and diamond model [adapted from Mehrizi and Pakeneiat (2008)] Criteria Sectoral innovation system Diamond model Main question and goal of model The main question(s) How innovation process (creation, absorption, distribuHow national conditions influence international tion, and utilization) take place in a sector? competitiveness of industries? The main unit of analysis Firm/sector Firm/sector/cluster Time horizon Medium/long term (in medium, this model captures Medium/long term (the influence of each dimension on the selection process but capability building and other ones takes place in medium term, but the adaptation process usually take place in long run) evolution of cluster takes 10–20 years) Quantitative vs. qualitative Mainly qualitative Both Considering differences between By “technological regimes” which is related to the Industries are different based on the degree of depenindustries “appropriability,” “opportunity,” and “accumulativedency on “factor conditions” or “supportive and ness” of knowledge base related industries”
38 2 Theoritical and Empirical Literature Review
The evolution of industry and path dependency
Dynamics of model Emergence of new industries
Considering the role of foreign investment Considering the position of sector in global value chain
Relation with external factors Relation between different industries (within the country) Considering the role of trade
Knowledge is developed and then actors change this knowledge into economic values, accordingly, the needed institutions will be built and the industry evolves Through the process of adaptation, firms try to learn by accumulation of knowledge and capability The sectoral system tries to learn by changing the capabilities of actors, creating new actors, and changes in the relations among them or by changing the institutions
(continued)
Can be explained but empirically, is due to different factors such as demand, supportive are related industries, factor endowment, or some initial successful firms Firms try to adjust their strategies to adapt to changes in the environment The sector evolves based on the horizontal (between firms, suppliers, supportive and related industries, customers) and vertical (in terms of market competition among firms) linkages
Value chain can be analyzed in the “supportive and related industries,” but the emphasis of this model on “domestic” supportive and related industries leads to paying insufficient attention to this point
The knowledge relations between local firms and global rivals and the role of complementary knowledge assets and capabilities determine the position of sector in the global value chain
From the knowledge transfer view
Are considered in terms of supportive and related industries In terms of factor conditions and demand conditions, but is not so capable to consider the impact of foreign competitors on the domestic industries Almost cannot consider this factor properly
Considered in terms of “chance” and some political action of government Is analyzed as facilitates information distribution as well as “motivation” of firms (as heightens competition)
More applicable for industries in large and developed nation
Diamond model
Analyzed in terms of knowledge flow between sectors Almost not
Considered in terms of institutions, nonmarket mechanisms and some of nonfirm organizations Is analyzed as affects on the knowledge spillover and sharing among different actors
No assumption
Size and development stage of national economy
Components and relation in model Within the industry Considering noneconomic factors (social and political) Considering geographical proximity
Sectoral innovation system
Criteria
2.10 Dynamic Comparative Advantage Model and the New Dilemma 39
Rivals cooperation to bring “complementary assets” – knowledge and capabilities together The cooperation between firms and nonfirm actors and among nonfirm actors is considered
Actors, relations, and institutions in any sector evolve based on changes in the national and international actors, relations, and institutions (such as nations IPR laws) In other direction, these changes within the sector can alter similar components in national and even international levels
Co-evolution of internal and external factors of industry
Production is one stage in the innovation process and focus on how firms translate inventions into economic value Competition is considered as one of the market-based interactions among firms
Is mainly done by creation and acquisition of knowledge Innovation is analyzed over its whole process from knowledge creation and absorption to its utilization The influence of all actors, relations, and institutions on the innovation process is analyzed
Sectoral innovation system
Cooperation
Competition between firms
Production
Innovation (radical/incremental/ process/product/)
Capability building
Table 2.4 (continued) Criteria Diamond model
In addition, as the sectors grow, other supportive and related industries would be influenced
Competition among firms (part of “firm strategy, structure, and rivalry” dimension) pushes firms to be more competitive Cooperation between rivals but may decrease the strength of rivalry Other kinds of cooperation especially with supportive and related industries are analyzed mostly based on market mechanisms The main influence of external environment on sector is through supportive and related industries, as well as foreign competitions
In this model, the emphasis is not on the nature and types of innovation, but on the forces that pushes firms to innovate Focused on the production process in a sector from suppliers to customers
Is mainly created by better allocation of resources due to the pressure of competition Innovation is one of the production factors
40 2 Theoritical and Empirical Literature Review
2.10 Dynamic Comparative Advantage Model and the New Dilemma
41
further discourage domestic firms to invest in innovative activities, which may result in low innovative productivity. Cohen and Levinthal (1989) argued that in many countries, weak IPR protection, in effect, stimulates innovative activities through absorbing knowledge spillovers from foreign and domestic firms as well. Deardoff (1992) also argued that imitation can be a significant way of technological diffusion for developing countries; stronger IPR protection will benefit foreign rather than domestic imitative firms. As a result, stronger IPR protection may reduce the outputs of domestic economy in developing countries (Singh 2006). However, IPR protection can also affect the type and level of knowledge, a country can attract from other countries. With weak IPR protection, foreign IPR holders generally seek to avoid transferring latest and most useful technologies (Lee and Mansfield 1996) to the country. IPR protection also influences the modes of technology transfer (Davidson and McFetridge 1984; Teece 1986a, b; Horstmann and Markusen 1987; Yang and Maskus 2001; Smith 2001). The defensive business strategies undertaken by the IPR holders will increase the cost of the technology owners, receivers, and the public. Multinationals that conduct R&D in countries with weak IPR protection have adopted stronger modes of entry to prevent spillovers (Gassmann and Han 2004). Maskus (2005) found that in fear of patent infringement, firms transferred technologies to China, which were at least 5 years behind the frontier. When IPR protection is stringent, it seems to more likely favor the property owners. High profits made from and difficulties in imitating protected technology may lead more and more domestic firms to engage in innovation (Chen and Puttitanum 2005). In domestic markets, less imitation may provide incentives for domestic firms to invest in innovation to improve product quality or process efficiency (Chen 2002). When FDI brings more advanced technologies to developing countries with strong IPR protection, homegrown improvements by domestic firms in developing countries are spawned (Berstein 2006).
2.10.7
Protection of IPR and FDI
In developing countries, stronger IPR protection may promote inwards knowledge and technology flows (Ferrantino 1993; Mansfield 1994; Smith 2001). Ferrantino (1993), Mansfield (1993), and Primo Braga and Fink (1998) found no significant relationship between IPR protection and FDI. Seyoum (1996) found significant relationship of IPR protection and inward FDI, especially in emerging markets. At the firm level, Smith (1999, 2001) found that the US experts depended on the degree of IPR protection in developing countries. Maskus and Eby-Konan (1994) found no significant relationship between IPR protection and FDI by US MNCs. Mansfield (1994) suggested that the volume and quality of FDI are affected by the strength of IPR protection, by analyzing 100 US firms with FDI in 14 countries.
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Table 2.5 Summary of effects of stronger intellectual property rights on innovation, technology diffusion, and growth [adapted from Falvey and Foster (2006)] Intellectual property rights protection Technology spillovers Domestic innovation Evidence mixed Higher R&D spending Domestic R&D facilitates technology transfer and raises growth Domestic patenting Evidence mixed, depending on Evidence mixed country’s development stages Channels of international Evidence mixed Evidence mixed technology transfer Foreign direct investment Technology licensing Stronger IPR protection increase Little evidence licensing, based on limited evidence Foreign patenting Positive effect Positive evidence
On the other hand, Lee and Mansfield (1996) argued that IPR protection might induce foreign firms to produce and sell technological advanced goods in developing countries. It may block local firms’ access to the relevant technologies and knowledge (Steinmueller 2001). The strong protection of IPR may limit firms in developing countries to absorb and reproduce the advanced technologies (Maskus 2000). In summary, strong protection of IPR would encourage foreign firms to bring the relatively advanced technology into developing countries. Weak protection of IPR would discourage foreign firms from engagement in technology transfer. Consequently, the foreign firms may take alternative IPR protection measures to prevent the access to their technologies by host countries. However, simply gaining access to foreign technology is not sufficient to explain the impacts of IPR protection on the firms’ innovative activities in developing countries.
2.10.8
Protection of IPR and Domestic Innovative Activities
Innovation is a process of discovery, learning, application, and creation of knowledge and to turn knowledge into economic activities (Tang 2006). The innovation matrix in the previous studies is just research-in and technology-out (Carayannis and Wang 2008). Most of research models in testing the relationship between the protection of IPR and innovation use either the input or output indicators. Empirical evidences on the impacts of IPR protection in promoting innovation in developing countries remain limited and inconclusive (e.g., Kumar 2002; Kim 2003). Table 2.5 summarizes the empirical findings from previous researches. Using shares of R&D investment of total GDP and a panel model of 32 countries, Kanwar and Evenson (2003) found that strong IPR protection had a positive and significant impact on R&D expenditure. Countries with a high percentage of GDP spending in innovation, however, may also tend to have a stronger
2.10 Dynamic Comparative Advantage Model and the New Dilemma
43
protection of IPRs (Falvey and Foster 2006). Using national level data, Allred and Park (2007b) found insignificant relationship between R&D investment and IPR protection. Using patent application data, it is concluded that IPR protection has no or little effect on domestic innovation (e.g., Schneider 2005), and the stronger IPR protection, the higher domestic innovative activity levels (Chen and Puttitanum 2005). Furthermore, the direction of such relationship is affected by the degree of imitation. Stronger IPR protection can increase innovative activities, depending on country’s development stages (Aubert 2004; Allred and Park 2007b). Kim (2003) argued that strong IPR protection might hinder technology transfer and indigenous learning in the early stage of industrialization through imitation of foreign products. Only after countries have built strong innovative capabilities to undertake creative imitation, IPR protection becomes an important element in technology transfer and industrial activities. This conclusion is built upon three assumptions. First, before a country having obtained sufficient innovative capacity, the main source of its technological learning is to imitate foreign products. Second, a country’s innovative activities are limited to formal R&D activities and patentable innovations. Third, technological gains from imitations to the country have overweighed the opportunities cost of encouraging inflows of advanced technologies to the country, and fostering its domestic creative imitations and innovations. These three assumptions are widely open for challenges. Weak IPR protection may have allowed few developing countries to imitate the advanced technology to raise their domestic technological sophistications. However, if these countries had adopted strong IPR protections to invest and encourage honest means of technological acquisition, assimilation, and creations, was it possible that they have achieved the same, even stronger, innovative capacities? Weak IPR protection that blocks inward technological flows (Mansfield 1994) may not be at the best interest of a developing country that aims at leaning and developing its own innovative capacities. Overall, previous research on relationships between IPR protection and innovative capacities was based on the patent data. Patent counting cannot capture the major innovative activities of firms in developing countries, given the adaptive and incremental nature of their innovations. There is a need to explore the relationship between IPR protection and firms’ innovative activities in developing countries. Specifically, this research seeks to fill this gap. In country studies, Maskus and McDaniel (1999) found IPR protection has positive impact on the incremental and adaptive innovation in postwar Japan. The measurement of innovative activity is mainly by its utility model. Evidences from Brazil and Philippines have suggested that utility models are more relevant than patents in their innovative activities (Aubert 2004). The large IT firms in high-tech niches in India proactively seek IPR-based business strategies (Basant 2004). A survey of 120 Indian IT firms revealed that a significant proportion of firms perceived that IPR protection is important (Gupta 2004). Gupta (2004) also argued that IPR protection, in fact, is considered as a more effective tool than imitation due to the complexity of the modern technology.
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Table 2.6 The impacts of stronger patent protection on innovation and diffusion [adapted from Allred and Park (2007b)] Region Innovation Diffusion Developed countries Positive Positive Interested appropriability Market expansion Knowledge spillovers Prospect theory Negative Negative Transaction costs Market power effect Defensive patenting Reduced rivalry Predicted net effect? Predicted net effect? Developing countries
Positive Interested appropriability Knowledge spillovers Negative Inability to imitate and adapt Traditional knowledge patented Predicted net effect: likely negative
Positive Market expansion Business confidence Negative Market power effect Increased cost of technological inputs Limited market size Predicted net effect: likely negative
Observed technological learning miracles through imitation, Kumar (2002) argued that soft protection of IPR facilitates domestic firms’ imitation in Korea and India. Kim (2002) made a same conclusion of Taiwan. These studies primarily look at the visible actions of imitation.
2.10.9
Impacts of IPR Protection
Allred and Park (2007b) developed a four-quadrilateral table to illustrate the theoretical channels through which stronger patent protection may positively or negatively affect innovations and diffusion (Table 2.6). The key point was made is that stronger IPR protection increases the cost of technological inputs and reduces their supply in developing countries (Van Elkna 1996; Glass 2004; Allred and Park 2007a, b). However, the potential results of increased competitions by patent holders in developing countries may have been neglected in these studies. Strengthened patent protection can increase volume and quality of technology transferred to this country (Diwan and Rodrik 1991; Taylor 1993; Allred and Park 2007b), which may force the technological owners to also consider lower the price and adopt more cooperative business strategies. Allred and Park (2007a) tested the relationships of patent rights protection and innovative activities, using the number of domestic patent filed. In the same years,
2.10 Dynamic Comparative Advantage Model and the New Dilemma
45
Allred and Park (2007b) used the data of 706 firms that were competing in 10 manufacturing industries of 29 countries. They found strong positive influences of patent rights on a firm’s propensity to invest in innovation. Why strengthening IPR protection has a positive impact on a firm’s R&D investment, and on inflows of foreign technologies; but a negative impact on national innovative outputs? Patent counting may not be a right measure of innovative outputs in developing countries. Meanwhile, Allred and Park controlled only firm size in their data-testing model. Firms’ characteristics such as education levels of workforce, the size of the city of a firm located, the technology position, ownerships of firms may also contribute to a firm’s propensity to invest in innovation, and its strategies for competitions in the markets. The contradiction in Allred and Park’s studies directly triggered this research. In summary, the empirical research has not sufficiently tested whether IPR protection can stimulate innovative activities in developing countries, not only in terms of expenditure of formal R&D or high-level innovation output of patents granted. More critically, there is a need to examine the relationship of IPR protection and the small, incremental, and adaptive innovations in developing countries. There are a few countries with weak protection of IPR that allow their firms to imitate advanced technologies without costs. The costs of discouraging inflows of most advanced technologies, incurring of other obstacles to access global technologies, and suppressing incentives of domestic formal R&D investment have not been fully examined. The purpose of this research is to sketch out some key patterns of innovative activities and examine the relationships of IPR protection and innovative activities in developing countries. Based on the research findings, this research will develop a competitive position model for firms in developing countries.
2.10.10
Summary
It is generally accepted that innovation is a key factor of competitiveness (Porter 1990; Dixon 2000; Hamel and Getz 2004; Audretsch and Dohse 2004). It is important to clearly understand the nature and scope of innovations in developing countries. Both the product life cycle model and the dynamic comparative/competitive advantage models assume or predict that innovation occurs almost exclusively in developed countries (Puga and Trefler 2005). The conventional science, technology, and innovation indicators and indices produced by UNDP, UNIDO, RAND suggest that a few developing countries have significant innovations, because the incremental and adaptive innovations in developing countries are not part of the lexicon of international trade (Puga and Trefler 2005). How intensively domestic firms in developing countries engage in such incremental and adoptive innovations? Do these types of innovation matter to a domestic firm’s competitiveness and productivity in a developing country? A lot of innovative efforts are pursued by firms in developing countries today do not constitute an innovation in the conventional measurements. Yet, countries that left behind the modern technology cannot build up
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their competitive advantages solely by “learning by doing” on the factory floor. Should a country support its incremental and adaptive innovations, and raise the level of its IPR protection? A firm’s competitiveness depends on its innovative capacities and value-added innovations (Lang 2001a, b; Sveiby 2001; Metaxiotis and Psarras 2006; Plessis 2007). However, innovation research has primarily focused on maintaining, nurturing, and renewing core capabilities/competencies of the most innovative firms (Dutrénit 2004). The linkage between knowledge production and economic system has not been sufficiently identified (Nelson and Rosenberg 1993; Hegde 2004). The conventional innovation is centered on knowledge creation through R&D. The catch-up innovation can be conducted by a variety of technical efforts. How does R&D investment affect catch-up technology advancing? Is there a discernable impact of incremental innovation on a firm’ competitive position? These questions have not been well answered, but taken as given by technology advocators (e.g., Asian Development Bank 2003; The World Bank 2008).
Chapter 3
Hypotheses, Models, Data, and Methodology
In the introductory section, this research highlighted the concept of competitive position, innovation, and national innovation system – IPR protection in developing countries. To examine how incremental and adaptive innovations advance a firm’s competitive positions in a developing country, this research attempts to investigate the discernible patterns and the interrelationships of a firm’s characters and its business environment factors. To do so, this research goes beyond the conventional comparative/competitive advantage models to also introduce global driving factors into the research framework, in which the sectoral innovation system applies. It extends the conventional innovation statistics and focuses on firms’ incremental and adaptive innovations.
3.1
Research Framework
Three research questions are proposed in this research: 1. Are sources of competitiveness primarily national or global in origin for firms in developing countries? 2. Is it rational for firms in developing countries to invest in R&D to strengthen their innovative capacity? 3. Does IPR protection stimulate incremental and adaptive innovation in developing countries? This research further proposes a competitive position model for developing countries. It attempts to extend conventional innovation and competitiveness model to firms in developing countries. The basic research framework is depicted in Fig. 3.1.
V. Wang and E.G. Carayannis, Promoting Balanced Competitiveness Strategies of Firms in Developing Countries, Innovation, Technology, and Knowledge Management 12, DOI 10.1007/978-1-4614-1275-5_3, © Springer Science+Business Media, LLC 2012
47
48
3 Hypotheses, Models, Data, and Methodology National innovation system Intellectual property protection (measured by patent protection) Outcomes
Firm’s characteristics Firm’s characteristics variables Firm’s R&D expenditure Technological base Firm ownership Firm size Workforce education level Knowledge cluster Global innovation network
Driving factors Foreign competitors Domestic competitors Foreign markets Domestic markets
Immediate outcome Firm’s innovate outputs
Intended outcome Firm’s competitive position
Mediate variables Licensing technology from a foreign source Licensing technology from a domestic source
Competition and Cooperation Domestic Innovation Environment
Business Environmental Variables Proportion of R&D as percentage of GDP Number of patents application filed by residents Number of patents application filed by non- residents Royalty and license fees receipts Royalty and license fees payments Foreign Direct Investment
Fig. 3.1 Model 1: research framework for modeling
Research Question I
49
Research Question I To what extent the technological advance vary according to a firm’s innovation efforts? (Fig. 3.2)
Technology license from a foreignowned company
H1d (-)
H1a (+)
Major new production line developed
H1e (+) Technology license from a domesticowned company
Firm R&D investment
H1c (+)
Changes in technological position
H1b (+) Types in acquiring technological innovations
Fig. 3.2 H1a–H1e: estimating the impacts of R&D investment on innovation outcomes
H1a: Firms invested in R&D tend to more likely successfully develop a major new product line. H1b: The ways in which firms acquiring technological innovation vary according to their R&D investment. Firms invested in R&D more likely to cooperate with foreign partners. H1c: Firms invested in R&D tend to more likely successfully advance its technological positions. H1d: Technology licensed from foreign owners would suppress the likelihood of subsequent new product development. H1e: Technology licensed from domestic owners would increase the likelihood of subsequent new product development.
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3 Hypotheses, Models, Data, and Methodology
Investment in R&D will enable firms in developed countries to continue their ownership advantages and competitiveness. This model is to estimate the impacts of a firm’s R&D investment on its competitive position of firms in developing countries. It has been argued that domestic pace of technological progress is determined mainly by the speed of applying existing technologies (World Bank 2008). Adaptive and incremental innovation can come from the regular operations of plants (Juma and Clark 2002). Juma and Clark (2002) further claimed that cumulative effects of incremental innovations over time may be more important than introducing new equipment. In Juma and Clark’s study, the small, incremental, and adaptive innovations are largely built on engineering and technical skills rather than formal R&D. The abilities of firms in developing countries to exploit external technological resources affect the process of countries’ technological catch-up (Katz 1987). It also may create high dependency of domestic firms on foreign technological innovations, given the large technological gaps between developing and developed countries. Merely imitation is not sufficient, because foreign firms will constantly innovate to generate new technologies and new generations of products to sustain their competitive advantages (Asian Development Bank 2003). After having reviewed the case studies of China, India, Mexico, Singapore, Korea, this research finds that although they follow different development path in increasing their technological competitiveness, the innovative commitments might have played an important role. R&D can directly lead to technological progress. It can also increase a firm’s ability in choosing right technologies, and leveraging its own complementary technologies, to reduce its dependency on foreign innovations. This research is to investigate the effects of a firm’s R&D investments on advancing of its technologies and competitiveness. Having analyzed the measurements used in previous studies, this research intends to measure the direct impacts of R&D investment. Grupp (1997) used 161 domestic or foreign-owned firms’ data and found that R&D investment and patents do not sufficiently explain the competitiveness in German. Grupp measures competitiveness by two indicators: trading result and export share. These two indicators may not directly reflect the results of innovations, as many nontechnological factors can play a large role in between. Huang et al. (2005) based on their study of more than 150,000 Chinese manufacturing firms, concluded that R&D and innovation efforts made by Chinese manufacturing firms did not contribute to their performance, except for firms in the labor-intensive sectors. Huang et al. (2008) found that domestic firms have invested more heavily in R&D than their foreign counterparts in the high-technology sector of China. Their findings imply two possible explanations. First, as foreign firms dominate the exports in high-technology sectors, domestic R&D investment may not be well reflected by exports shares. The impacts of R&D may be more on domestic markets. Second, the long-term impacts of R&D investment may not be fully captured by these immediate outcomes. The current research, therefore, uses whether a new product line has been developed in the same time period and whether a new product line has been developed after 2–3 years of R&D investment. This measurement has advantages over the
Research Question II
51
previous research: (1) unlike market share or export, this can better rule out of nontechnical factors; and (2) it captures both immediate and mid-term impacts of a firm’s R&D investment. In addition, this research posits that the latecomer disadvantages in technological competition will lead less incremental innovation activities when firms directly use a foreign technology. On the other side, a well-developed domestic technology represents a powerful engine of industrial advancing. Licensing a domestic technology will lead to more backward and forward innovation activities than licensing a foreign technology. A domestic license is also more likely to become an important reference to stimulate domestic firms’ innovative activities.
Research Question II To what extent firms’ innovation strategies vary by local and global business factors in developing countries? (Fig. 3.3)
Percentage of foreign share
H2g
Degree of competition
Domestic versus foreign in origin
Number of customers
H2a (+)
H2b (+) H2c (+)
Number of suppliers
Innovations ο Increase quality ο Reduce cost
H2d (+)
Intensity of networking
Fig. 3.3 Model 3: H2a–H2c – estimating impacts of local and foreign competition/suppliers/ customers on a firm’s innovative commitment
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3 Hypotheses, Models, Data, and Methodology
H2a: Firms with more competitors tend to have higher level of innovation activities. H2a-1: Firms with both domestic and foreign competitors tend to have higher level of innovative activities. H2a-2: Firms encounter mainly with foreign competitors tend more likely to introduce new or improved products to markets. H2a-3: Firms encounter mainly domestic competitors tend more likely to introduce new or improved production process. H2b: Firms serve both domestic and foreign customers tend to have higher level of innovative activities. H2b-1: Firms that mainly serve foreign customers tend more likely to introduce new or improved products to the market. H2b-2: Firms that mainly serve domestic customers tend more likely to introduce new or significant improved production process. H2c: Firms have both domestic and foreign suppliers tend to have higher level of innovative activities. H2c-1: Firms with foreign suppliers tend more likely to introduce new or significant improved products to the market. H2c-2: Firms with domestic suppliers tend more likely to introduce new or significant improved production process. H2c-1: Firms networked with foreign partners tend more likely to introduce new or significant improved products to the market. H2c-2: Firms clustered with domestic partners tend more likely to introduce new or significant improved production process. H2g: Firms with a higher percentage of foreign ownership tend to have more connections with both foreign and domestic business partners. In Porter’s view, strong competition leads to improvement of existing technologies and to introduction of new technologies (Porter 1990). The new development of Schmpeterian models (e.g., Acemoglu et al. 2003; Aghion et al. 2006) claimed that strong competition would spur innovation of firms with advanced technologies, but discourage firms that are far from the frontier technology to innovate. This study is to examine the impacts of driving forces in Porter’s Model on firms’ innovation in developing countries. Technological sources that are available to a firm’s will influence the type of innovative activities to which the firm may commit. Technologies from foreign sources are less likely to perfectly match local market demands. Firms may more tend to conduct adaptive innovations. The outcome of this type of innovations is more likely to be product innovation. On the other side, when firms use locally developed technology or nonfrontier technological innovations, the pressure for lowering cost may force the firms to improve their production processes. This research introduces global factors into Porter’s model. Buckley et al. (2002) found that foreign presence is one of the most important factors of enhancing the total factor productivity in Chinese industry. Djankov and Hoekman (2000) found that total factor productivity growth is higher in firms with foreign partnerships, followed by firms with joint ventures. Firms without foreign partnerships have the
Research Question III
53
lowest total factor productivity growth in Czech Enterprises. Extending previous studies, the current research proposes that both local and global cooperation and competition change the rivalry of firms in developing countries. The global business environment is different from the one that Porter analyzed in his model. Globalization has found more foreign affiliates in developing economies than in developed economies. There were 335,338 foreign affiliates in developing economies and 247,241 in developed countries in 2005. However, there were only 18,029 parent corporations based in developing countries. There were 50,520 parent corporations based in developed counties (United Nations 2006). The rapid development of multinational enterprises may potentially drive firms in developing countries out of markets. It also stimulates firms in developing countries to advance their competitive position more quickly. Product market competition is more intensive in leading developing countries than in developed countries (Glen and Lee 2003). Increased number of firms in developing countries integrates into global and regional value chains. Market demands dictate the products to be supplied by a firm (Carayannis and Roy 1999). Carayannis and Roy (1999) also identified that “the creation of technological standards that define and enable the emergence of new markets”. GarciaTorres (2009) further found that technology reshapes society’s consumption habits and customs.
Research Question III To what extent firms’ innovation commitments vary according to national intellectual property rights protection? (Fig. 3.4) Types of acquiring technological innovations
H3a (+)
H3d (+)
Degree of IPR protection H3b (+)
Firm’s R&D investment H3c (+)
Firm’s competition
Fig. 3.4 Model 4: H3a–H3d – IPR protection and innovation
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3 Hypotheses, Models, Data, and Methodology
H3a: The ways in which firms acquiring technological innovation vary according to the degree of IPR protection. H3b: Strong IPR protection tends to increase firms’ R&D investment. H3c: The degree of IPR protection affects the type of a firm’s competitors. Strong IPR protection tends to introduce higher number of foreign competitors. Domestic technology holders may face more challenges than foreign technology holders. H3d: Strong IPR protection tends to accelerate commercialization of R&D investments. In order to catch-up in global economy, it is important that a country’s institutions and policies will ensure its firms are sufficiently dynamic and outward looking, so that they are able and encouraged to compete successfully in foreign markets. For developing countries, knowledge and technology inflows are important sources of innovation (Evenson and Westphal 1995). Costs in technological acquisition may be one of the key factors that determine whether a competitor will take risks to imitate a protected technology or carry an adaptive innovation. High-technology transfer costs may be charged when the IPR owners have fewer competitors in a developing country. It may change quickly when similar and substitute technologies have also been transferred to the same country. Costs of technology licensing may lead firms to avoid risks and costs of imitation. When the related knowledge and technologies become more widely available and accessible, the business competitions may less focus on the protected technology, more on its business applications – incremental and adaptive innovations. This research proposes that a domestic firm may experience more pressures from IPR violations than a foreign firm. Glass and Saggi (1998) argued that when a technological gap between two firms is too wide, the less advanced firm may not have physical and human capital to use the more productive technology. Halpern and Muraközy (2004) in their study of the FDI in Hungary also found that there were significant horizontal and backward spillovers from domestic firms. For domestic firms, foreign presence only matters to domestic firms in a very small distance. Domestic technology holders in developing countries may have fewer resources to take costly measures to protect their IPR than foreign firms. Complementary or substitute technologies for domestic firms more likely reside within other domestic firms, which make the domestic firms as the IPR violation targets and at a high risk of IPR competitions.
3.2
Model Specifications
As Nelson and Winter (1982) claimed that the survival of a firm is propelled by innovation and determined by their environment. The analysis of relationships of different level factors shall use multilevel modeling (Hox 2002; Goldstein 2003; Luke 2004; Srholec 2008). Thus, a two-dimensional matrix developed by Depperu is used in this research. Competitive position refers a firm’s technological position
3.2 Model Specifications
55
Table 3.1 Competitiveness and approaches [adapted from Asian Development Outlook (2003)]
comparing with its reference group. It is treated as a dependent variable. Competitiveness is, to a large degree, a firm-level concept (Buckley et al. 1988). It is treated as a dynamic process as illustrated in Table 3.1 in this research. This research focuses on how firms’ innovation commitments accelerate the dynamic progress. The analytic unit is a firm. The criteria and variables used to measure competitive position are constructed to measure the specific time and conditions within which a firm competes. A widely used econometric model was developed by Fagerberg (1996) as X = f(T, O) (Huang et al. 2005). Where X is a proxy of export performance, T is a technology proxy, and O is a set of other variables, such as prices, investment, and institutional factors. Chudnovsky et al. (2006) used the econometric analysis and found that in-house R&D and technology acquisition expenditure are positively related to the enhanced probability of introducing new products and/or process to market in Argentine. This paper also uses other alternative variables that are pertinent to its economic development stages, to measure innovation in developing countries, to identify and justify impacts of innovation on competitiveness. In summary, the research models in this study follow the conceptual framework set by Crepon et al. (1998) and followed by recent researches (e.g., Chudnovsky et al. 2006). Innovation is a process with certain inputs, interrelated actors, and different forms of outputs. Furthermore, innovation is not the end in itself. It constitutes the knowledge/technology bases for further innovation (Chudnovsky et al. 2006).
56
3.2.1
3 Hypotheses, Models, Data, and Methodology
Model Specification for Research Question I
To what extent does technological advance vary according to a firm’s innovative efforts? Innovation productivity is estimated using a panel data1 regression model as follows: Yit1 = b 0 + b1 X1t0 + b 2 X 2 t0 + b3 X3 t0 + b 4 X 4 t0 + o ′,
(3.1)
where Yit1 is the outcome variable-incremental innovations of firm in the period of time of t1. It is the outcome of a firm’ innovative commitment. X1t0 is the innovative commitments that measured by R&D investment in this research at time period t0. X2t0 is the technology base of the firm that measured by relative advanced comparing with its main competitors at time t0. X3t0 is the ownerships of the firm that with different networks to access technologies and knowledge at time t0. X4t0 is the location of the firms (whether it is a capital city and the size of the city at the period of time t0). o¢ is the error term that includes the random error and the error of the long-term impacts of R&D investment that may be not captured. The outcome of the technological innovation is measured by 1. Immediate outcome: major new product line developed. 2. Intended outcome: a change of technological positions comparing with a firm’s main competitors. The tobit approach in econometric modeling is used in this research. There are two latent variables: the decision to undertake R&D or not, and the actual level of R&D investment. This study uses both of these parameters for testing the hypotheses. In testing the overall impacts of R&D on firms’ incremental and adaptive innovation, this book also uses the total incremental innovation as well as product innovation, technological acquisition, process innovation, quality accreditation, and organizational innovation for Yit1. Given the high proportion of zero values of firms in R&D investment, this research uses both linear regression and binary logistic regression. Therefore, the outcomes of R&D investments of firms in developing countries are measured by a dummy variable (“1” for yes, and “0” for No). Innovation output is weighted by its degree of importance. This will allow the model to take into consideration of both the occurrence of innovative outcome and the impacts of this innovative outcome. To test the different impacts of technology, licensing from foreign and domestic firms during the time period of t1, fixed effect is also tested.
1
The same firms were interviewed in 2002 and 2005 World Bank Enterprises Surveys.
3.2 Model Specifications
3.2.2
57
Model Specification for Research Question II
To what extent do firms’ innovative strategies vary by their business environmental factors? To test the effects of the driving factors of incremental and adaptive innovation of firms in the developing countries, the following equation is proposed. Yi = b 0 + b1 X1 + b 2 X 2 + b3 X3 + b 4 X 4 t + o ′,
(3.2)
where Yi is the innovative commitments made by a firm. X1 is the pressure from competitors, X2 is the support from the suppliers, X3 is the demand from the customers, and X4 is the location of the firm, which serves as proxy for cluster effect. o¢ is the error term.
3.2.3
Model Specification for Research Question III
To what extent do firms’ innovative efforts vary according to their firm’s national intellectual property rights protection? The impacts of IPR protection on innovation are estimated as following: Yi = b 0 + b1 X1 + b 2 X 2 + b3 X3 + b 4 X 4 t + o ′,
(3.3)
where Yi is the innovative commitments made by a firm. In this study, it is tested by R&D expenditures, product development, technological acquisition, technological networking, respectively. X1 is the pressure from competitors, X2 is the support from suppliers, X3 is the demands from customers, and X4 is the location of the firm that serves as proxy for cluster effects. o¢ is the error term. The impact of IPR on the relationship between R&D investment and innovation outcome is estimated using a panel data2 regression model as follows: Yit1 = b 0 + b1 X1t0 + b 2 X 2 t0 + b3 X3 t0 + b 4 X 4 t0 + b 5 X 4 t5 + o ′,
(3.4)
where Yit1 is the outcome variable-incremental and adaptive innovations of a firm in the period of time t1. X1t0 is the innovative commitments that measured by R&D investment at time t0. b5X4t0 is the strength of IPR protection, patent right index as proxy through time t0. X2t0 is the technology base of the firm that measured by relative advanced comparing with its main competitors at time t0. X3t0 is the ownership of the firm that with different access to technologies and knowledge at time t0. X4t0 is the education level of the workforce of the firm at the period of time t0. o¢ is the error term. 2
The same firms were interviewed in 2002 and 2005 World Bank Enterprises Surveys.
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3 Hypotheses, Models, Data, and Methodology
To test the impacts of IPR toward the type of innovation outcomes, this research uses the total incremental innovation as well as product innovation, technological acquisition, process innovation, quality accreditation, and organizational innovation, respectively. The ultimate goal of a firm’s technological innovation commitments is to increase its productivity and advance its competitive position. Following the concept of R&D set by Neary (1999), an Innovation–Technology–Productivity Model is specified as following. Due to limited data availability, the model can only be partially tested. It will be useful to present the complete model in this study.
3.2.4
Innovation–Technology–Productivity Model
Put all together, the Innovation–Technology–Productivity Model is proposed as following: c (x, X ) ≡ a [x + by ], where c is the marginal cost of production, x is the local technology, X is the foreign technology, y is the usable foreign technology (0 £ a £ 1, 0 £ b £ 1). a = f{n, z}, n is the number of firms under the benefits of technology, z is the size of each individual firms. b = cX/cx. However, the higher value of b reduce the incentive of domestic firms to engage in R&D (suppress x). X = f(t, c), t is the advance degree of the technology(0 £ t £ 1); c is the contract type (technology transfer mode). y = f(x, X): The relationships of the local and foreign technology are: technology gap (the narrower the gap, the higher the transferable proportion of foreign technology), the degree of complementary nature (higher the degree of complementary technology, higher the local bargain power and higher technological productivity).
3.3 3.3.1
Research Data Time Fame of the Study: 1998–2005
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) that are administered by the World Trade Organization (WTO) requires that almost all developing nations to complete implementation by the deadline of January 1, 2000. Thus, 2000 is an important milestone for developing countries in strengthening their intellectual property rights protection. This study takes the Patent Rights Index of 2000 developed by Park (2008). In 2000, there was a 33% increase of the mean patent strength for all countries over that of 1960–1990 (Allred and Park 1994).
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59
The wide gap enables this research to test the relationship between the IPR protections and the innovative commitments, the impacts of IPR on the relationship between innovative commitments and technological advancing. The data on innovation input indicator is a firm’s R&D expenditure. It is measured by R&D expenditures of 1998–2002, and 2003–2005. The outcome indicators in innovation are pertinent to firms in developing countries. The driving forces of innovation include competition, markets (customers), and suppliers (product value chains), as listed in Porter’s Diamond.
3.3.2
Data and Sampling
3.3.2.1
Data
This chapter draws its data from the Business Environment and the Enterprise Survey of The World Bank. The core survey uses a stratified random sampling method. The merit of this survey is its broad coverage of innovation activities of firms in developing countries. The survey, thus, has several merits to be used for the current study. First, it covers a large set of countries with common questionnaires. The survey collects information on whether a firm uses technology licensed from a foreignowned company, its R&D expenditure in the last 3 years, the ownership structure, the educational levels of the staff, etc. Second, the survey allows this research to capture innovative activities typical to firms in developing countries. The survey asks whether a firm has undertaken any of the following ten initiatives in the last 3 years: developed a major new product line, upgraded an existing product line, introduced new technology that has substantially changed the way that the main product is produced, discontinued at least one product (no production) line, opened a new plant, closed at least one existing plant or outlet, agreed a new joint venture with foreign partner, obtained a new licensing agreement, outsourced a major production activity that was previously conduced in house and brought in-house of a major production activity that was previously outsourced. Third, the survey collects information on the most important channels used by firms in developing countries to acquire technological innovations from the broad range of possibilities, including embodied in new machinery or equipment, by hiring key personnel, licensing or turnkey operations from international sources, licensing or turnkey operations from domestic sources, developed or adapted within the established locally, transferred from parent company, developed in cooperation with client firms, developed with equipment or machinery supplier, from a business or industry association, trade fairs and/or study tours, consultants and from university, public institutions. However, the enterprise surveys do not take into the considerations of the quantitative aspects of the innovations. All the innovative initiatives are measured of being undertaken or not, regardless of the number of initiatives were undertaken.
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3 Hypotheses, Models, Data, and Methodology
Table 3.2 Distribution of firms by ownership type Firms in 2005 sample Type of firm Number of firms Percentage of total Domestic 2,978 85.5 Joint 257 7.4 Foreign 247 7.1 Total 3,482 100
Firms in the 2002 and 2005 sample Number of firms Percentage of total 223 72.6 42 13.7 42 13.7 307 100
Another significant drawback is that the information can hardly be crosschecked with similar questions of these key indicators such as the R&D expenditure, educational levels of the manager, and the employees.
3.3.2.2
Sample: Selection of Firms
Developing countries included all less developed countries, except for the least developed countries, according to United Nations classification.3 The main sample includes 3,482 manufacture firms in 27 countries. The manufacturing firms are selected based on the percentage of a firm’s sales comes from manufacturing. In this research, if a firm has at least 40% of sales come from manufacturing, the firm is included in the study. Appendix A provides the list of countries included in the sample. This research focuses on private firms’ innovative activities. Therefore, the sample of firms in this research does not include firms that the government or state has over 10% share of ownership. To compare the differences of foreign vs. domestic actors, this research classifies the firms into three categories. A firm is classified as a domestic firm, if at least 90% is owned by the private domestic individual(s)/ company(s)/organization(s). If the private foreign individual(s)/company(s)/ organization(s) own at least 90%, a firm is classified as a foreign firm. If a firm is less than 90% owned by a domestic individual(s)/company(s)/organization(s), less than 90% owned by a foreign individual(s)/company(s)/organization(s), and less than 10% owned by government and state, it is a domestic and foreign joint firm. The distribution of firms in the samples is listed in Table 3.2. Especially, the enterprise survey contains 307 manufacturing firms of 26 countries that were surveyed in 2002 and again in 2005 with a similar questionnaire. This constitutes a panel data. The panel data provides this research an opportunity to capture the some long-term impacts of the R&D. Appendix A provides the list of countries that included in the sample. Table 3.3 shows the distribution of the average percentage of R&D expenditures of 2000–2002.
3
http://unstats.un.org/unsd/methods/m49/m49regin.htm, as of June 14, 2010.
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61
Table 3.3 Distribution of the average percentage of R&D expenditures out of average annual sales, 1998–2002 Percentage of R&D expenditure Number of firms Frequency (%) 0 163 53.1 0.1–4.9 61 19.9 5.0–9.9 30 9.8 10.0–19.9 38 12.4 20–60 15 4.9
3.3.2.3
IPR Protection
To capture the effect of intellectual property rights on bilateral trade flows, Fink and Braga (2000) used the IPR index developed by Park and Ginarte (1996). This research uses the Patent rights index developed by Park (2008). The index of patent rights protection covers the membership in the international treaties, coverage and restriction on patent rights, enforcement, and duration. The index covers the most important components of patent legal system, which may avoid the biases that can be introduced from survey data. The index of patent protection ranges from 0 to 5, where 0 is the weakest and 5 is the strongest. Rapp and Rozek (1990), Bosworth (1980), Ferrantino (1993) also used the similar methodologies, with fewer number of elements incorporated. To increase the validity of findings in this research, IPR protection is also measured by other two relevant variables. One is the degree of confidence of firms toward the legal system that will uphold their contract and property rights in business disputes. The other one is how problematic are anticompetitive practices of other competitors. Appendix B displays the mean and standard deviation by country.
3.3.3
Variables
3.3.3.1
Innovations of Firms in Developing Countries
Outcome Variable Total Innovation (Discrete Variable). The technological achievement is measured by the total technological initiatives in advancing technologies of firms weighted by the degree of importance of each technological initiative during 2003–2005. The scope of these technological initiatives include development successfully a major new product line, upgraded an existing product line; agreed to a new joint venture with foreign partner, obtain a new product licensing agreement; outsourced a major production activity that was previously conducted in-house, and brought in-house a major production activity that was previously outsourced; and obtained a new quality accreditation (ISO 9000, 9002, or 14000, AGCCP, etc.).
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3 Hypotheses, Models, Data, and Methodology
The degree of importance is used as the weight to each initiative. The range of the importance is at a 1–5 scale: 1. 2. 3. 4. 5.
Not important Slightly important Fairly important Very important Extremely important
Product Innovation (Discrete Variable). The product innovation is measured by whether a firm has developed successfully a major product line and/or upgraded an existing product line during 2002–2005, and weighted by the degree of importance. The degrees of the importance are defined as following. 1. 2. 3. 4. 5.
Not important Slightly important Fairly important Very important Extremely important
Technological Acquisition (Discrete Variable). The technological acquisition is measured by whether a firm has agreed to a new joint venture with foreign partner and/or obtain a new product licensing agreement during 2002–2005, and is weighted by the degree of importance. The degrees of the importance are defined as following. 1. 2. 3. 4. 5.
Not important Slightly important Fairly important Very important Extremely important
Process Innovation (Discrete Variable). The process innovation is measured by whether a firm has outsourced a major production activity that was previously conducted in-house and/or brought in-house a major production activity that was previously outsourced during 2002–2005, and weighted by the degree of importance. The degrees of the importance are defined as following. 1. 2. 3. 4. 5.
Not important Slightly important Fairly important Very important Extremely important
Quality Accreditation (Discrete Variable). The quality accreditation is measured by whether a firm has obtained a new quality accreditation (ISO 9000, 9002, or 14000, AGCCP, etc.) during 2003–2005, and weighted by the degree of its importance.
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63
The degrees of the importance are defined as following. 1. 2. 3. 4. 5.
Not important Slightly important Fairly important Very important Extremely important
Organizational Innovation (Discrete Variable/Ordinal Variable). The organization innovation is measured by organizational changes in terms of allocation of responsibilities, budgetary resources, and staff within the firm over the period of 2003–2005 as following: 1. The firm is organized in much the same way as it was 3 year ago. 2. The firm has had some reallocations of responsibility and resources between departments. 3. The firm has had major reallocations of responsibility and resources between departments. 4. The firm has had a completely new organizational structure. Predictor Variables Percentage of R&D Expenditure of Average Annual Sales (Continuous Variable). The percentage of R&D expenditure is measured by a firm’s spending on the research and development (including wages and salaries of R&D personnel, materials, R&D-related education, and training costs) as a percentage of the average sales of the firm over the period of 1998–2002 and 2003–2005. Technology Base (Discrete/Ordinal Variable). A firm’s technological base is measured in the relative advancement of firm in its main product line to its closest competitors, as following: 1. The firm’s technology is less advance than that of its main competitor. 2. The firm’s technology is about the same as that of its main competitor. 3. The firm’s technology is more advance than that of its main competitor. Firm Ownership (Discrete/Categorical Variable). Firm ownership is an important determinant of the firm dynamics (Ayyagari et al. 2007). This variable is measured by categorizing the firm based on its percentage of ownerships by domestic and foreign firm’s individual(s)/company(s)/organization(s) as following: 1. Domestic firm, if at least 90% is owned by the private domestic individual(s)/ company(s)/organization(s). 2. Foreign firm, if the private foreign individual(s)/company(s)/organization(s) own at least 90%. 3. Joint firm, if a firm is less than 90% owned by a domestic individual(s)/ company(s)/organization(s), less than 90% owned by a foreign individual(s)/ company(s)/organization(s), and less than 10% owned by government and state.
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3 Hypotheses, Models, Data, and Methodology
High-Level Education of Workforce (Continuous Variable). This variable is measured by the percentage of workface at a firm that has some university education or higher in 2002 and 2005. Technology Licensed from a Foreign-Owned Company (Dummy Variable). Dummy variable equals to 1 if a firm licensed its technology from a foreign-owned company in 2003–2005. A firm licenses its technology within last 3 years may have suppressing effects on firms’ own innovative activities if the technology is new and technological gap is significant. To test whether there is a short-term suppressing effect of licensing from foreign-owned company, the last 3 years data are used. Technology Licensed from a Domestic-Owned Company (Dummy Variable). The variable is to find a firm’s technological sources. Dummy variable equals to 1 if the firm licensed its technology from a domestic-owned company. A firm licenses its technology within 3 years may have stimulating effects on firms’ own innovative activities when complementary and incremental innovation can generate higher profits or better meet the market demands. To test whether there is a short-term stimulating effect of licensing from domestic-owned company, the last 3 years data are used.
3.3.3.2
Driving Factors of Technological Innovations
Outcome Variable Innovative Commitment (Discrete Variable). The indicator is used here to capture innovation intensity and types. Therefore, both grouped and aggregated measurements are applied for this indicator. To capture innovation intensity, this variable is to measure the most important commitment of a firm in acquiring new production technology over a period of 2003–2005. The data is calculated by whether a firm has acquired a production technology in 2003 and 2005. If a new technology being acquired, it is weighted by the most important way of the firm in acquiring the new technology. The weights are assigned as following: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Embodied in new machinery and equipment Hired key personnel/consultants with the technological expertise New licensing or turnkey operations from domestic sources Transferred from the parent company New licensing or turnkey operations from international sources Obtained from a business or industry association Obtained from university or public institution Developed in cooperation with customers Developed in cooperation with supplier Developed or adapted within the firm
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65
Table 3.4 Distribution of the most important way of new technology acquisition by firm’s ownership type Foreign Domestic Joint firms Most important way of new technology acquisition firms (%) firms (%) (%) Embodied in new machinery and equipment 59.6 77.6 70.7 Hired key personnel/consultants with the technological 2.6 3.5 4.9 expertise New licensing or turnkey operations from international 2.6 1.8 3.3 sources New licensing or turnkey operations from domestic sources 1.8 1.8 0.0 Developed or adapted within the firm 8.8 7.9 8.1 Transferred from the parent company 12.3 0.7 3.3 Developed in cooperation with customers 6.1 4.1 4.9 Developed in cooperation with supplier 6.1 1.6 2.4 Obtained from a business or industry association 0.0 0.6 2.4 Obtained from university or public institution 0.0 0.4 0.0
Out of 3,482 firms in the 2005 survey sample, 42.7% (1,487 firms) have acquired new production technology during 2003–2005. Out of the 1,487 firms that have acquired new production technology, 70.7% of firms had their technologies just embodied its new technology in the new machinery and equipment. There are 119 firms developed or adapted new technology within the firms. Of these 119 firms, 99 firms are domestic firms. Foreign firms took advantages of their parent companies in technology transfer. They are also worked closely with customers and suppliers than domestic firms (Table 3.4). As Ayyagari et al. (2007) pointed out that firms in any country are more likely to concentrate on only certain types of innovation activities than others. Thus, they created the aggregated indices to reflect the innovative commitments. This study moves further to categorize the innovative activities according to the type of innovation and degree of innovation involved. To capture the diversity nature of innovative commitments of firms in developing countries, the key categories in this study are grouped into R&D expenditures, product development, technological acquisition, technological networking, respectively. While Chudnovsky et al. (2006) found the external sources of technology are more significant than in-house innovative activities. This study further takes into consideration that the in-house innovation also has the role to increase a firm’s capacity to identify, access, and utilize the external technology sources. But external technological sources may also discourage the firm’s in-house innovative activities, when the technological gap is too wide to be closed up by the technology followers. R&D expenditure is measured by a firm’s spending on research and development (including wages and salaries of R&D personnel, materials, and R&D-related education and training costs) as a percentage of the average sales of the firm. Product development is measured by new technologies that are developed or adapted within the firm, developed in cooperation with customers, and/or developed in cooperation with supplier.
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3 Hypotheses, Models, Data, and Methodology Table 3.5 Percentage of exports as of total sales by ownership type Firm ownership Mean (%) N SD (%) Foreign firms 46.7 247 41.8 Domestic firms 12.1 2,978 25.8 Joint firms 37.8 257 36.4 Total 16.5 3,482 30.1
Rogers et al. (1998) and Carayannis and Alexander (1999) emphasized the importance of cooperation in research and development. Technological acquisition refers to the new technology is obtained through the technologies that embodied in new machinery and equipment, hiring key personnel/ consultants with the technological expertise, new licensing or turnkey operations from international sources, and new licensing or turnkey operations from domestic sources. Technological networking is counted when a firm has obtained its new technology from a business or industry association and/or from university or public institution. According to the technology evolution theory, leaning, upgrading, and creating of technologies fundamentally depend on the networks of trust and associations (Carayannis and Alexander 2000; Wamae 2006)
Predictor Variables Percentage of Exports (Continuous Variable). This is measured by the percentage of a firm’s sale are exported directly and indirectly through a distributor. On average, there are 16.5% of total sales of 3,482 firms in the sample exported their products to foreign markets. The percentage of exports of foreign firms is as high as 46.7%. The domestic firms on average exported only 12.1% of their products. The joint firms exported 37.8% of their products to the foreign markets. This indicator partially reflects the “technological push” innovations. The exporting firms have better knowledge to the advanced technologies in the markets (Baldwin and Gu 2004) (Table 3.5). Years of Exporting Experience (Continuous Variable). The young firms are more dynamic (Ayyagari et al. 2007). This variable is calculated as the years from a firm’ starting year of exporting to 2005. Over 70% of firms do not have exporting experiences. Over 90% of exporting firms have less than 15 years of exporting experiences (Fig. 3.5). Percentage of Imports of Material Inputs and Suppliers (Continuous Variable). This variable is measured by the percentage of a firm’s inputs and suppliers are imported directly and indirectly through a distributor. On average, 55.5% of material inputs and suppliers are imported directly for foreign firms. This was 28.8% for domestic firms and 46.2% for joint firms (Table 3.6). Importance of Pressure from Domestic Competitors in Developing New Products and Market (Discrete/Ordinal Variable). Ayyagari et al. (2007) found strong support for
3.3 Research Data
67
80
Percent
60
40
20
0 .00
6.00 3.00
12.00 9.00
18.00 15.00
25.00 21.00
35.00 29.00
55.00 45.00
86.00 76.00
YEARS
Fig. 3.5 Distribution of years of experiences in exporting to foreign markets
Table 3.6 Percentage of imports of material inputs and suppliers by firm type Firm ownership Mean (%) N SD (%) Foreign firms 55.5 247 37.6 Domestic firms 28.8 2,978 36.7 Joint firms 46.2 257 39.1 Total 32.0 3,482 37.8
the role of competition in spurring innovation and foreign competition, in particular, have a positive influence on the innovation. However, Ayyagari et al. (2007) measured the competition by the number of competitors a firms faces their relative technological sophistications, with an assumption that foreign competitors are likely to be more sophisticated. However, when a firm faces few large efficient competitors, it may be under higher pressure than that of a firm faces a large number of small inefficient firms. The variable in this study is measured by a firm’s rate of the importance of pressure from domestic competitors on key decisions about the firm with respect to developing new products and market (Table 3.7). It is on a 1–4 scale as following: 1. Not at all important 2. Slightly important 3. Fairly important
68
3 Hypotheses, Models, Data, and Methodology Table 3.7 Importance of pressure from domestic and foreign competitors and customers in developing new products and market Pressure from Pressure from domestic competitors foreign competitors Pressure from customers Ownership type Mean N SD Mean N SD Mean N SD Foreign firms 2.5 247 1.1 2.8 244 1.1 3.2 244 1.0 Domestic firms 3.0 2,953 1.0 2.3 2,868 1.2 3.1 2,936 1.0 Joint firms 2.6 257 1.0 2.7 255 1.1 2.9 252 1.0 Total 2.9 3,457 1.0 2.4 3,367 1.2 3.1 3,432 1.0
Table 3.8 Importance of pressure from domestic and foreign competitors and customers reducing the production costs of existing products Pressure from Pressure from domestic competitors foreign competitors Pressure from customers Ownership type Mean N SD Mean N SD Mean N SD Foreign firms 2.5 247 1.1 2.8 244 1.1 3.2 244 1.0 Domestic firms 3.0 2,953 1.0 2.3 2,868 1.2 3.1 2,936 1.0 Joint firms 2.6 257 1.0 2.7 255 1.1 2.9 252 1.0 Total 2.9 3,457 1.0 2.4 3,367 1.2 3.1 3,432 1.0
4. Very important Importance of Pressure from Foreign Competitors in Developing New Products and Market (Discrete/Ordinal Variable). The variable is measured by a firm’s rate of the importance of pressure from foreign competitors on key decisions about the firm with respect to developing new products and market (Table 3.8). It is on a 1–4 scale as following: 1. 2. 3. 4.
Not at all important Slightly important Fairly important Very important
Importance of Pressure from Customers in Developing New Products and Market (Discrete/Ordinal Variable). The variable is measured by a firm’s rate of the importance of pressure from customers on key decisions about the firm with respect to developing new products and market. It is on a 1–4 scale as following: 1. 2. 3. 4.
Not at all important Slightly important Fairly important Very important
This variable also serves as the proxy of markets’ pull factor of a firm’s commitment to innovation in terms of the more sophisticated foreign customers. The local markets are so often believed to hinder the innovation, due to limited purchasing power (Wamae 2006).
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69
Importance of Pressure from Domestic Competitors in Reducing the Production Costs of Existing Products (Discrete/Ordinal Variable). The variable is measured by a firm’s rate of the importance of pressure from domestic competitors on key decisions about the firm with respect to reducing the production costs of existing products. It is on a 1–4 scale as following: 1. 2. 3. 4.
Not at all important Slightly important Fairly important Very important
This variable also serves as the proxy of markets’ pull factor of firm’s commitment to innovation, in terms of the customization to meet the local demands. Importance of Pressure from Foreign Competitors in Reducing the Production Costs of Existing Products (Discrete/Ordinal Variable). The variable is measured by a firm’s rate of the importance of pressure from foreign competitors on key decisions about the firm with respect to reducing the production costs of existing products. It is on a 1–4 scale as following: 1. 2. 3. 4.
Not at all important Slightly important Fairly important Very important
Importance of Pressure from Customers in Reducing the Production Costs of Existing Products (Discrete/Ordinal Variable). The variable is measured by a firm’s rate of the importance of pressure from customers on key decisions about the firm with respect to reducing the production costs of existing products. It is on a 1–4 scale as following: 1. 2. 3. 4.
Not at all important Slightly important Fairly important Very important
IPR Protection Patent Rights Index (Discrete Variable). The index is measured by the strength of IPR protection in 2000 that developed by Park (2008). It ranges from 0 (weakest) to 5 (strongest). The value is calculated by aggregating five key components of the patent protection: extent of coverage, membership in international treaties, loss of rights, enforcement provision, and duration of protection. The analysis of 7,580 firms in the developing countries of the World Bank Business Environment Survey, based on an item in the WBES, that reads “Please judge on a four-point scale how problematic are the following practices of your competitors for your firm? – They violate my copyrights, patents, or trademarks,”
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3 Hypotheses, Models, Data, and Methodology Table 3.9 Distribution of reported obstacles to competition of the violation of copyrights, patents, or trademarks No obstacle Some obstacles Major obstacles Total
Number
%
2,640 2,897 2,043 7,580
34.8 38.2 27.0 100
indicates that 34.8% firms did not think the violation of copyrights, patents, or trademarks is an obstacle to competition. There are 2,043 firms or 27.0% reported that the violation of copyrights, patents, or trademarks is the major obstacles to competition. 38.2% reported that violation of copyrights, patents, or trademarks is somewhat a problem. Table 3.9 illustrated the distribution of responses to the survey questions of these 7,580 firms. When IPR protection is very weak, 37% of foreign-owned firms reported that the violations of patents are the major obstacles to competition. In the strong intellectual protection environment, only 15.1% of foreign-owned firms reported that the violations of patents are the major obstacles to competition. For domestic firms, there are 27.4% of firms reported that violations of patents are the major obstacles to competition with very weak IPR protection, but 20.3% with strong IPR protection (Table 3.10).
Control Variables Total R&D Inputs (Continuous Variable). This is an indicator at country level. For this research purpose, the data is for 2000–2005. The country level R&D capacity is the overall environment that the firms’ innovative activities take place. The data defined as research and development expenditure is % of GDP. Country Level Patents (Discrete Variable). This variable is the total number of patents granted to the resident of a country in 2000. It reflects the innovative capacity of the country. Firm Size (Discrete Variable). Firm size is measured by the total number of full-time employees of a firm. Big firms have strong capacity in conducting innovative activities. The firm sizes are grouped as below: 1. 2–49 employees, small firm 2. 50–249 employees, medium-size firm 3. 250–9,999 employees, large-size firm Out of these 3,482 firms, 67.1% are small firms, 22.8% are medium-size firms, and 10.1% are large-size firms. In Schumpeter model (1942), a firm’s ability to innovate is mainly connected to its size (McCraw 2007). Initially he defended that small companies should be in a better position due to their flexibility. On the other
Distribution in percentage (%) No obstacle Some obstacles 27.8 28.5 Major obstacles 35.2 40.1 Total 37.0 31.4 30.0 39.8 30.2
53.2 31.8 15.1
27.1 45.5 27.4
25.5 46.0 28.5
30.6 35.7 33.7
43.7 36.0 20.3
Table 3.10 Distribution of reported obstacles to competition of the violation of copyrights, patents, or trademarks. Foreign ownership Domestic ownership Very weak Weak IPR Moderate IPR Strong IPR Very weak Weak IPR Moderate IPR Strong IPR IPR (1–2) (1–2.5) (2.5–3.5) (3.5–5) IPR (1–2) (1–2.5) (2.5–3.5) (3.5–5) Distribution in number No obstacle 15 111 125 194 84 299 584 806 Some obstacles 19 156 166 116 141 540 681 663 Major obstacles 20 122 126 55 85 335 642 375 Total 54 389 417 365 310 1,174 1,907 1,844
3.3 Research Data 71
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3 Hypotheses, Models, Data, and Methodology
hand, large companies might get trapped in bureaucratic structures. Later on, he also argues that a large firm has better resources and capacity to innovate. Firm Location (Discrete/Ordinal Variable). Porter (1990, 1996, 1998) has argued that clusters are central to competitiveness. Interfirm knowledge spillovers are often geographically concentrated (Singh and Khanna 2002). The firms in the capital or large cities may tend to have stronger cluster effects comparing to firms in small towns. Instead of mapping up the precise cluster networks, this chapter use geographic locations as of large to small towns or cities as a proxy to reflect the possible cluster effects in the research. This indicator is to measure the cluster effects on firms’ innovative activities. 0. 1. 2. 3.
The capital city or other over one million population Other, 2,500,000–1,000,000 population Other, 50,000–250,000 population Under 50,000 population
Of these 3,482 firms, 33% were located at capital cities, 20% were located at other cities or towns with 250,000 to 1 million of population, 22% located at other 50,000–250,000 cities or towns, and 24% were at the city or town with less than 50,000 population.
Chapter 4
Results
The Findings from the Empirical Analysis The findings from the empirical analysis are presented in this section, which follow the same order as of the research questions that are raised in the above chapter.
4.1
Model Estimating the Impacts of R&D Investment on Innovation Outcomes
Hypotheses concerning innovation outcomes were tested using the 2005 data, which includes 3,482 firms in 27 countries. To capture the concurrent effects of R&D on the innovation outcomes, major contributing factors identified in the previous section were also tested. Out of these 3,482 firms, 450 firms reported investments in R&D during the past 3 years in 2005 survey. The probability of nonzero R&D is small. In such a case, a zero inflated Poisson (Zip) model is also used to capture any systematic variation with zero and nonzero R&D investments. The data test indicates that a firm that invested in R&D was more likely to have a major new product line developed (P < 0.001). As being specified in Chap. 2, the size of a firm affects its innovation capacity. Therefore, the size of the firm has been introduced into the model as a control variable. A detailed data analysis indicated that 67% of these firms had less than 49 employees. Therefore, small- and medium-sized firms are represented in the survey. Table 4.1 provides the distribution of firm sizes in the sample. The statistical results show: both firm sizes and R&D investments are significantly related to the possibilities of having major new product lines developed (Appendices D and E). In addition, the correlation test indicates that the size of a firm is correlated with the probability of investment in R&D (Fig. 4.1). The statistical test has also confirmed that foreign firms had the same tendency of engaging in R&D in the foreign countries as domestic firms (Fig. 4.2). V. Wang and E.G. Carayannis, Promoting Balanced Competitiveness Strategies of Firms in Developing Countries, Innovation, Technology, and Knowledge Management 12, DOI 10.1007/978-1-4614-1275-5_4, © Springer Science+Business Media, LLC 2012
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Table 4.1 Firm size in the sample of data analysis Firm size Number of firms Number of full-time employee 1–49 2,336 Number of full-time employee 50–250 794 Number of full-time employee >250 352
Percentage distribution 67.0 22.8 10.1
3000 LOGIRD 0 1
Count
2000
1000
0 # of full-time emplo
# of full-time emplo
# of full-time emplo
SIZE
Fig. 4.1 Firm sizes and investments in R&D
After controlling the firm size, the probabilities in R&D investments are the same for a foreign firm, a joint firm, and a domestic firm. The testing results have been summarized in Table 4.2. When the importance of a major newly developed product line has also been introduced into the model, the system indicates that firms that invested in R&D during the last 3 years were more likely to have an important major new product line developed. To test the hypotheses of H1b–H1e, this study first analyzed the modes of acquiring a new production technology by a firm. Over the past 36 months before the survey conducted, 43% of firms in the sample had acquired a new production technology. Out of these 1,487 firms that a new technology has been acquired, 75.7% of firms were still in the stage of importing technologies that were embodied in machinery and equipment. There were only 29 firms that obtained a new license or a turnkey operation from international sources, while another 25 firms obtained from domestic sources (Table 4.3).
4.1
Model Estimating the Impacts of R&D Investment on Innovation Outcomes
75
Firm Size=# of full-time employees >250 140
R&D investment 0
120 1 100
Count
80
60
40
20
0 foreign
domestic
Joint
Ownership
Fig. 4.2 Firm size, R&D investment, and firm ownership
Table 4.2 Estimates of outcomes of R&D investments A major new product line developed Unweighted Variable R&D investment 0.688(***) 0.521(***) 0.741(**) Firm size 0.306(***) 0.329(***) R&D investment* firm size −0.122
0.522(***) 0.304(***) −0.117
Weighted 1.150(***) 0.579(***)
* p
