Globalization, Economic Growth and Innovation Dynamics Springer-Verlag Berlin Heidelberg GmbH Further Publications by Paul J.J. Welfens P.I.I.Welfens P.I.I. Welfens Market-orientedSystemicTransfonna EconomicAspects ofGerman Unification tions in EasternEurope Expectations, Transition Dynamicsand Problems, Theoretical Issues,and Policy International Perspectives Options . 2nd revised and enlarged edition 1992.XII,261pp. 20figs.,29tabs., 1996.XV, 527pp.34figs., 110tabs., Hardcover,ISBN3-540-55793-8 Hardcover,ISBN3-540-60261-5 M.W.Klein,P.I.I.Welfens P.I.I. Welfens, D.Audretsch, Multinationalsin the NewEuropeand I.T.Addison and H.Grupp GlobalThade Technological Competition,Employment 1992.XV, 281pp.24figs.,75tabs., andInnovationPoliciesin OECD Hardcover,ISBN3-540-54634-0 Countries R.Tilly,P.I.I. Welfens 1998.VI,231pp. 16figs.,20tabs., EuropeanEconomicIntegrationas a Hardcover, ISBN3-540-63439-8 Challengeto Industryand Government Contemporaryand Historical Perspectives I.T.Addison, P.I.I.Welfens on InternationalEconomic Dynamics Labor MarketsandSocial Security 1996.X,558pp. 43figs.,Hardcover, WageCosts, SocialSecurityFinancing and ISBN3-540-60431-6 Labor Market Reformsin Europe 1998.IX,404pp.39figs.,40tabs., P.I.I. Welfens Hardcover, ISBN3-540-63784-2 EuropeanMonetaryIntegration EMSDevelopments and International Post P.I.I. Welfens MaastrichtPerspectives EU EasternEnlargementand the Russian 3rd revised and enlarged edition Transfonnation Crisis 1996.XVIII,384pp. 14figs.,26tabs., 1999.X,151pp. 12figs.,25tabs., Hardcover,ISBN3-540-60260-7 Hardcover, ISBN3-540-65862-9 P.I.I.Welfens European Monetary Union P.I.I.Welfens Transition,InternationalImpact Globalizationofthe Economy, and PolicyOptions UnemploymentandInnovation 1997.X,467pp. 50figs.,31tabs., 1999.VI,255pp. 11figs.,31tabs., Hardcover,ISBN3-540-63309-7 Hardcover, ISBN3-540-65250-7 P.I.I.Welfens,G.Yarrow P.I.I. Welfens,G.Yarrow, R.Grinberg, Telecommunicationsand Energy C.Graack in Systemic Transfonnation TowardsCompetitionin Network International Dynamics, Deregulationand Industries Adjustment in Network Industries Telecommunications, Energy and 1997.XII,501pp.39figs.,Hardcover, Transportationin Europe and Russia ISBN3-540-61586-5 1999.XXII,570pp.63figs.,63tabs., P.I.I.Welfens,H.C.Wolf Hardcover,ISBN3-540-65859-9 Banking,International CapitalFlows and Growthin Europe P.I.I.Welfens,I.T.Addison, Financial Markets,Savingsand Monetary D.B.Audretsch, T.Gries, H. Grupp Integration in a Worldwith Uncertain Globalization,EconomicGrowthand Convergence InnovationDynamics 1997.XiV, 458pp.22figs.,63tabs., 1999.X,160pp. 15figs., 15tabs., Hardcover,ISBN3-540-63192-5 Hardcover,ISBN3-540-65858-0 Paul J.J. Welfens . John T. Addison David B. Audretsch . Thomas Gries Hariolf Grupp Globalization, Economic Growth and Innovation Dynamics With the collaboration of Stefan Iungblut and Henning Meyer With 15Figures and 15Tables 'springer Prof. Dr. PaulJ.J.Welfens Prof.Thomas Gries UniversityofPotsdam UniversityofPaderborn European Institutefor Fachbereich 5,Wirtschaftswissenschaften, InternationalEconomic Relations Volkswirtschaftslehre, Internationale August-Bebel-Str.89 Wachstums- und Konjunkturtheorie 14482Potsdam WarburgerStr. 100 Germany 33095Paderborn http://www.euroeiiw.de Germany Prof.John T.Addison Dr.HariolfGrupp UniversityofSouth Carolina FraunhoferInstituteforSystems DepartmentofEconomics and InnovationResearch (lSI) CollegeofBusinessAdministration BreslauerStr.48 The H. William CloseBuilding 76139Karlsruhe Columbia, SC29208 Germany USA Prof. Dr.DavidB.Audretsch Indiana University InstituteofDevelopment Strategies (SPEA) Suite 201 Bloomington, Indiana47405 USA [email protected] LibraryofCongressCataloging-in-Publication Data DieDeutscheBibliothek- CIP-Einheitsaufnahme Globalization,economic growth and innovation dynamics: with IStables/ PaulJ.J.Welfens,JohnT. Addison. David B.Audretsch, Thomas Gries. Hariolf Grupp (eds). - Berlin: Heidelberg; NewYork: Barcelona:HongKong:London:Milan:Paris:Singapore:Tokyo:Springer.1999 ISBN978-3-642-08515-4 ISBN 978-3-662-03813-0(eBook) DOl 10.1007/978-3-662-03813-0 Thisworkissubject tocopyright. AlIrights are reserved.whether thewholeorpartofthematerialis concerned. specificallythe rights oftranslation.reprinting,reuseofillustrations. recitation. broadcast ing, reproduction on microfilm or in anyother way,and storage in data banks. Duplication of this publication or parts thereofispermittedonlyunder the provisions ofthe German Copyright Lawof September 9. 1965.in its current version. and permission for use must alwaysbe obtained from Springer-Verlag.Violationsareliableforprosecutionunder theGermanCopyright Law. CISpringer.VerlagBerlinHeidelberg1999 OriginallypublishedbySprmger-VerlagBerlinin1999. SoftcowrreprintofthehardcoverIstedition1999 The useofgeneral descriptive names. registered names, trademarks, etc.in this publication does not imply.even in the absence of a specific statement, that such names are exempt from the relevant protectivelawsand regulations and thereforefreeforgeneraluse. Hardcover-Design:ErichKirchner.Heidelberg SPIN10724088 43/2202-54 3 2 I 0- Printed onacid-freepaper Preface Sincethe 1980sas foreign direct investmenthas increased strongly, new countries opened up as host countries (or became influential as source countries) and inno vative forms ofinterfirmcooperationhave been established. This has lead to more intense global competition. Rising foreign direct investment could stimulate eco nomic growth worldwide to the extent that itcontributes to technology spillovers, international technology trade, improved use ofknow-how and a higher overall investment outputratio plus a higher marginal product ofcapital worldwide. The spatial distributionofforeign investmentflows isinturn influencedbyregional or localclusters ofR&D centers andthe availabilityofhuman capital orother factors which can be profitably combined with firm specific advantages important for multinational companies (MNCs). Moreover, public support for R&D>and the quality oftheeducationsystem alsoplayarole forattracting MNCs. In the 1980sand early 1990sinternational competition increasednotorily in the OECD countries, but also worldwide. On the one hand, newcomers from Asian NICs entered medium and advanced technology fields, on the other hand the US, France and the UK as well as Russia reduced their emphasis on military research and development (R&D) after 1990. Hence, the end ofthe Cold War led to intensified competition in markets for civilian products. The ratio ofcivilian R&D to GDP has increased in most countries worldwide and there are prospects for arapid increase inR&D outlays insome NICs andthe PR China atthe turn of the century. Moreover, the internet has reinforced access to new technological knowledge. The observable heterogeneity ofthe global growth process let to a large body ofempirical and theoretical research. One ofthe main conclusions from the empirical literature is that the hypothesis of absolute convergence formerly predicted by growth economists does not hold, i.e. not all countries do automati cally converge to the same steady state position.However, ifcountries are cluste red, further statements can be made. Six "clubs" with similar developments in terms ofincome levels and average growth can be identified: the industrialised elite, the industrialized catching up countries, the strongly catching up countries, the slowly catchingup countries,theslowly falling behind andthe strongly falling behind countries. Overall a process of"conditional convergence" can be observed for the first four convergence clubs while countries ofthe last two clubs tend to diverge. Conditional convergence implies that an economy will converge to a steady state that is characterised by a set offundamentals specific to the country. Meanwhile a thousands of regressions have been run to identify those fundamentals. The most important ones are the investment rate, the human capital endowment, the R&D intensity and the countries integration into world markets. The empirical results therefore strongly supportthe hypothesis that only countries VI Globalization, EconomicGrowthandInnovation Dynamics with sufficient abilities to innovate or acquire new technologies are able to convergeintermsoftheirproductivitylevelsandincome. EU research is not sufficiently specialized and innovations ofEU firms often not in the most dynamic patent classes. Some informal coordination of national R&D policies could be useful inthe future and the creation of EU-wide R&D networks could be encouraged. However, -disregardingspecificexceptions -thecreation ofanEU-wideR&Dnetwork shouldnotbeconsidered ifthere isno alternative competing networkwithin Western Europe.EUfirms could be encou raged to tap the R&D potential in eastern Europe and Russia where skilled personnel often is available at lowcosts. Atthe bottom lineit is clear that in the face ofglobalization EU countries have to improve education, training and R&D effortsinordertomaintainaglobaltechnologicalleaderstatus.Lowequity-capital ratios of firms in many EU countries raises doubts about the EU's ability to successfully exploit new innovation fields where provision of risk capital is important for survival and expansion ofnewcomers - more international bench marking studies are necessary in the future, and one may recommend regular benchmarking in all major policy fields. Capital marketpolicies are important as anindirectwaytostimulateR&Dinthecommunity. The most important economic challenge confronting Europe is to restructure economic activity and move out of industriesbased on the traditional factors of production and into those industries that are knowledge based. The traditional view aboutthe processofstructural changeisthat the large enterprises are the driving force of such structural change. Large organizations have command over vast R&D resources. However, a compelling body of evidence spanning a broad range of countries suggests that small and new firms play a crucial role in triggering structural change. The reason that small and new firms are a driving force behind structural change is that people start firms to pursue ideas that otherwise would not be pursued by the incumbent firms. New firms serve as agents of change, away from the status quo and towards new activities thatarecontroversialanduncertain. The greatest challenge for achievingefficientR&D policies in Europe is toreduce thebarriers impedingthe mobilityandcommercializationofnew know ledge.Europe hasnotperformedwellinappropriatingthereturns fromthe invest ments made in newknowledge,both interms ofR&Dandhuman capital. Part of this challenge lies in shifting policies away from targeting outputs and outcomes totargetingknowledge inputs. In recent years, one important characteristic oflabor markets in Anglo Saxon countries at least has been the pronounced widening in skill differentials. The long-standing shift in favor ofskilled labor and away from unskilled labor would appear to have accelerated inthe lasttwo decades.The supply of skill has increasedlessrapidly andunskilledwageshavedeclinedrelatively(and intheUS absolutely).There islittledisputationintheUSandtheUKastothedominanceof the relative demand shifts favoring the higher skilled, though there is more ambiguity in continental Europe given intervals of rising skilled worker Preface VII unemployment. The controversy instead has to do with the sources of these relativedemandshifts. The two candidates are increasedinternationaltrade and skill-biased (i.e. unskilled-laborsaving)technological change, each ofwhich falls underthe rubric of"globalization." In both the US and the UK, decompositions ofthe aggregate change in, say, nonmanualemploymenthave indicatedthat within-industrymove ments dominatebetween-industryshifts. The presenceofMNCswith distributedR&D facilities isamatteroffact. GlobalisedR&D isincreasingfrom a low level inmost countries.The net outflow ofR&D isaconcernfor some countries but whetheritisbetterto make "national" companies work abroad and participate in foreign national systems or to invite foreign companies to the own territory remains largely open. Technology spill overs andknowledgeflows certainlyaccrueinboth cases and the debate ofthe net R&D flows and their benefits is largely a question of employment within the nationalterritoryand alsotax revenuesfrom local R&D,productionand services. Ifnot the functional specification but the qualification ofthe employees serves at a benchmarking criterion for the human-capital intensification, then for majorOECD countries one arrives atthe following assessment. In the first halfof the nineties one has to confirm a trend claimed already earlier that the share of employees with a higher education degree (university, polytechnical or related schools) and the share ofacademic staff(university degrees only) is increasing in the manufacturing sector and in the service industries. This means that there is tendency to employ relatively more highly qualified persons both in the service sector, which isexpanding, and inthe manufacturingsector with aloss ofjobs. A series of smaller European countries is strongly oriented towards general universities and other non-orientedresearch anddoes spend comparatively little money on oriented research. The Netherlands, Italy, Sweden and Germany also belong to this group with a share of less than 50 per cent dedicated for oriented research. The other EU countries and notably the United Kingdom and France spentrelatively little on general basic research and put more emphasis on orientedresearch(in case ofthe two last-mentionedcountries, for armamentalso). Thus, wehave to conclude,country-specificpatterns ofspendinginbasic research persisteven withinthe EuropeanUnion. ReportedlytheUnited States government with its large share ofdefense research spends least on general basic research, whereas Japan with a small defense R&D budget resembles the pattern of Germany. To the extent that a supply side R&D policy prevailed in the European Union we have to emphasis that science-based innovation is important in many cases but not in all. In global innovation, down-stream related processes such as effective national lead-markets and demand stimulation and articulation are also important. Inthis sense, it isrecommendedthat R&D policy shouldtry to warrant that those lead-markets be inthe European Union where strong global players are active in.In so far as by non-R&D measures the rapid and stable development of VIII Globalization, &onomicGrowthandInnovationDynamics those markets can be facilitated, R&D policy shouldjoin inwith other European policiesinordertoachievethemaximumbenefit. ps: The following study grew out of project No IV/97/03 for the European Parliament. The authors would like to thank Nadine Richter, Ralf Wiegert,AlbrechtKauffmannandTimYarlingforexcellenteditorialsupport. Potsdam,May 1999 PaulJ.J. Welfens (coordinator) TABLEOF CONTENTS 1. GLOBALIZATIONOFTHE ECONOMYANDINCREASINGINTERNATIONAL COMPETITION 1 1.1 RisingIriternationalTrade inaBroaderPerspective 3 1.2 TheIncreasingRoleofForeignDirectInvestment 5 1.3 GlobalTelecomsNetworksandNewCommunicationTechnologies 10 1.4 RussiaandChinaasNewPlayers 12 1.5 IncreasingHighTechnologyCompetitionandRisingRoleofTrade andFDI 14 1.5.1 MultinationalCompanies:RegionalConcentrationandIssues ofInnovation 16 1.5.2 Competition, SkillRequirementsandLaborMarketsintheUS 20 1.5.3 EnvironmentalProblems,InnovationandOptimalGlobal Growth 26 1.6 MNCs' RoleforEnvironmentalPolicyandSocialPolicies 27 1.7 Theory ofGlobalization:TradeandGrowthTheoryinaTechnological Perspective withFDI 29 1.8 MNCs' ImpactuponNationalEconomiesandtheEU 33 1.9 ForeignDirectInvestmentintheTriadandEasternEurope 34 2. HUMANCAPITALACCUMULATION,GLOBALIZATIONANDGLOBAL PRODUCTIVITYGROWfH 41 2.1 EmpiricalCharacteristicsoftheGlobalGrowthProcess 43 2.2 LocalCharacteristics,GlobalIntegrationandGrowth 52 2.3 HumanCapitalRequirementsforTechnologyUpgradinginaGlobal Economy 57 2.4 UpgradingandChangeinCompetitivePositions 64 2.5 RegionalCompetitionandHumanCapitalAllocation 68 3. THEORETICALANDPRACTICALASPECTSOFHIGHTECHNOLOGY POLICY 73 3.1 Endogenous GrowthTheoryandTheoryofHighTechnologyPolicies 75 3.2 TrendsinInternationalInnovationsandthePresenceofMNCs 78 3.3 InternationalTrendsinServiceIndustries 79 3.4 SkillRequirementsandTechnologyDynamics 82 3.5 TechnologyDynamics,Skills,andUnemployment 83 3.6 NewFirmsandSmallFirms:RoleforInnovationandStructuralChange88 3.7 LaborReallocation inDynamicMarkets 91 3.8 FirmsfromEasternEuropeandtheNICsasNewcomersinEurope 93 x Globalization, EconomicGrowthandInnovationDynamics 3.9 GlobalizationandtheRisingImportanceofDiffusion 95 3.10Challenges forAchievingEfficientR&DPoliciesintheEU 96 4. EUROPEANR&DPOLICYFROMAGLOBALPERSPECTIVE 103 4.1 R&DPolicies intheEU,theUSandFarEastAsia 105 4.2 BasicResearchinanInterriationalComparativePerspective 113 4.3 LinksbetweenResearchandIndustry 115 4.4 PositionofEU Science-B~edIndustries 116 4.5 RequirementsforFutureR&DPolicies 118 4.6 SpecialRoleofSmallMNCs 118 5. THEFuTUREROLE OFR&D POLICY:POLICYOPTIONSAND RECOMMENDATIONS 127 5.1 InnovationandInnovationPolicy 129 5.2 PolicyOptions 132 5.3 AdjustingGuidelines,PromotingCooperationandIncreasing Transparency 133 5.4 EnvironmentalProblemsandGrowth:SomePolicyConclusions 134 5.5 FacilitatingNetworkBuilding 135 5.6 ExploitingCommunicationOpportunities 136 5.7 NewRolefortheEUinEducationPolicies 137 5.8 ImprovingPatentProtection 137 5.9 MobilizingEntrepreneurshipinUniversities 144 5.10Perspectives:GlobalizationandPoliticalInnovationinaDemocracy 145 ApPENDIXA: TABLESANDFIGURES 149 EXECUTIVESUMMARY 157 APPENDIXB:GLOBALIZATION,THEINFORMATIONSOCIETYAND ECONOMICCATCHING-UPINTHEWORLDECONOMY (Statement ofProfessor Welfensbefore theEIIWAnnual Meeting, Potsdam, Dec.5,1997) 169 Endnotes 175 ListofTables 177 ListofFigures 179 References 181