Tech Cap Building in Bd, Dsaconf99huq

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TECHNOLOGICAL CAPABILITY BUILDING IN

LOW-INCOME DEVELOPING COUNTRIES:

Towards Understanding the Nature of the Problem

by

M M HuqUniversity of Strathclyde, Glasgow

1. INTRODUCTION

The main objective of this paper is to reflect on technological capability building

(TCB) with a view to understanding some relevant issues in the context of low-income developing countries (LIDCs).

To start with let me mention that in the paper I have tried to use some of my ownwork (especially those carried out in Bangladesh), although I have also used someother relevant studies.

In an age when the case for liberalization is being followed by most developingcountries, often pushed by the IMF and the World Bank, the ability to competeeffectively at home and in international markets will largely determine the survival ofa production venture. Being borrowers (or say imitators) of technology rather than

innovators provides the developing countries with a distinct disadvantage since theyare unable to gain monopoly profit in any of their production activity. In fact, most ofthe manufactured goods exported by the low-income countries are low technologymanufactures produced long after the technological methods were invented; theLIDCs are keen to take advantage of the cheap labour that prevails. On the positiveside, there is the advantage that the technology is widely known, there are manysources available to procure the technology and the technology can be bought atcompetitive prices so long as there are no obligations towards suppliers credit or tiedforeign aid. On the negative side, however, there are a number of disadvantages.Firstly, because LIDCs do not produce the technology themselves they are heavilydependent on technological suppliers. Secondly, as the products are made using little

technology there is intensive competition among the LDCs and within an LDC, withhundreds and thousands of firms competing against each other (for example in carpetand garments manufacturing). This intensive competition is an important factor forkeeping the prices down, thus causing deterioration in the net barter terms of tradeeven for their manufactured exports. Thirdly, in relation to the first point, there arecases where LIDCs manage to move to medium and high level technologies but haveto depend heavily on the importers for the necessary support in design and so forthbecause of lack of local R&D.

Furthermore, in an age which is increasingly advocating the liberalization strategy anydirect involvement by the state these days could possibly be frowned upon. Theneoclassical economists are expected to be particularly critical to any stateinvolvement as they believe that government intervention in the trade flows of


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developing countries (a strategy which many developing countries followedvigorously with little success for a number of decades from the 1950s onwards) hasdone serious damage to resource allocation. They are, therefore, keen to see a returnto the days when laissez faire prevailed with a minimal government role.

One may be tempted to draw some obvious conclusions, such as the ones below,when examining the liberalization strategy now being vigorously pursued:

(a) Technological capability building should be left to market forces, thusenabling it to develop efficiently without any government intervention;

(b) With regard to the first point, in the free enterprise mode of development aspursued by the industrialized countries, technological capability building doesnot need any government intervention.

At the outset, let it be mentioned that the available theoretical arguments and the

empirical evidence do not support the above standpoints which follow from theorthodox liberal approach.

The next section (Section 2) will briefly provide some theoretical background totechnology capability building (TCB). Section 3 will present a brief survey of thestate of TCB in some low-income developing countries (LIDCs). In Section 4, wediscuss whether LIDCs should have a policy with regard to the promotion of TCB.Finally, in Section 5, we discuss the conclusions that have been reached.

2. A BRIEF THEORETICAL BACKGROUNDSince the1980s, there has been a healthy amount of studies on the subject oftechnology capability building (TCB) with particular emphasis on some of thedynamic aspects (see, e.g. Enos and Park 1997; Lall 1987, 1992; Huq et al 1991,1993; Bell and Pavitt 1992). Some of the initial technological evaluation studieswhich took place in the mid 1970s (Strathclyde University, see e.g. Pickett, 1981 andHuq and Aragaw, 1981) were rightly criticized for focussing on the static cost-minimizing approach. At the time when the studies were carried out the wastage ofcapital which went along with the import of large-scale capital intensive technologiesby most developing countries was a matter of serious concern and, understandably,

these studies tried to draw attention to the proposal that by careful selection adeveloping country could easily go for a better technological alternative than the oneadopted. (Huq 1996) However, the approach failed to take into account thedynamic features of technology assimilation, diffusion and innovation. Thus, for acloser understanding of technology capability building the need was felt to define theconcept in a much broader way, in particular by incorporating the capability to select,assimilate, use, maintain, adapt, design, and even create technology, thus ensuring thecapability to develop products and processes in response to a changing economicdevelopment. (see, Huq 1996)


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Following a UN study (1987), three main aspects of TCB are listed below:

(a)The selection of machinery and equipment for producing specific goods andservices;

(b)The assimilation and diffusion of those technologies in the host economy; and(c)The development of indigenous capacities for innovation.One can also think of some extra features which, for example, have been observed byBhalla while examining the case of advanced technologies (Bhalla 1996, see alsoHuq 1998):

(d) an organizational capacity for manufacturing new products using newtechnologies;

(e) indigenous capability in production, design and engineering at a stage wheretechnology can be produced/assimilated and efficiently utilized;

(f) opportunities of collaboration with industrialized countries; and

(g) the speed and extent of technology diffusion.

Bell and Pavitt (1997) are keen to focus on technological learning enabling technicalchange to take place. An important feature of the dynamic elements is of technologylearning and this has been strongly emphasized in relevant literature (see, e.g. Lall1987, 1992). The learning process involves a number of components including(a) development of human capital; and (b) Research and Development (R&D).

Development of Human Capital. An important prerequisite of technology capabilitybuilding is a labour force which can select, install, maintain, assimilate, design,manufacture and even create the technology. The workers do not need to be theinventors, but must have the ability to absorb borrowed technologies successfully. Masseducational development which took place in South Korea (and also in Singapore,Taiwan and Hong Kong) preceding their success in industrialization is often provided asan example.

R&D. This is considered to be the core of technology capability building. Freeman(1987) associates R&D with the national system of innovation and describes it as thedecisive factor. The ease of absorbing new technologies in agriculture, thanks largely tothe successful R&D carried out in Asian and South American countries, has greatlycontributed to the success of the Green Revolution. There is a very high social rate ofreturn from R&D in agriculture, typically exceeding 20% and often higher than 40%(Khan and Akbari 1986). Unfortunately, however, investment in R&D for themanufacturing sector is negligible in most LIDCs; this is perhaps not surprising, giventhe close relationship that exists between GDP per capita and R&D expenditure (seeWorld Bank 1999). According to a recent estimate by the World Bank (1999), percapita expenditure on R&D is over 250 times in the high-income economies compared

to that in the low-income economies (excluding China).


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Table 1Expenditure on R&D and the Availability of Scientists and Engineers in R&D

R&D No. of Scientists &

Engineers in R&DAs % of Per Capita (1981-95)GDP Expenditure on (Per Mil People)

R&D (US $)

Brazil 0.88 _ 165

Canada 1.50 288 2,322

China - - 364

France 2.42 439 2,537

Germany 2.66 446 3,016

India - - 151

Japan 2.87 544 5,677

Mexico 0.30 9 95

South Africa - - 1,098

UK 2.08 325 2,417

USA 2.75 611 3,732

Sources: Data on GDP are taken from the Green Paper on Science and Technology (1996) produced bythe Government of South Africa, while those on the number of scientists are from the World Bank (1999).The information relating to R&D expenditure as a percentage of GDP in Brazil refers to 1995 and is takenfrom UNESCO, World Science Report 1988, as quoted in R Arocena and J Sutz, Looking at NationalSystem of Innovation from the South.

Information on R&D expenditure as available from low-income developing countries iseither sketchy or, when available, it is often difficult to use this for comparison withdeveloped countries. It is, however, not surprising given the almost absence of R&D inthese countries, with the exception perhaps of China and India which have taken thedevelopment of technology as a policy objective. One general fact, however, isapparent; there is close relationship between GDP per capita with R&D expenditure, thelower the GDP per capita, the lower is the expenditure on R&D. Table 1 gives someidea about the expenditure on R&D and the availability of scientists and engineers inR&D in some selected countries.

In the technology learning process, two other factors which have been stronglyemphaised in the literature are:


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* improved negotiations with the suppliers of technology (Enos and park 1987);and

* development of S&T infrastructure (Bhalla 1996).

3. THE STATE OF TECHNOLOGY CAPABILITY BUILDINGIN LOW-INCOME DEVELOPING COUNTRIES.

Since the 1980s there have been a number of studies on technology capability building.These studies, which are of an empirical nature, have focussed strongly on the success ofthe industrialisation drive in the Newly Industrializing Countries (NICs).While a numberof authors including Dahlman and Westphal (1981) and Katz (1987) have focussed onLatin America, others such as Linsu-Kim (1980), Lall (1987), Enos and Park (1988),Hobday (1991), Huq et al (1992, 1993) and Chen and Sewell (1996) have focussed on

Asian countries.

South Korea. South Korea in particular has been closely studied by a number of peopleand the overwhelming conclusion is that technology capability building in Korea hasbeen strongly coordinated by the government (see, e.g., Kim and Dahlman 1992, andChen and Sewell 1996, p. 760). In the words of Chen and Sewell (1996, p.760):

For a number of years the South Korean government has continued to play anactive role in promoting indigenous technological development through anumber of initiatives. In 1967 the Ministry of Science and Technology (MOST)was established to act as a central agency for policymaking, planning,coordination and promotion of science and technology. Although there hastended to be a territorial conflict between MOST and the South Korean Ministryof Trade and Industry, MOST is in charge of funding and providing directguidance to many of the government-supported research institutes. The SouthKorean Institute of Science and Technology (KIST) established a year earlierthan MOST has been set up as the first modern multi-disciplinary researchorganization in South Korea, undertaking contract research with industry.

Chen and Sewell also found that Taiwan went through the same developments that

South Korea had. Like the role played by MOST in South Korea, NSC in Taiwan actedas a central agency of science and technology formulation, coordination andimplementation at the national level. However, as observed by Chen and Sewell (1996,p.777), despite the broad similarities in policy South Korea seems to have beenrelatively more successful than Taiwan in mobilizing the private sector to invest inR&D, a factor which can be partly attributed to its more concentrated economic powerbut also to its relatively more generous levels of government subsidy.

However, for the low-income developing countries there are not many studies similar tothe ones on NICs. From the limited information available a portrayal shall be given of

technology capability building in some selected low-income developing countries.


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Nepal. Research undertaken by Chitrakar (1994, 1999) and Shakya (1997) enables USto get a good understadning of some of the relevant aspects of TCB, including the stateof S&T infrastructure and R&D expenditure. While Chitrakars original studies relatedto FDI, subsequently he studied closely the S&T infrastructure and its effectiveness intechnological capability building. A number of important findings emerge from

Chitrakars studies:

* There is no local R&D in FDI, although they are found to havecontributed in investment and employment growth and also havedemonstration and spillover effects.

* S&T infrastructure is fragmented.

* Hardly any private R&D, although in recent years one or two NGOsare carrying out R&D.

* Existing R&D activities, particularly at the university-level, are moreorientated towards fundamental research.

* A high percentage of the R&D fund (70-80%) is spent on salaries andwages. (The exception is an NGO, Lever, which spends 65% on R&D)

Indira Shakya's research is in the form of an industry case study, thus enabling one tohave a clearer idea of areas not covered by Chitrakars studies. She finds that R&Dis almost non-existent and the S&T infrastructure needs rapid development andsuitable coordination. However, by focusing on a particular sector, micro hydro, shehas been able to see the technological development by examining the technologymanufacturers and users. Thus viewed, she finds that the sector has some glimmer ofhope. BYS started to promote the technology in collaboration with non-profit makingforeign organizations. Some of the skilled hands left BYS to start their own firmsand in the recent past there were in total nine industrial units producing turbines andother necessary equipment (the amount of units is now eight); working with the usersof this particular technology, they have improved the efficiency of the turbines basedon in-house experimentation, in effect R&D. However, there is a serious lack ofcoordination in the research that is being undertaken and little collaboration with theGovernment Research Organizations and Universities. Credit given by ADB (N) ata subsidized interest rate for electricity generation has helped the expansion of the

micro-hydro units thus helping the local manufacturers of turbines, but the creditpolicy is not well-formulated and has operated in an ad-hoc basis. Since this type ofsmall turbine is not made in many countries the local demand has been met by thelocal producers but it is believed that countries like China and India can produce theseturbines at a much lower cost.

Bangladesh. I have been involved with some technology studies at the industry levelin Bangladesh. Another recent study worth mentioning is that by Mahmood et al,which was produced in 1991 in the form of a Task Force Report submitted to thePlanning Adviser of the Government of Bangladesh.


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As in Nepal, Bangladeshs S&T infrastructure is fragmented with strong emphasis onpure fundamental research. The amount spent on R&D is negligible and there ishardly any R&D activity undertaken by the private sector, including the FDI sector.

My own study on fertilizer manufacturing was found to be particularly revealing in

terms of technology capability building (see Huq 1992). In spite of investing heavilyin the manufacture of fertilizer (mainly urea and a small percentage of TSP) during aperiod of over 30 years, Bangladesh has little to demonstrate in terms of TCB. This isa result of heavy dependence on suppliers credit and little government direction.

However, two recent studies, one on ready made garments (RMG) manufacturing byBhattacharya (1996) and the other on leather manufacturing by myself ( Huq1996),provide some new insights. Although, in the case of RMG, the producers enjoy someassured market under the Multi-Fibre Agreement, introduced in 1971, in general theyhave to compete in the world markets. However, an important factor in thedevelopment of these two industries is the push by the government. Both of these

sectors have been regarded as thrust sectors and the government is encouragingthese industries to meet export targets by providing the investors with variousincentives. It has been found that these incentives have played an important role intransforming the growth and structure of the sectors (Huq 1996). The above twosectors alone are accounting for over 80% of Bangladeshs exports with the RMGindustry bringing over three-quarters of the total export earning of the country.However, TCB is still very shaky. There is still hardly any investment into R&D.The main growth push factor for RMG is the cheap wage rate but because of extremecompetition the charges, offered by the buyers for cutting and making (C&M), havefallen drastically. In the case of leather manufacturing there are seriousenvironmental considerations which are being ignored at the moment creating seriouslong run cost impacts for the country.

Sub-Saharan Africa (SSA). Information on R&D in SSA countries is hardlyavailable. However, a recent study by James (1995) provides some relevantinformation about technology capability building, based on selected public sectorprojects, as may be seen from Table 2.

Even in countries such as Ghana, the Ivory Coast, Nigeria and Tanzania, productioncapability is confined to simple consumer goods mainly for the local market, while in

Kenya the capability is further developed as the consumer goods produced are ofhigher quality, some of which are exported. It is only in Zimbabwe that there isproduction capability in consumer goods and capital goods and that technology isselected based on intensive search from various alternatives; there is also some localdesign and innovation capability and that there is substantial reliance on the domesticcapital goods sector. So far as capabilities in terms of design and innovation areconcerned they are either nil or non-existent in most of the selected SSA countries,except Zimbabwe. As mentioned earlier, expenditure on R&D hardly features inthese countries.


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4. SHOULD LIDCs HAVE A TECHNOLOGY POLICY?In the light of the preceding discussions, let us now pose the question of whether low-income countries should have a technology policy. The question is relevant in thesense that the liberalization strategy appears to be successful in attacking rent-seekingwhich was rampant in the import substituting industrialisation (ISI) phase of

development. The liberalization strategy has also been found helpful in forcinginvestors to be competitive.


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However, a distinction needs to be made between trade policy and technologicalpolicy. The liberalisation strategy which has now become almost the conventionalwisdom in most countries of the world is a policy prescription more in the context oftrade policy. In the case of technological capability building market failures will

remain a permanent feature in many areas, including human capital development andR&D with two obvious features:

(a) The market rate of return will be lower than the social rate of return thuscausing underproduction; and

(b) There is likely to be a lack of co-ordination between various agentsparticipating in the activities.

It is, therefore, not difficult to answer the question posed above: the state will need tobe involved in technological capability building. The point of Intellectual Property

Rights (IPR), a topic which is attracting a lot of attention recently, is perhaps worthmentioning at this point. The main justification of providing IPR to a person or anorganization is that it is not possible to depend on a free market to reap the benefit.The industrialized countries, led by the USA, strongly argue for the enforcement ofintellectual property rights. In other words, the argument is not for free trade butrather the opposite, to honour the monopoly rights of the patent holder. It is arguedthat if IPR is not enforced a market failure exists. If we free the market there is noincentive for R&D so the patent holder has the right to impose restrictions on thetransfer.

Thus, the above argument recognizes that market failures are pervading in the area oftechnology development that even the US government, which strongly advocates freeenterprise, is forcefully arguing for the implementation of intellectual propertyrights.

If the liberal standpoint of non-intervention by the government is extended to TCB, anobvious contradiction arises between enforcing IPR and not intervening for improvingthe S&T infrastructure and R&D growth.

In fact, given the very low level of R&D in LIDCs they will have to abandon thehope of TCB if they decide to take the liberalization stand.

However, by introducing market failure into technological capability building oneshould not ignore the point that government failure has been strongly associated withindustrial policy in most developing countries. One, therefore, needs to focus onpromoting the involvement of the private sector in technological capability building.The experience of South Korea is particularly revealing within this context. While thegovernment has helped in building the training and skill base and in providing someuseful S&T institutions (e.g. MOST and KIST), R&D development in the privatesector has been strongly pushed. The Government of South Korea took theresponsibility of promoting indigenous technological development by establishing thenecessary S&T infrastructure, providing its own fund for R&D and at the same time

strongly encouraging private firms to undertake R&D. (Chen and Sewell 1996)


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The development of the capital goods sector is also another related issue. On its ownthe sector is not developing since past state participation in production has not beenfound to be successful. Bangladeshs experience in this regard is simply striking(Huq et al 1993). The pertinent question that needs to be answered with regard toTCB is how the private sector can be encouraged to promote the sector rapidly.

It may even be necessary to extend the private sector involvement much wider. Chenand Sewell (1996), for example, mention that South Korean firms increased theirpresence overseas (particularly in the US) through a programme of acquisition,providing them with direct access to highly qualified scientists and engineers,advanced technologies and major markets. Perhaps for the LIDCs this will, for thetime being, remain a dream.

In closing this section, it should be mentioned that the suggested approach proposedin this paper, fortunately, does not completely clash with World Banks recentthinking on the issue. In the latest World Development Report(1998/99), the World

Bank suggests that action to improve information failures in developing countriesshould be taken.

5. CONCLUDING REMARKSTechnological capability building is a conscious process of development. Theexternalities and the degree of market imperfections involved in technologydevelopment are so high that left to market forces, there is hardly any prospect ofdevelopment in this regard. This is particularly so in developing countries which arenot able to enforce strictly intellectual property rights. Such a situation, however,does not necessarily imply direct public production of R&D. Indeed, given theexperience of government failures of implementing trade policy for efficient resourceallocation in LDDS, the direct role played by the government needs to be carefullyconsidered.

Thus viewed, there are four major policy implications which can be listed as emergingfrom the paper.

1. On Production in a Competitive Environment. A competitive productionenvironment is expected to push the manufacturers to take measures for

technological capability building, otherwise they will find it difficult tomaintain their competitive advantage; especially with regard to developingcountries who are dealing with borrowed technology. The liberalizationapproach should, therefore, prove helpful for TCB through the increase andexpansion of trade outlets. The example of the South Korean firms increasingtheir presence overseas (particularly in the US) through a programme ofacquisition provides them with direct access to highly qualified scientists andengineers, advanced technologies and major markets. (Chen and Sewell 1996,p.765) However, for the LIDCs such a programme of increasing overseaspresence will, obviously, prove demanding.


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2. On Human Capital Development. It is recognized all over the world that forthe development of human capital it will not be possible to depend entirely onthe private sector. This is a merit good and does not truly reflect the socialrate of return. However, there are opportunities for private sector participationsince it will ultimately increase both the quantity and quality of trained

manpower in the scientific, engineering and technology sectors and inmanagement.

3. On Increasing R&D Expenditure. Given the low level of income, R&Dexpenditure is much lower in LIDCs. There is, therefore, hardly any prospectof increasing R&D if left to market forces. There is also hardly any prospect ofR&D if the developing country concerned depends on FDI. Any policy forincreasing R&D should not imply that the growth should necessarily be in thepublic sector. In an age where the private sector is being promoted actively,they should be encouraged to participate in R&D. Indeed, the private

participation in R& D will be of great help as it will be directly market-orientated. However, as this type of R&D may often lack a long-termprospect, the government will be required to co-ordinate the direction ofresearch taking its distribution and content into consideration in the interests ofthe economy as a whole.

4. Need for Central Coordination. Given the fragmentary nature of researchactivities now being undertaken in most LIDCs, a central coordination is ofurgent necessity. In the case of Japan, MITI has been found to carry out sucha coordinating role besides remaining active in carrying out R&Dprogrammes. (Tamura and Urata 1990). In South Korea, MOST played therole of planning, co-ordination and promoting science and technology bymaking the old institutions active and adding, as required, new S&Tinstitutions. It is doubtful if a private sector agency can be given theresponsibility of playing the coordinating role. One has to question, therefore,whether the state agency can stand up to the challenge.

In conclusion, it should be mentioned that in the face of market failure while stateparticipation is needed to correct the underproduction in the required R&D, it does notfollow that the state will necessarily have to engage itself in production. Indeed,

active private sector participation emerges from the experience of studies carried outnot only in Japan but also in South Korea and Taiwan. It is also apparent that theS&T infrastructure needs to be significantly strengthened by coordinating theactivities of the existing institutions and also by adding, as required, some new onesaccording to the planning and promotion programmes. The main objective is to makethe production sectors remain competitive by acquiring various abilities - to select,assimilate, design, maintain, innovate and even create new technologies - to introduceprocesses and products into the competitive markets.


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Glasgow, 10 September 1999.


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15

TECHNOLOGICAL CAPABILITY BUILDING IN

LOW-INCOME DEVELOPING COUNTRIES:

Towards Understanding the Nature of the Problem

by

M M HuqUniversity of Strathclyde, Glasgow

Paper Presented at the DSA Annual ConferenceUniversity of Bath

(11-14 September 1999)

Documents

Tech Cap Building in Bd, Dsaconf99huq