1. GLOBALIZATION OF
INNOVATION
How Emerging
Economies Access
Global Knowledge
Why different high-tech
sectors have become
successful in China and
India?
Giacomo Bova
Tudor Carstoiu
Szilvia Varszegi

2. Introduction
China and India - the developing Asian giants
o Countries with similar characteristics
o Different development paths
o “World factory” and “world office”
Purpose of the research:
o Why different high-tech sectors emerged successful in these
countries?
o Explaining economic diversity
o Concentrating only on high-tech sectors
o High level of complexity of the issue
o Finding an appropriate approach to the problem

3. Approach 1. – Endogenous growth theory
o Technology is (at least partly) a private good:
o Not freely available
o Requires specific knowledge/skills to exploit is
o The creation of knowledge depends of R&D (local or foreign origin)
o R&D not only to generate, but also to assimilate and exploit existing
information!  absorptive capacity
o Rate of innovation and growth depends of absorptive capacity
o different capabities
o comparative advantages
o Barriers to technology and knowledge diffusion across national
boarders
o Tendency of geographical localization of innovative activities

4. “Being backward in level of productivity carries a potential for rapid
advance (M. Abramovitz)
o The larger the technological gap between leader and follower, the
larger the follower’s potential for growth
o The process slows down over time(?) - the follower can become an
innovator itself
The pace of catch up process depends on:
o Factors limiting or enhancing the diffusion of knowledge
o Rate of structural change
o Accumulation of capital
o Expansion of demand
Factors facilitating the diffusion of knowledge:
o Channels of international collaboration and trade
o Multinational companies
o Direct capital investments
o Conditions of labor supply
o Macro and monetary conditions
o “Adequate social capacity”
Approach 2. – Catch up hypothesis

5. o Technological paradigms/trajectories
o Institutional policy environment
o facilitator or
o impediment to technological change and growth of a sector
o Country-specific characteristics
Approach 3. – Evolutionary tradition

6. o Freeman (1997): “The network of
institutions in the public and private
sectors whose activities and
interactions initiate, import, modify
and diffuse new technologies.”
o Viotti (2001)
o Absorb knowledge actively
o Generate opportunities of
learning
o Develop technological
capability
Approach 4. – National system of innovation

7.  Hypothesis 1: Those high-tech sectors emerged more successful
than others, in which the country was somehow better able to
access and absorb global knowledge and become an
innovator itself.
 Hypothesis 2: National innovation systems have played a
crucial role in the emergence of succesful high-tech sectors.
 Our approach to the problem

8. 1. Studying the evolution of some of the largest and most
successful high-tech sectors within the countries
o Accessing global knowledge through different channels
o Role of government regulations and policies
o Role of NIS (if any)
o Innovation capacity
2. Comparing sectors within the countries
3. Comparing China and India
Methodology

9. Similarities
o Developing countries
o Large economies
o Abundant cheap labor
o Rich in natural resources
o Gradual opening up of the
economy
o Regional inequalities
o Urban migration
o Main destinations of
knowledge flows
China, India

10. o 1st producer of automobiles in volume in the world
o The Chinese automotive industry was established after Japan’s
occupation of Manchuria that began in 1931
o 1950s: plants and licensed auto design founded with the help of
the USSR
o Some multinationals (Volkwagen, GM) established themselves in
the market mostly through joint ventures with Chinese counterpart
companies
o 2001 joining the WTO: new wave of entry of multinationals
o Mostly assembly of ready parts – no local R&D!
o Gov. incentives for foreign investments in vehicles manufacturing
 allow expansion of multinationals
o Technology transfer through joint ventures, but Chinese brands still
inferior to big players
o Objective to establish a new innovation-oriented country - but
gap between the government’s objectives and execution
China – Automotive Industry

11. o One of the fastest growing industries in the world
o Increasing need for energy
o 7/10 largest M&As in 2013 in the energy sector with foreign
companies
o OFDI $34.6 billion in 2009 on the renewable energy sector
o Eg.: massive Investments in Brazil (2005-2012 $ 18.1bln)
o International cooperation:
o CBHCCC (China-Brazil high-level co-ordination and and co-
operation committee)
o JUCCCE (Joint US-China Collaboration on Clean Energy)
o Increase in the number of patents (from 3.5% to 17.5% of IEA all
patents) - majority submitted by BRIC countries
China – Energy Industry

12. China - Pharmaceutical industry
o 5th pharma industry in the world (20% annual growth projection)
o Strong gov. funding an increase in middle class spending to
overtake western markets
o Macro and micro policies guide almost every aspect of this sector
o The 20 largest MNCs have extensive operation facilities including
R&D centers, joint ventures and fully owned companies
o High global competition pushed Chinese companies to innovate
o The strength of China is the production of generics and active
pharmaceutical ingredients for export (80% of total export value
in 2009)
o Partnerships in target markets through joint ventures, collaboration
with research institution or MNC’s and setting up R&D centers
o Improving R&D capabilities in universities and research institutions
o A combination of traditional and next-generation advantages
makes China an ideal place for pharma manufacturing

13. China - Discussion
 Automotive
o access to global knowledge mainly via MNC’s
o Government incentives for FDI
 Energy
o high level of OFDI
o international collaborations
o driven my strong demand
 Pharmaceutical
o MNC’s FDI and R&D collaboration  emerging local companies
o rising income increased the local demand
Hypothesis 1: Accessing global knowledge was crucial is all the
sectors, but happened through different channels
Hypothesis 2: Crucial importance of policy intervention contributed
heavily to the growth.
National System of Innovation emerging, but not so dominant in
these sectors yet.

14. o Value: $108 bln, CAGR 9.5% $300 bln by 2020
o Largest sourcing destination - 52% $130bln market
o 4th in India’s total FDI share
o Early 90s: US-based companies began to outsource work on
low-cost, English-speaking talent pool in India
o 1995-2000: IT industry started to mature, increased investment in
R&D and infrastructure  India increasingly seen as a product
development destination
o After 2000: firms growing in number, size and complexity &
western firms set up a number of captives in India
o Recently: some Indian firms became multinational companies
and started to make OFDI and global acquisitions
o Growth drivers: talent pool, domestic growth , infrastructure,
policy support and global demand
India – IT Industry

15. o 1.4% of the global pharma ind. in value terms and 10% in vol. terms
o Cost efficiency and human competencies are main competitive
advantages
o Ranked 5th in terms of attracting FDI
o Most USFDA-approved manufacturing plants outside the US
o The government has invested USD1.1 in the billion Public-Private
Partnership fund to support R&D in India
o Before 1970s’ the market was dominated by foreign companies with
little domestic participation
o Between 70s’ and 90s’, Indian Patent Act passed in 1970, several
domestic companies started operations
India – Pharma Industry

16. o 1990-2010: market liberalization, Indian companies increasingly
launched operations in foreign countries, India became a
major destination for generic drug manufacture & Approval of
Patents (Amendment) Act 2005 which led to adoption of
product patents in India
o After 2010: increase in patent filing by Pharma players
o Expansion by Indian players abroad, especially Africa
o R&D spending by Indian multinationals is rising due to the
introduction of product patents
o Sector driven by confluence of demand, policy and
capabilities
India – Pharma Industry cont’d

17.  IT industry
o Historical coincidences
o Y2K (increase in demand for services)
o Internet and dot-com boom
 Pharmaceuticals industry
o Specific policies
o Rising income increased the local demand
Hypothesis 1: Crucial importance of global knowledge (MNCs)
Structural and systemic factors common to both sectors:
o Human resources (english speaking, highly qualified)
o The diaspora (non-resident Indians) and the market
linkages
Hypothesis 2: There is also an evident support of a still infant
National System of innovation
o Institutional networks (clusters)
o Government support
India – Discussion

18. Most important differences in country characteristics
o Culture
o Historical roots
o Ratio of qualified labor (skills, languages)
o Infrastructure
o Political system
o Opennes to international cooperation
o Pace and way of market liberalization
o Export vs. inward orientation (local demand)
o Structure of the economy
o Institutions and policies – national innovation systems
Comparision

19. Foreign born highly skilled expatriates in OECD
countries, by country of origin, 2001
Technology content of China and India’s manufactured
exports, 1988-2007
(Percentage shares of manufactured exports)
Source: Mani S., IDRC, May 5 2011

20. Comparision
Infrastructure comparision
Indicator China India
Telephone line (pieces/1000 persons) 205.00 46.28
Mobile telephone (sets/1000 persons) 210.20 24.17
Computers (sets/1000 persons) 27.60 7.20
Internet user per 1000 persons 63.25 17.49
Highway Length of Transport Routes (miles) 1,765,222 3,315,231
Highway Freight Ton Kilometers (100 million
tonne miles) 6782,5 null
Railway Length of Transport Routes (miles) 73,000 63,140
Railway Freight Ton Kilometers (100 million
tonne
miles) 17246,70 3332,28
Education system comparison
Indicator China India China India
Financial expenses on education
(billion) 385.06 268.95
Financial expenses on education as
percentage of GDP (%) 3.3 5
Literacy Rate (above 15 years old) (%) 88.4 61.3
The percentage of people with high
education diploma (%) 5.2 16.2
Data Source: China Statistical Yearbook 2006, Indian
government budget and economic research website
Infrastructure:
flow of knowledge
China: more
efficient logistics
infrastructure
Education:
Innovate human
resource
India: though basic
education is better
in China, higher
education, and
therefore supply of
innovate human
resource is much
better in India

21.  Limitations of the research
 Hypothesis 1- vast empirical evidence in the case studies
 Successful developing countries have used different
strategies to build capabilities in the various sectors
 MNC’s (FDI)
 OFDI
 International collaborations
 Levaraging on different country characteristics facilitated
the access to global knowledge in certain industries
 In both countries, increasingly much of innovative
activities
 Hypothesis 2 – mixed evidence
 Strong government policy support and interventions
 But National Innovation Systems are rather recently
emerging in the sectors we covered
Conclusion

22. Thank you for your attention!

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