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Analysis
Making returns on knowledge

Making returns on knowledge

How innovation can flow from globalisation

by Otaviano Canuto in Washington

Tue 3 Jul 2018

The April issue of the International Monetary Fund's World Economic Outlook included a chapter on how globalisation has helped technology leaders' knowledge spread faster. Cross-border technological diffusion has not only contributed to rising domestic productivity levels in advanced and emerging economies, but also facilitated a partial reshaping of the innovation landscape. Some recipient countries have become significant new sources of research and development as well as patents.

More trade, foreign direct investment and international use of patents have disseminated knowledge and technology across borders. This diffusion can lead to increases in average outputs at relatively low costs. Knowledge flows from abroad can have an impact both on productivity, through the adoption of foreign technologies in the production process, and on innovation, when combined with domestic R&D. The WEO estimates that in emerging market economies, 'from 2004 to 2014, foreign knowledge accounted for about 0.7 percentage point of labour productivity growth a year, or 40% of observed sectoral productivity growth, compared with 0.4 percentage point annual growth during 1995-2003'. According to the report, these results remain robust even when China is excluded, indicating that productivity effects were broad-based among emerging market economies.

International sources of technological innovation are changing, as R&D expenditures skyrocket in China and stocks of international patents pile up in South Korea. These countries have joined traditional leaders in sectors such as electrical and optical equipment and, especially South Korea, machinery.

This has happened even as, since the early 2000s, frontier economies have gone through a slowdown in the increase of labour and total factor productivity, a measure of how efficiently inputs are being used in the production process. These economies have also experienced slower growth in patenting and, to some extent, lower R%D investment.

The WEO highlights the positive effects of heightened international competition on innovation and technological diffusion. This could be considered an additional channel through which globalisation is reinforcing incentives to innovate and adopt technologies from abroad.

Simple interconnectedness does not automatically spark productivity increases and local innovation. Any application of technology needs locally specific content that cannot be acquired or transferred by means of textbooks or other codifiable forms of knowledge transmission. This knowledge cannot be made explicit, such as through the use of blueprints, and thus cannot be perfectly diffused as either public information or private property. It must be developed locally.

Production, technology adoption and invention require a relatively high level of such idiosyncratic knowledge and local capabilities. It is typical for latecomers to start from production and technological adoption and only then move on to invention. That has been the case in South Korea and China. These countries are developing their innovation capabilities after intense learning through using and adapting existing technologies.

Success depends on access to finance, infrastructure, skilled labour, and good managerial and organisational practices. In the absence of these factors, returns from investing in the development of capabilities are likely to be low. Solutions must be found to market failures that generate disincentives to the accumulation of knowledge. The transaction costs associated with doing business, such as trading across borders, hiring and enforcing contracts, also cannot be too high.

This beneficial environment is not widespread, which is why there have not been large changes in the international innovation landscape. It also explains what Xavier Cirera and William Maloney, economists at the World Bank, have called the innovation paradox. Low levels of innovation-related investment in developing economies do not correlate with the high returns thought to accompany technological adoption and catch-up. Globalisation may spread knowledge. Profiting fully from that knowledge requires a further effort.

Otaviano Canuto is an Executive Director of the World Bank.

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