East Asian Economy: KBE and Innovation in East Asia * Some parts of this note are borrowed from the references for t

1. East Asian Economy <Lecture Note 8> 2013.12.5 East Asian Economy: KBE and Innovation in East Asia * Some parts of this note are borrowed from the references for teaching purpose only. Semester: Fall 2013 Time: Thursday 2-5 pm Professor: YooSoo Hong Room: 423 Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home P.: http://yoosoohong.weebly.com 1 1

2. Knowledge (Innovation) Based Economy

3. Emerging Knowledge Economy • Increased generation/codification of knowledge (e.g., patents granted in the US: from 49,971 in 1963 to 175,983 in 2000) • Closer links with science base/increased rate of innovation/shorter product life cycles • Increased importance of education, up-skilling of labor force, and life long learning • Growing investment in intangibles (R&D, education, brands…) – OECD countries spend more than $520 billion per year in R&D • Value added increasingly associated with investment in intangibles such as branding, marketing, logistics/information management • Innovation and productivity increase more important in competitiveness and GDP growth • Increased Globalization and Competition • Constant change and competition implies the need of constant restructuring and upgrading: the ability to create, access and use knowledge is becoming the fundamental determinant of global competitiveness.

4. Knowledge Gap and Wealth of Nations

5. Knowledge Economy  Concept of KBE or KE - An economy where creation, acquisition, circulation (dissemination) and utilization of knowledge is the core (engine) of growth. (OECD)  Why knowledge now? - “Throughout history, relative economic performance has been closely associated with the capacity of countries to participate in successive technology/knowledge revolutions (agriculture, manufacturing, services, knowledge societies)”; - “Knowledge has played a critical role in differentiating the long run economic performance of countries”; - “In the last 50 years, economic growth has been closely associated with urbanization, emergence of new organizational forms, and regional and global trade—all these trends, in turn, are closely linked to agglomeration of people and ideas”

6. Stages of Economic Development Factor-driven Economy Investment - driven Economy Innovation - driven Economy • Basic factor conditions (low cost labor, natural resources, geographic location) are the dominant sources of competitive advantage • Technology is assimilated through imports, FDI and imitation • Companies have limited roles in the value chain, and focus on assembly, labor intensive manufacturing, and resource extraction • The economy is highly sensitive to world economic cycles, commodity prices, and exchange rates • Efficiency in producing standard products and services is the dominant source of competitive advantage • Foreign technology is accessed through licensing, joint ventures, FDI, and imitation • The nation is not only assimilating foreign technology, but has the capacity to improve on it • Heavy investment is made in efficient infrastructure, modern production process, and ease of doing business • Innovative products and services at the global technology frontier are the dominant sources of competitive advantage • Characterized by strengths in all areas together with the presence of deep clusters • Companies compete with unique strategies that are often global in scope • The economy has a high service share, and is resilient to external shocks Source: Porter, Michael E. Competitive Advantage of Nations, 1990.

7. Development Stages in the Korean Economy 1950s 1960s 1970s 1980s 1990s 2000s Aid,Labor intensiveproduction Imitation Simple tech. Import of oldplant/ machinery Heavy industry Assimilation Minorinnovations R&D New product development R&D intensiveincrease in scienceNew productinnovation Innovationfrontier Traditional Imitative Catch-up Innovative Catch-up Innovative Economy “Intensive Growth” Transition to Innovation-driven Economy Outward-looking Invesment-driven Economy“Extensive Growth” Agricultural Economy Factor-driven Economy “Extensive Growth” Outward-looking Stages of Development

8. Strong Correlation: GDP/Capita and KE Index Source: KAM Africa GDP/capita = $2624

9. The Importance of Knowledge-Based Economy (KBE) • Global economy is changing the landscape of economies in Asia - Knowledge has increasingly become an important means for value creation. - The knowledge content of goods and services is increasing as manufacturing is “dematerializing” and economies are becoming “weightless”. - Globalization and the ICT revolution are emerging in the modalities of creating value. • The Importance of KBE - Knowledge-based economies is a global trend. - PRC’s economy is expected to be the largest in the world and the Asian economic landscape will continue to be pushed to high-growth.

10. Asian government is facilitating and creating opportunities toward a more knowledge-based economy and society. • Four pillars of a KBE - Education, including building a skilled workforce - National innovation systems, including science and technology, R&D - Building networks, including ICT infrastructure and social networks - Policy and regulatory (business) environment • New paradigms for managers and policy makers - Distinction between knowledge and information - Recognizing and managing intangibles - Attention to tacit knowledge - Stakeholder capital in a networked economy and society - Value-driven development

11. Interconnected Interdependent The Four Pillars of the Knowledge Economy Biz Environment and Institutional Regime Education Information Infrastructure Innovation Systems

12. Models Toward a Knowledge-Based Economy(KBE) • Asian governments envision and plan for a mix of KBE - Thailand’s IT2010: “good use of ICT” - e-Korea Vision 2006: “quantitative expansion of the Internet” - e-Japan strategy: “knowledge-emergent society”

13. Knowledge-Based Economy Indicators for the Asian Region

14. The Four Pillars of a Knowledge-Based Economy • Education and the skilled workforce - Skills required in a KBE such as communication skill, critical thinking and problem solving, sustainable use of resources, development of self and a sense of community, expanding world vision - New teaching and learning strategies are needed. - Diaspora (migration of workforce) is critical issue and Asian countries face the issue of retaining the skilled workers. “Brain drain” can be “Brain gain” which raises the skill level of the home country.

15. National innovation systems (NIS) - “A subsystem of the national economy in which various organizations and institutions interact and influence each other in the carrying out of innovative activity.” - Innovation and improvement in technical capacity are the result of a complex set of relationships among actors creating, acquiring, disseminating, and applying various kinds of knowledge. - Actors are private enterprises, universities and public research institutions, relevant financial institutions, and the government. • An innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations. Also, new material or new resources finding is included in innovation. An innovation creates new values.

16. Building Networks - Capacity of ICT to support the development of networks and to establish and maintain connections among individuals, groups, and organizations is considered to be of great use of and value to others. - Benefits of ICT and Networks (The ICT revolution has fast-tracked the innovation process) - Toward an ubiquitous network society (social computing of voicemail, e-mail, online chats, and collaborative applications) - Elements needed in building ICT are an appropriate regulatory framework, readiness and availability of human resources, research and education of IT skills. • Setting the policy and regulatory environments - Policy: legislation, organization/reorganization, and regulations - Planning: formulation of vision, strategy, and road map - Infrastructure and programs: establishing and implementing the needed physical, institutional, and social infrastructure and programs

17. Gross Expenditures on R&D in PPP by Country and as Percentage of Global Expenditures 2010

18. The R&D Input Landscape

19. Framework for Cross-leveraging Knowledge Assets Across the Asian Region

20. Technological Catch-up

21. Technology and Development • Definition of Technology • -Technology is the knowledge useful for production of goods and • services. • Importance of Technology • - The history of human being is the history of knowledge • (science and technology). • - Technology and productivity are the main engines of economic • growth. • - Technology is the main determinant of competitiveness. • - Technology affects welfare of individuals and the society.

22. Industrial Economy Stages of Industrial Development in the World Knowledge-based/ Innovative Economy Agricultural Economy • Land • Labor • Natural Resources • Science & Technology • Innovation • Entrepreneurship • Capital • Labor • Management

23. Technology and Development Social Infrastructure, Culture And Institutions Resources for education, health, communication, Employment Advances in medicine, communications, agriculture, energy, Manufacturing, etc. Knowledge, creativity Economic Growth Resources for technology development Productivity gains Technology Development Source: UNDP. 2001

24. Technology and Economic Development • Two Patterns (Stages) of Economic Growth • o Extensive Growth • - Increasing production by increasing input of production • factors • o Intensive Growth • - Increasing production by productivity increase • (More production is possible with the same resources.) • Technology, Productivity and Economic Growth • Technology → Productivity → Trade and Industry → Economic • Growth

25. Technology and Economic Growth First Stage Investment in Technology Creation of Technology Innovation Increase in Productivity Strengthening International Competitiveness Increasing Trade Second Stage Economic Growth Virtuous Circle (Increase sin Income, Demand, Investment, etc.)

26. ◆ USA ◆ Japan ◆ England France ◆ Korea ◆ ◆ Taiwan ◆ German ◆ Canada ◆ Mexico Italy ◆ ◆ China 0 20 40 60 80 100 120 Innovation and Economic Performance - Technological innovation plays a key role in productivity increase, long-term economic growth and enhancing living standards. (Innovation is the engine of growth.) Relative Economic Performance 120 100 80 60 40 20 0 Innovation Capability Note: As of 2000.

27. Two different Development Stages

28. Development Stages in the Korean Economy 1950s 1960s 1970s 1980s 1990s 2000s Aid,Labor intensiveproduction Imitation Simple tech. Import of oldplant/ machinery Heavy industry Assimilation Minorinnovations R&D New product development R&D intensiveincrease in scienceNew productinnovation Innovationfrontier Traditional Imitative Catch-up Innovative Catch-up Innovative Economy “Intensive Growth” Transition to Innovation-driven Economy Outward-looking Invesment-driven Economy“Extensive Growth” Agricultural Economy Factor-driven Economy “Extensive Growth” Outward-looking Stages of Development

29. Science Technology and Innovation • Science is the process of generating knowledge based on logic and evidence. • Technology is the application of scientific knowledge to production, and frequently involves invention, i.e, the creation of a novel object, process or technique. • Innovation is the process bringing together new ideas and technology, or finding novel applications of existing technologies. Generally, innovation means developing new ways of doing things in a place or by people where they have not been used before. Modern innovation is usually stimulated by innovation systems and pathways. • The phrase ‘Science and Innovation’ implicitly includes science, engineering, technology and the production systems which deliver them.

30. Five Dimensions of STI Capacity National (and local)government capacity to formulate and implement coherentS&T programs and policies Enterprise capacity toutilize knowledge to innovate and producehigher value added,globally competitivegoods and services Production of newknowledge via R&D Import, adapt, andadopt knowledgeproduced outside thecountry Technologically andscientifically skilledworkforce trained to equipment andproduction processes Source: Ansu, Yaw, 2007

31. Stages of Catching-up Industrialization Internalizing parts and components Internalizing skills and technology Initial FDI absorption Internalizing innovation Pre- industrialization Creativity Technology absorption STAGE FOUR Full capability in in-novation and pro-duct design as glo-bal leader Agglomeration (acceleration of FDI) STAGE THREE Management & te-chnology mastere-d, can produce hig-h quality goods Arrival of manufacturing FDI STAGE TWO Have supporting industries, but st-ill under foreign guidance Japan, US, EU STAGE ONE Simple manufact-uring under forei-gn guidance Korea, Taiwan, China-2 STAGE ZERO Monoculture, sub-sistence agriculture, aid depende-ncy Thailand, Malaysia China-1 Vietnam Border to Middle Income Economies Poor countries in Africa Source: Kenichi Ohno. 2009

32. Stages of Technology Capacity Building Creation Improvement Assimilation Acquisition S&T & R&D Stages Imitation Internalization Generating Developing Country Newly-Industrializing Country Advanced Country Development Stages

33. The Example of Korea Imitation Stage Assimilation of imported technologies Textiles and consumer electronics Internalization Stage Product based innovation Automobile, shipbuilding, DRAM, CDMA, TFT-LCD Generating Stage Path-navigating innovation Fuel cell, 4G mobile handset, next generation vehicle

34. Catch-Up Oriented Industrial Technological Capabilities inDeveloping Countries ExternalSupports IndependentDevelopment CapabilityEnhancement CapabilityEnhancement InternalEfforts Closing toAdvanced Level Capability Enhancement Core Technologies, Advanced Technologies… Industry Planning, Policy, Effects Source: Hong, Su, Lu

35. R&D Expenditure / GDP by Region

36. R&D Expenditures in Asian Countries (in US$ million) Reprinted from: Ismail, M. 2013. p.5.

37. High Technology by Sector Reprinted from: Ismail, M. 2013. p.4.

38. Knowledge-based Development (KBD) • The central ideas of the KBD - Shifting value creation toward creation and useful application of human knowledge; - Creation, development, and deployment of three types of knowledge assets: knowledge embodied in people (human capital), knowledge embedded in formal or informal structures and processes (structural or process capital), and knowledge, information and support from relationships, linkages and networks (stakeholder capital). - Attention to the three value domains of sustainable development (economic, socio-cultural, and natural) and hence a strategic national perspective for leveraging on a country’s unique mix of financial, intellectual, socio-cultural, and natural capital. • Leveraging on a country’s unique human capital

39. Setting up structural capital that empowers farmers • Innovating new sustainable enterprise models • Knowledge networking for critical capabilities • Building on indigenous social capital for enterprise development • Optimum mix of overseas development assistance, private, and public investment in various forms of capital

40. East Asian Regional Initiatives • Formulation of a KBD Model • Focused Anti-Poverty KBD development agenda • Training of economic/development planners and establishment of an e-community of KBD planners in Asia • Cross-leverage knowledge assets across the Asian region • Networking of Asian institutions in knowledge management and organizational learning • Assist in formulating KBE plans • Policy study on cross-border e-commerce

41. National Science Strategies-NEA

42. Inter-organisational and Regional Learning ‐ Taiwan – Developing local technological capabilities of SMEs, ITRI; brain circulation between Hsinchu and Silicon Valley and mainland China • Singapore –Big science initiatives, National Research Foundation (NRF) , A*Star; attraction of foreign talents and institutes • Daejon/Korea – KAIST, high tech amalgamation and entrepreneurship. R&D concentration in Seoul.

43. MNEs and Academic Capabilities: China • 750 R&D centres with foreign investment in China in big cities (e.g. Beijing, Shanghai, Guanzhou and Shenzen) in 2005 • Re-integration (R&D with production sales) and re-agglomeration (spatially close to each other) in the Beijing-Tianjin city-region • Competition for talents in Beijing and Shanghai and decentralising efforts in collaboration with the top universities in the regions • Localisation of the MNC R&D centres • Intra-country spatial dynamics • Building RIS with universities and MNEs

44. Global R&D Landscape (2012)

45. Knowledge Researchers Knowledge University Research Institutes Indigenous Knowledge Base Global Knowledge Base Funding Funding Funding Grants Technology Government Knowledge Graduates Incentives Grants Tax Industry • Industrial & Technological Deepening • Transition to Knowledge Based Economy • Sustainable Economic Growth Source: Suh. 2000 Interactions in a National Innovation System 45

46. Roles of the Three Main Players • Universities – undertake basic science and technology research – educate scientists and technologists needed by business and government • Governments – design IPR system for business and universities – commission science research e.g. for defense – finance universities, subsidise business R&D • Business (Private) sector – conduct R&D to develop commercial products – launch innovative products – start up new firms to exploit new science

47. Conceptualization of the R&D system Source: JeongHyop Lee. “Evolution of Republic of Korea’s R&D System in a Global Economy”.

49. Innovation

50. Types of Innovations • Product innovation: introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics. • Process innovation: implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software. • Marketing innovation: implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. • Organisational innovation: implementation of a new organisational method in the firm’s business practices, workplace organisation or external relations. • New resources or material: used as inputs of production