Asian Innovation Systems

1. Asian Innovation Systems Basel, September 8-9, 2011 Georg Erber Senior Economist, DIW Berlin

2. The Increasing Importance of the BRIC-Countries

3. Innovation and Locational Competition • Locational comparative advantages are not necessarily persistent in global innovation competition One key driver in the dynamic global competition of innovation systems is the significantly higher long-term economic growth, higher investments in innovative activities which after a while is leading to the erosion of the incumbents comparative advantages. • Specialization at a location is an insufficient answer As one could observe in the area of the ICTs, the loss of control of key elements of the value chain at one location in a country and their major companies producing there could have dramatic relocation effects. The early on access to the components leads to a comparative disadvantage when time to market is a essential element (the winner-takes-it-all-effects). Vertical constraints in the supply-chain to give exclusive easy access – intentionally or even unintentionally – are part of a techno-nationalism often an important element in Asian innovation policy thinking.

4. Innovation and Locational Competition • Examples: • Siemens as a mobile-phonemanufacturerobtainedcolour-displays significantlylaterthantheirJapaneseand South Koreancompetitors. The suppliers in Japan and South Korea ofcolour-displays hadalreadymadecontractswiththeir national mobile-phonemanufacturerslike Samsung or Sony. Effect: Siemens lost rapidlymarketshare in theirnichemarket of premium mobile phones. • China restrictedsuddenlytheaccessto rare earths an essential ressourceneeded in manyhigh-techproducts in particular in electricmobility. This leadtoasuddensignificantincreases in theprices of rare earth in global marketswhichcouldbeavoidedbymanufactures in China. Effect: Toyota decided after thistoshiftparts of theirPrius III productionfrom Japan to China. • Photovoltaic: Chinese photovoltaiccompaniesrapidlyincreasedtheirmanufacturingcapacities in panelsandareundercutting in theirsupplypricestheir German competitiors - onceworldmarketleaders - bymorethan 30%. Effect: dramaticcollapse of the German photovoltaicindustry. Global marketshare: 2004: Germany 69%, China 7%; 2010: Germany 21%, China 45%

5. Locational specialization as a competitive strategy? • Only if one can maintain a long-term competitive advantage under the constantly shift global innovation cluster landscape • Otherwise the risk of relocation to other more attractive places is a coinstant challange • Example: Germany photovoltaic manufactures relocate manufacturing sites to Malaysia, e.g. near Malacca (habour city). Export-FDI-substitution to stay competitive. • They get significant financial support from the Malaysian government (race for global subsidies) • They internalize cheap labour cost advantages in Malaysia in comparison to Germany • They are significantly closer to the booming Asian markets • Profiting from ASEAN and China free-trade agreements • Facing less challenges of a major national champions, like they would have to face in China, Taiwan, South Korea or Japan • Low transportation costs in Asia (via India as well as to East Asia) • In Germany manufacturing setup with significant government subsidies is rapidly shrinking even when now Germany is going for a Green growth strategy to reduce rapidly the dependency from fossil fuels and nuclear energy.

6. Companies are going global by relocation Countries and regions cannot • Lesson: Regions and countries need to establish a global reputation for major global innovation cluster • Need for a Cluster Policy and Global Network Buildung Strategy First: A regional innovation cluster can only become a key global player if it becomes efficiently a networked regionally innovation cluster offering complementary capabilities to all kinds of different players of the global innovation system Only if one manages to become a persistent innovation location in the top 10 or 5 in the global innovation system (mega clusters) in specific areas not easily to immitate by competing regions in their catch-up cluster policy the regional innovation cluster obtains sufficient stability to attract the necessary resources like a well developed innovation eco-system, represented e.g. by innovative entrepreneurial skills, marketing power for innovations, venture capital financing, human capital formation according to the needs of the regional innovation cluster, an attractive legal and regulatroy framework for innovations highly-flexible regional innovation networks to act mission oriented on particular global challenges (see e.g. Lee, Miller, Hancock, Rowen 2000)

7. Companies are going global by relocation Countries and regions cannot • Second: A regional innovation cluster can only become a key global player if it is also efficiently networked with other key global innovation clusters offering complementary capabilities • Need to develop an efficient knowledge transfer capability from other global regions. If the Mega-Cluster is a hub for certain global innovative capabilities, it needs as a complementary capability to communicate with different global mega-clusters, transfer of essential capabilities and cooperate with foreign communities efficiently. • This makes it necessary to establish in the different global clusters diaspora networks of domestic citizens to have a better understanding and more unbiased perception about the foreign clusters. China e.g. uses a highly effective diaspora network at teh Silicon Valley (see e.g. Saxenian 2007). • This could get as far as the German manufacturing and innovation cluster in Taicang near Suzhou in the Yangtze-river delta. see http://europe.chinadaily.com.cn/epaper/2011-08/26/content_13198497.htm

8. China • China is rapidly becoming a key player in the global innovation system. The combination of huge human ressources, rapid internal and export-oriented economic growth, a strategic orientation of the central government to catch-up and overtake the current global leader in innovation, the US, has already had stunning impacts. The whole initiave started 15 to 20 years ago. So the cluster policy of the Chinese central government has a long-term commitment • China is persuing a long-term innovation strategy for for than 20 years. Similar to the EU it has long-term development targets to become by 2020 the leader in the global innovation system. • There are currenty three Mega-clusters existing in China. • The first is the area around Beijing-Tianjin • The second is the area in the Yangtze-Delta with Shanghai as the hub and spokes in Hangzhou, Suzhou, and Nanjing gradually extending its reach to Wuhan and Chonqing. • The Third is the Pearl river delta with Shenzen at its center in close cooperation wih Hong Kong and Guandong • New emerging clusters are Chengdu and Xi‘an

9. China • From the beginning the Chinese were very much oriented to knowledge transfer from abrod in particular the global centers of excellence • By sending a significant amount of their brightest students to the top-universites in the US and Europe they created step-by-step a diaspora network in the particular local innovation communities • By offering extremely profitable locational advantages (free or close to costless land usage, tax exemption, access to the human ressources of local universities, support by development of the necessary infrastructures, advantegous financing conditions from state controled banks) to major foreign high-tech companies they attracted step by step more and more global players of multinational companies to setup not only production locations – controled by obligatory export-quotas and forced partnership in joint-ventures with Chinese companies – to China. By this more and more tacit knowledge of best practice spilled-over to the Chinese workers at the respective companies. • Weak IPR-protection supported the start-up of only Chinese controlled companies which began to compete with the foreign ones. First in the domestic market, but rapidly expanding as well into export markets. Focussing first on less profitable developing countries markets, they avoided the head-on competition with the foreign global insumbents. However, due to high cost pressures they developed a high price competitiveness which on average led to the retreat of foreign multinationals from these markets.

10. Japan • Japan has performed very successfully a strategic national innovation system policy. It early on focused on long-term potential markets like environment protection and energy technologies, autoimation and robotics, ICT-technologies with application in equipment manufaturing but as well in electronic consumer goods. • With the intense competition between Japan, the US, South Korea, Taiwan and now China, Japan has lost ist competitive advantages in the consumer electronics field. • There fore Japan has intensified ist efforts to focus on their other innovative strengths like energy, environment and electro mobility and battery storage technologies. • Japan developed a highly differentiated cluster policy. The innovationscluster in Kitakyushu has been setup to be one of the key Japanese green growth clusters in Japan • The German Fraunhofer Society has setup an own institute there to participate more effectively in the local innovation network

11. South Korea • The South Korean innovation system was highly successful to compete against the US, the European and Japanese innovation systems for quite some time. • In particular focussing on ICT and their application in consumer electronics like flat panel TV-sets or mobile phones, they have become by their global multinational companies like Samsung or LG or Semiconductor manufaturers global leaders in their fields. However they as well face now steep competition from China who has targeted this field years ago. By acquisition of global brands like Lenovo from IBM or developing their own brands with HTC in mobile phones, they face the challenges to relocate as well more and more of ist production to China. • Together with the Seoul area the government currently develops Songdo IBD: South Korea’s New Eco-City. This area should become a testbed for a future environmentally friendly urban area. The Korean government wants to develop a knowledge base how all the complex sub systems of a city has to be merged together to offer an overall systemic comparative advantage for the future environmental city. This is significantly more ambitious than most activities in the US and Europe. Germany will have aptly named ECO CITY Hamburg, the UK has Hanham Hall, Sweden has Super Sustainable City in Gothenburg, Spain has Logroño Montecorvo Eco City, and the UAW has Masdar. • The willingness to take high risks and cover major losses by tax payers money makes it difficult for many Western companies to compete with the South Korean national champions on a level playing field. However, this scope and scale oriented national innovation policy leads to deficienies in the support of the broad SMEs innovation capability. SMEs controlled by the larger Korean multinationals are squeezed in their profitability and therefore cannot flourish as e.g. in Germany or Taiwan.

12. We urgently need more knowledge about the rapid developments in Asia to hold ground • Thank you for your attention