China and India:

1. China and India: Technological upgrading patterns and their implications for other developing countries Tilman Altenburg, German Development Institute, Bonn OECD Development Centre Paris, 16 March 2006

2. Key questions: 1. To what extent, at what velocity, and in which sectors can we expect China and India to catch up with global technological leaders? 2. How do they manage to catch up? What are the policy lessons? 3. What are the economic consequences for other developing countries?

3. 1 To what extent, at what velocity, and in which sectors can we expect China and India to catch up with global technological leaders?

4. Software industry: India 20 years of spectacular growth. 12 billion US$ exports, 345,000 employment. 80% exports. Several Indian firms emerging as global players. However: Specialisation on lower-end services, BPO-ITES, still low market share in system integration, embedded software, product design etc.

5. Space industry: India Successful development of three sub-systems: satellites, rockets, ground systems. Robotic moon mission planned. Only developing country to develop own remote-sensing satellites. Rockets capable of placing 2 ton satellites in orbit. Increasing local content of core technologies. Systems integration capability (dealing with huge simultaneous & complementary technological developments), several hundred research projects with over 100 universities, research centres and increasing private sector participation Partly commercial success: leading provider of civilian satellites, many countries use Indian rockets. However: Still dependent on subsidies, global consolidation may threaten minor competitors (as in aircraft industry)

6. Automotive industry: China Chinese joint venture partners start producing own cars First exports of national brands Increasing number of own patents Acquisition of auto and autoparts companies Major manufacturers set up R&D centres in China, partly adaptive R&D, partly due to government pressure However: Still basically foreign licenses, little innovation Still 10 years time-lag, reduced from 30 years

7. Personal computer industry: China World’s leading producer of PCs. Emergence of strong local brands Acquisiton of IBM’s PC production However: most critical components imported / licensed Still low degree of appropriation of technological capabilities

8. Are China & India catching up? Still distant from technological frontier Technological gap rapidly decreasing. Difficult to assess how long it will take to close the remaining gap. Very different perceptions! Need for better proxies for technological mastery/ upgrading

9. Are China & India catching up? • Hypothesis: Substantial further progress likely because of • Global economic shift towards Asia. China and India emerging as world’s leading markets • Pan-Asian production system benefits China (advantages in manufacturing combined with capital and know-how from Taiwan, Singapore, Japan, Korea) • - Strong bargaining power (trading technology for markets). Major manufacturers set up R&D centres in China and India • - Strong investment in human capital • Global network of qualified expatriates • High savings & foreign exchange reserves => investment in R&D + acquiring technology firms + hiring return migrants

10. 2 How do they manage to catch up? What are the policy lessons?

11. Very heterogeneous policy trajectories India’s space industry: Ambitious space programme started in 1962, national pet project. Science-driven, strong government support Building on international cooperation with NASA, SU, France, ESA. Strong focal institution (ISRO): 11,000 scientists Private sector came in lately. ISRO helped to develop technology firms India’s software industry: Early focus on human capital building, excellent universities and technical colleges Until 1984 no specific promotion policy for IT, even disincentives Oversupply of IT engineers => emigration and “body shopping” => strong diaspora as facilitators for India’s market access, return migration. Not result of visionary industrial policy, dynamic development surprised India Luck: Window of opportunity when oversupply of engineers met new technological standard that made outsourcing possible.

12. China`s automotive industry • Competence building through various phases of industrial policy: • Centralized planning, SOE => from 1978 ISI => from 1994 increasing use of bargaining power • after 2001 WTO, liberalisation, carrot and stick approach. Still discretionary government influence. • Trading technology for markets. • Acquisition of foreign auto parts and car makers to get access to technology, brand names, markets • China’s PC industry • Started as an extension of Taiwanese computer industry • Export assembly base • Increasing backward integration from comparative advantage in low-cost assembly, acquisition of foreign technology companies

13. Policy lessons? • Still feasible to catch up with technological leaders • Very different trajectories may lead to technolo-gical upgrading • In the long run, trajectories converge towards similar patterns of mature National Innovation Systems • Strategic vision, political leadership & coherent sector policies often crucial, but not always • High emphasis on skills development and increasingly on R&D • Neither China nor India offer “conducive investment climate” in the traditional sense. Do they perform well because of or despite this? • Especially China negotiates incentives, puts pressure on foreign investors.

14. 3 What are the economic consequences for other developing countries?

15. Technological progress makes Chinese and Indian growth sustainable => growth prospects of world economy. • Sustained growth increases demand for raw materials and improves terms of trade for net commodity exporters • Especially strong pull-effects for Asian neighbours • More competitive pressure in knowledge-intensive production => rising entry barriers for other DCs • New South-South technology alliances likely to emerge (IBSA, China-Brazil space technology) • Rising labour costs: will China and India move out of very low-cost manufacturing? • Provision of technologies more appropriate to DC needs ? • Greater role in global governance structures. Aid for raw materials