4th PH.D. SCHOOL ON INNOVATION AND ECONOMIC DEVELOPMENT

GLOBELICS ACADEMY, LISBON, 2007

THE ROLE OF NATIONAL SYSTEMS OF INNOVATION

FOR FDI IN DEVELOPING COUNTRIES

CHIARA FRANCO

cfranco@spbo.unibo.it

Ph.D. in Law and Economics, University of Bologna

AIM OF THE PAPER

ANALYSIS OF THE WAY NSI IN A ANALYSIS OF THE WAY NSI IN A DEVELOPING CONTEXT PLAY A ROLE IN DEVELOPING CONTEXT PLAY A ROLE IN ATTRACTING FDI AND ABSORBING THEIR ATTRACTING FDI AND ABSORBING THEIR SPILLOVER EFFECTSSPILLOVER EFFECTS

METHOD

SPECIFIC RESEARCH QUESTION WHAT ARE THE INSTITUTIONS AND ORGANIZATIONS

THAT INSIDE THE NSI FRAMEWORK ARE THE MOST IMPORTANT FOR THE INFLUENCE OF THE FDI INFLOWS, THE AMOUNT OF TECHNOLOGY TRANSFERRED AND THE ABSORPTION OF THEIR INDIRECT EFFECTS (SPILLOVER)?

REVIEW OF THE LITERATURE ON NSI IN DEVELOPING COUNTRIES REVIEW OF THE LITERATURE ON NSI IN DEVELOPING COUNTRIES AND ON THE RELATIONSHIP BETWEEN FDI AND INSTITUTIONSAND ON THE RELATIONSHIP BETWEEN FDI AND INSTITUTIONS

EMPIRICAL APPLICATION THROUGH WORLDBANK DATABASE (KAM)EMPIRICAL APPLICATION THROUGH WORLDBANK DATABASE (KAM)

EXTERNAL SOURCES: FDIEXTERNAL SOURCES: FDI

FDI inflows towards developing countries are regularly FDI inflows towards developing countries are regularly

risingrising

Source: World Investment Report (2006)

-

100 000

200 000

300 000

400 000

500 000

600 000

700 000

800 000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

North America

Europe

Developing economies

Japan

EXTERNAL SOURCES: FDI/2EXTERNAL SOURCES: FDI/2Relevant economic weight for their economies (FDI stock as % of GDP)Relevant economic weight for their economies (FDI stock as % of GDP)

Source: World Investment Report (2006)0,00

5,00

10,00

15,00

20,00

25,00

30,00

35,00

40,00

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Europe

North America

Japan

Developing economies

STRUCTURE OF THE PAPERSTRUCTURE OF THE PAPER

1.1. CRITICAL REVIEW OF SOME PAPERS WHERE THE CRITICAL REVIEW OF SOME PAPERS WHERE THE CONCEPT OF NSI IS APPLIED TO A DEVELOPING CONCEPT OF NSI IS APPLIED TO A DEVELOPING CONTEXTCONTEXT

2.2. SUMMARY OF THE MAIN RESULTS OF THE FDI SUMMARY OF THE MAIN RESULTS OF THE FDI SPILLOVER LITERATURE FOCUSING THE SPILLOVER LITERATURE FOCUSING THE ATTENTION ON THE INSTITUTIONAL CONTEXTATTENTION ON THE INSTITUTIONAL CONTEXT

3.3. IDENTIFICATION OF INSTITUTIONS AND IDENTIFICATION OF INSTITUTIONS AND ORGANIZATIONS (INSIDE THE FRAMEWORK OF ORGANIZATIONS (INSIDE THE FRAMEWORK OF NSI) THAT ARE CRUCIAL FOR FDINSI) THAT ARE CRUCIAL FOR FDI

4.4. EMPIRICAL APPLICATION EMPIRICAL APPLICATION

1.NSI IN DEVELOPING COUNTRIES1.NSI IN DEVELOPING COUNTRIES

A.THEORETICAL AND METHODOLOGICAL ISSUES OF NSI LITERATURE RELEVANT FOR DEVELOPING COUNTRIES

B.CRITICAL REVIEW OF STUDIES RELATED TO THE CONCEPT OF NSI IN DEVELOPING COUNTRIES

AIM: FIND OUT WHETHER IN WHAT WAY THE ROLE PLAYED BY FOREIGN SOURCES IS TAKEN INTO ACCOUNT

A. METHODOLOGICAL AND THEORETICAL ISSUES

NSI literature adopts a SYSTEMIC APPROACH towards innovation

A lot of definitions: Freeman (1987), Lundvall (1992), Nelson and Rosenberg (1993), Metcalfe (1995)….

COMMON POINTS:

• Innovation process in a developed context

• Important role given to linkages

• Identification of the main functions: produce, use and diffuse innovations

Firms do not innovate alone but they are part of a complex environment where institutions and organizations shape and guide their innovative efforts (Edquist 2004; Narula 2004)

• Innovation in developing countries is of different nature

• Both institutions and organizations can be missing or inappropriate and the interactions with firms may be missing as well

• Absorption function

RELEVANCE FOR DEVELOPING COUNTRIES

B. CRITICAL REVIEW OF STUDIES RELATED TO THE CONCEPT OF NSI IN DEVELOPING COUNTRIES

COMMON POINTS

- Broad approach adopted

- NSI as an ex-ante concept

- Importance of firm interaction with other non firm actors (universities, standard setting agencies, research institutes, private foundations, financing organisations, schools, government agencies)

- Importance of the effectiveness in learning

(Viotti, 2001;Mathews 2001; Wong 1999; Lall and Pietrobelli 2003; Arocena and Sutz 1999; Gu 1999; Edquist 2001; Oyelaran-Oyeyinka 2005; Intarakamnerd 2002)

Absorption of foreign sources of technology: function and the institutional set up concerned with this function not properly identified

Exceptions:

Lall and Pietrobelli (2003): Sub-Saharan Africa;“Even countries that import all their technology have to undertake significant, costly and risky effort to use the technology efficiently (National Technological System)”

Viotti (2001): comparison between Brazil and South Korea; “National Learning Systems should be centered in the activities, institutions, and relationships, associated to learning, rather than to innovation.Absorption and incremental innovation should, therefore, be the main focuses of studies of NLS”

Edquist (2001): System of Innovation for Development;“for developing countries the generation of technological capability is primarily a matter of absorbing products and processes developed in other countries and deepening their knowledge about them over time”

2. FDI AND 2. FDI AND SPILLOVER

PROCESSPROCESS

A.A. SUMMARY OF THE RESULTS OF SPILLOVER SUMMARY OF THE RESULTS OF SPILLOVER LITERATURELITERATURE

B.B. FOCUS ON THE RELATIONSHIP BETWEEN FDI FOCUS ON THE RELATIONSHIP BETWEEN FDI AND INSTITUTIONSAND INSTITUTIONS

AIM: FIND OUT WHETHER AND IN WHAT WAY THE INSTITUTIONAL CONTEXT IS TAKEN INTO ACCOUNT IN THE FDI LITERATURE

RESULTS OF THE EMPIRICAL LITERATURE ARE MIXED BUT:

FOR DEVELOPING COUNTRIES INTERINDUSTRY SPILLOVER ARE USUALLY GREATER THAN INTRAINDUSTRYSPILLOVER (BLALOCK 2004, SMARZYNSKA 2002, KUGLER 2006) BECAUSE OF THE BACKWARD LINKAGE EFFECTS

HOWEVER ALSO IN THIS CASE THERE CAN BE NEGATIVE RESULTS:

Yudeva et al. (2003) for Russia

Merlevede and Schoors (2005) for Romania

Sasidharan (2006) for India

A. SUMMARY OF THE RESULTS OF THE FDI SPILLOVER LITERATURE

It is due to the fact that the positive results are not automatic consequences of the presence of Multinational Enterprises (MNEs) but they have to be accompanied by significant efforts of local firms in term of ABSORPTIVE CAPACITIES.

LITERATURE GAP: ROLE OF INSTITUTIONS

MY PERSPECTIVE: THEY ARE IMPORTANT IN AN INDIRECT WAY BY HELPING FIRMS IN BUILDING GREATER ABSORPTIVE CAPACITIES

• HIGHER POSSIBILITY TO QUALIFY AS A SUPPLIER, HIGHER AMOUNT OF FDI INFLOWS

• HIGHER POSSIBILITY TO TAKE ADVANTAGE OF FDI SPILLOVER WHATEVER IS THE CHANNEL CONSIDERED

NON FIRM SECTOR IMPORTANT FOR TWO REASONS (Narula 2004):

• TO PROVIDE SKILLED AND EDUCATED WORKFORCE

• TO PROVIDE A SORT OF R&D INFRASTRUCTURE (UNIVERSITIES, PUBLIC RESEARCH INSTITUTE) TO DIRECT TECHNOLOGY STRATEGY

EDUCATION

R&D CAPABILITIES

B. FDI AND INSTITUTIONS

IN THE LITERATURE (SEE BLONIGEN 2005 FOR A SURVEY) CONSIDERED ONLY:

• LEGAL AND POLITICAL INFRASTRUCTURE OR MACROECONOMIC ENVIRONMENT

(tax systems, trade protection, easiness to create a company, lack of corruption, security of property rights, transparency, contract law)

• ANALYSIS WITH RESPECT TO LOCATION CHOICE NOT LINKED WITH THE TYPE OF FDI AND MOTIVATIONS

LITERATURE GAP

NOT CONSIDERED THOSE INSTITUTIONS THAT CAN STRENGTHEN THE INNOVATIVE CAPACITY AT THE FIRM AND AT THE COUNTRY LEVEL

This may influence the flow of FDI and the amount of technology transferred.

Exception: IPR regime

Influence the composition of FDI

Maskus (2004), Smarzynska (2004)

Lall (2003): the need of a proper IPR regime varies by level of development

3.3. NSI FRAMEWORK (broad NSI FRAMEWORK (broad definition)definition)

Oyelaran-Oyeyinka (2005)Oyelaran-Oyeyinka (2005) • Political and legal structuresPolitical and legal structures

• Basic and high-tech infrastructureBasic and high-tech infrastructure

• Science and technological knowledge Science and technological knowledge basebase

• Financial and incentive structureFinancial and incentive structure

SCIENCE ANDTECHNOLOGICAL

KNOWLEDGE BASE

FINANCIAL AND INCENTIVE

INFRASTRUCUTRE

BASIC ANDHIGH TECH

INFRASTRUCTURE

POLITICAL AND LEGAL

INFRASTRUCTURE

FIRM

R&D CAPABILITIES

EDUCATION

IPR REGIME

4. EMPIRICAL APPLICATION4. EMPIRICAL APPLICATION

DATABASE USED: Knowledge Assessment DATABASE USED: Knowledge Assessment Methodology DATABASE (WORLD BANK)Methodology DATABASE (WORLD BANK)

AIM: TO FIND OUT WHETHER AND TO WHAT EXTENT AIM: TO FIND OUT WHETHER AND TO WHAT EXTENT THE INSTITUTION AND ORGANIZATIONS IDENTIFIED THE INSTITUTION AND ORGANIZATIONS IDENTIFIED IN THE PREVIOUS SECTIONS FULFIL THEIR FUNCTION IN THE PREVIOUS SECTIONS FULFIL THEIR FUNCTION (QUANTIFICATION OF NSI)(QUANTIFICATION OF NSI)

ANALYSIS OF CORRELATION MATRIX

30 COUNTRIES SELECTED BY GEOGRAPHICAL AREA30 COUNTRIES SELECTED BY GEOGRAPHICAL AREA

SOUTH AMERICA

Argentina

Brazil

Bolivia

Chile

Colombia

Ecuador

Paraguay

Perù

Uruguay

Venezuela

SUB-SAHARAN AFRICA

Angola

Botswana

Cameroon

Cote d’Ivore

Ghana

Kenya

Sierra Leone

Uganda

Tanzania

Zimbabwe

ASIA

Bangladesh

China

Hong Kong

India

Malaysia

Pakistan

Singapore

Thailand

Vietnam

Political and legal infrastructure

Intellectual Property Protection, 2006

Regulatory Quality, 2005   

Rule of Law, 2005 

Government Effectiveness, 2005

Control of Corruption, 2005 

Scientific and technological knowledge base

Researchers in R&D, 2004 

Science and Engineering Enrollment Ratio, 2004

Science Enrollment Ratio, 2004

Gross tertiary enrollment, 2004

Professional and Technical Workers as % of the Labor Force, 2004

Total Expenditure for R&D as % of GDP, 2004 

Scientific and Technical Journal Articles, 2003

Patent Applications Granted by the USPTO, average for 2001-05 

High-Technology Exports as % of Manufactured Exports, 2004 

Financial and incentive infrastrucuture

Intensity of Local Competition, 2006

Domestic Credit to Private Sector (% of GDP), 2005

Cost to register a business % of GNI per capita, 2005

Availability of Venture Capital, 2006

Basic and high-tech infrastructure

Telephone Mainlines Per 1,000 People, 2004 

Internet Users Per 1,000 people, 2004

ICT Expenditure as % of GDP

32 VARIABLES SELECTED ACCORDING TO THE NSI FRAMEWORK

ANALYSIS OF THE CORRELATION MATRIX (FDI INFLOWS AS %GDP,2000-2004 AVERAGE)

Political and legal infrastructure

Intellectual Property Protection (2006) 0,35

Regulatory Quality, 2005  0,86

Rule of Law, 2005 0,853

Government Effectiveness, 2005 0,917

Control of Corruption, 2005 0,82

Scientific and technological knowledge base

Researchers in R&D, 2004  -0,09

Science and Engineering Enrollment Ratio, 2004 0,1

Science Enrollment Ratio, 2004 -0.02

Gross tertiary enrollment, 2004 0,04

Total Expenditure for R&D as % of GDP, 2004  0,403

Scientific and Technical Journal Articles, 2003, 0,53

Patent Applications Granted by the USPTO, average for 2001-05  0,241

Public Spending on Education as % of GDP, 2003 0,04

Financial and incentive infrastrucuture

Intensity of Local Competition, 2006 0,13

Domestic Credit to Private Sector (% of GDP), 2005 0,33

Cost to register a business % of GNI per capita, 2005 -0,18

Availability of Venture Capital, 2006, 0,33

Basic and high-tech infrastructure

Telephone Mainlines Per 1,000 People, 2004  0,55

Internet Users Per 1,000 people, 2004, 0,43

ICT Expenditure as % of GDP 0,24

RESULTS

LOW CORRELATION WITH:

• R&D RESEARCHERS

• GROSS TERTIARY ENROLLMENT

• SCIENCE AND ENGINEERING ENROLLMENT RATIO

• PUBLIC SPENDING ON EDUCATION

• ICT EXPENDITURE

FDI MOTIVATIONS

INSTITUTIONS AND ORGANIZATIONS OF NSI NOT EFFECTIVE

FIRM LEVEL TECHNOLOGY ABSORPTION (0,12)

ANALYSIS OF THE CORRELATION MATRIX BY COUNTRY GROUPINGS

SUB-SAHARAN AFRICA

NEGATIVE CORRELATION WITH ALL VARIABLES

ONLY SIGNIFICANT CORRELATION ARE WITH:

• BASIC INFRASTRUCTURE

• POLITICAL AND LEGAL INFRASTRUCTURE BUT NOT IPR (-0,35)

SOUTH AMERICA

HIGH POSITIVE CORRELATION WITH:

POLITICAL AND LEGAL INFRASTRUCTURE BUT NOT IPR (-0,002)

BASIC INFRASTRUCTURE BUT NOT HIGH-TECH

POSITIVE WITH SCIENTIFIC AND TECHNOLOGICAL BASE BUT NOT RESEARCHERS IN R&D AND SCIENTIFIC AND TECHNICAL JOURNAL

ASIA

HIGH POSITIVE CORRELATION WITH

ALL VARIABLE ESPECIALLY

IPR (0,7)

SCIENTIFIC AND TECHNICAL JOURNAL (0,8)

ANALYSIS OF THE CORRELATION MATRIX (FIRM LEVEL TECHNOLOGY ABSORPTION, 2004)

Political and legal infrastructure

Intellectual Property Protection (2006) 0,72

Regulatory Quality, 2005  0,58

Rule of Law, 2005 0,133

Government Effectiveness, 2005 0,432

Control of Corruption, 2005 0,193

Scientific and technological knowledge base

Researchers in R&D, 2004  0,66

Science and Engineering Enrollment Ratio, 2004 0,42

Science Enrollment Ratio, 2004 0,16

Gross tertiary enrollment, 2004 0,322

Professional and Technical Workers as % of the Labor Force -0,13

Total Expenditure for R&D as % of GDP, 2004  0,577

Scientific and Technical Journal Articles, 2003, 0,67

Patent Applications Granted by the USPTO, average for 2001-05  0,57

Public Spending on Education as % of GDP, 2003 0,269

Prof. And tech. Workforce as % of Labour Force, 2004

- 0,13

Financial and incentive infrastrucuture

Intensity of Local Competition, 2006 0,78

Domestic Credit to Private Sector (% of GDP), 2005 0,33

Cost to register a business % of GNI per capita 2005, -0,46

Availability of Venture Capital, 2006, 0,81 University company

collaboration,2006 0,85

ANALYSIS OF THE CORRELATION MATRIX BY COUNTRY GROUPINGS

MORE SIMILARITIES THAN DATA RELATIVE TO FDI INFLOWS

HIGH CORRELATION WITH

UNIVERSITY COMPANY COLLABORATION

RESEARCHERS IN R&D BUT EXCEPT FOR AFRICA

TOTAL EXPENDITURE FOR R&D AS % OF GDP

SCIENTIFIC AND TECHNICAL JOURNAL

PATENT APPLICATIONS GRANTED BY THE USPTO

SCIENCE AND ENGINEERING ENROLLMENT RATIO

GROSS TERTIARY ENROLLMENT

IPR PROTECTION

R&D CAPABILITIES AND EDUCATION ARE IMPORTANT

(SUB SAHARAN AFRICA HAS THE LOWEST VALUES)

CORRELATION FDI INFLOWS – FIRM LEVEL TECHNOLOGY ABSORPTION

ALL COUNTRIES: 0,12

ASIA: 0,46

SUB-SAHARAN AFRICA: -0,67

SOUTH AMERICA: 0,20

GREATER POSSIBILITY OF BACKWARD LINKAGES

GREATER SPILLOVER POTENTIAL

MISMATCH BETWEEN NSI COMPONENTS ATTRACTING FDI AND THOSE NEEDED TO BUILDING ABSORPTIVE CAPACITY ESPECIALLY FOR SOUTH AMERICA AND SUB -SAHARAN AFRICA

DIFFERENT FDI MOTIVATIONSDIFFERENT DEGREE AND AMOUNT OF TECHNOLOGY TRANSFER (SPILLOVER POTENTIAL)

NOT EFFECTIVENESS OF NSI IN FULFILLING THE FUNCTION OF ATTRACTING AND ABSORBING EXTERNALITIES COMING FROM FDI

THANK YOU!