1.1.1.

TECHNOLOGY AND ECONOMIC DEVELOPMENT (1)

Capabilities approach and similarities with Schumpeterian approach. But development without
development

1.1. ABOUT DEVELOPING CATCH - UP

Schumpeterian growth involve in an essential way the coevolution of technology, firm and industry structures, and a
variety of non-market institutions. rapid economic development of countries, originally far behind the frontier, who
have broadly caught up. Successful development involves the coevolution of technologies employed, firm and
industry structure, and broader economic institutions. Government policies and programs are an essential part of the
picture, for better or for worse, but inevitably.
For countries aiming to catch up, the basic challenge is to learn to master new ways of doing things. This involves
breaking from the circular flow of economic activity that Schumpeter used as his base concept for defining what he
meant by innovation. In Schumpeter’s sense of the term, catch up requires innovation. The innovation involved in
catch up is not what economists studying technological advance in countries at the frontier tend to mean by the term.
The innovation in catching up involves bringing in and learning to master ways of doing things that may have
been used for some time in the advanced economies of the world, even though they are new for the country or
region catching up. In most cases there are models in advanced countries that can serve as targets for emulation,
and in many cases active assistance is available in developing the new capability. In some cases important aspects of
the model can be simply imported.
But bringing into operation practices that are new in the context involves an essential break from Schumpeter’s
circular flow of customary activity.
The record is clear that there is considerable learning that needs to be done to enable the new modes of operation to
be got under effective control, and a high chance of failure. These are the hallmarks of innovation, at least in
evolutionary economic theory.
Neoclassical growth theory misses all of this. In a recent article Howard Pack and I argued that neoclassical theory
sees economic development as largely driven by accumulation – investments in physical and human capital. In
contrast, we argue that the key driving force of catch-up is assimilation, learning to do effectively what countries at
the frontier have been doing, often for some time. We recognize, of course, that countries behind the frontier that
have made successful progress in closing the gap have been marked by high rates of investments in physical and
human capital.
These were needed to bring in the new ways of doing things, but not sufficient. The premise of neoclassical theory is
that, if the investments are made, the acquisition and mastery of new ways of doing things is relatively easy, even
automatic. The experience of some of the Communist economies in the period between 1960 and 1990 shows how
wrong is this presumption. High rates of investment, without effective assimilation, Successful innovation requires
access to physical and human capital. However, to a considerable extent, innovation and effective learning tend to
draw supplies of physical and human capital by enabling their rates of return to be high. Of course, if a country does
not have the institutional structure that enables physical and human capital to be drawn to, or created for, promising
innovative efforts, innovation will be scotched. But as we read the successful histories of catch-up in Japan early in
the twentieth century, and Korea and Taiwan toward the close of the twentieth century, it was innovation that was
driving the process, proceeding in an environment where supplies of physical and human capital were available and
forthcoming if the returns were high.
Much of the standard discussion about what is needed for catch-up focuses on the need for access to and
achievement of mastery over modern technologies.
I would like to propose that that job today is in some ways easier and in some ways more difficult than it was when
Korea and Taiwan were successfully taking aboard modern technologies. It is easier because the body of relatively
codified knowledge underlying most important technologies has become much stronger than was the case, say, thirty
years ago, and much of that knowledge can be garnered through training, sometimes advanced training, in the
relevant sciences and engineering disciplines.
The need for technological apprenticeship in, or tutelage by, companies in the leading countries, therefore, has
diminished. I am not arguing that a freshly MIT trained engineer, or a Ph.D. scientist, can step right in and be
effective in the operation of a modern technology. However, that training provides a substantial base for learning by
doing and using. From this point of view, technological catch-up is easier today than it was fifty years ago.
But from another point of view, it is harder. There is, first of all, greater need for large scale public and private
investments to create a technologically sophisticated cadre of indigenous engineers and applied scientists.

Economic theories of development, going back to Rostow (1959) and Kuznets (1966), have argued that once a
process of industrialisation has begun in a country it follows a roadly-predictable pattern. Modern endogenous
growth theories, emphasizing the role of knowledge and technology in economic growth, argue that, beyond a
growth in total factor inputs, investments in productive capital and technological learning lead to rapid
improvements in productivity, which in turn leads to wealth creation and economic growth. As applied to Asia, this
model emphasizes the importance of knowledge and the accumulation of technological capabilities (Lall, 1987;
Stiglitz, 2003). Even though the explanation for growth differs from the classical Rostovian stages model of
development, the end point remains the same, with late-comer economies tending to be seen as convergent with
those in advanced economies in their structure, productivity and slower rates of overall growth (Solow, 1956; Barro
and Sala-I-Martin, 1992). This does not mean that there ‘…is one pattern of growth to which all economies
conform...’, (Lucas, 1988: 41) but that generally-applicable mechanics explain growth.

1.2. S TRUCTURAL CHANGE

Economic growth is associated with structural change in the economy, with a shift from agriculture to industrial
production, and rapid productivity improvements leading to growth in new industrial sectors and a growth in
services. Traditional industries are modernized and new industries become established, (edit) with industries tending
to be concentrated in highly energy, materials and water intensive sectors, such as steel, chemicals, petroleum and
rubber and plastics. New consumption patterns emerge, affecting the demand - besides industrial goods - for food,
energy, mobility, housing and other services, while also shaping the resource- and environmental intensity of growth
(Bernardini and Galli, 1993).

1.3. S OCIO-TECHNICAL SYSTEM

To foster economic growth and structural change, to promote the process of urbanization and to meet the demands
of new consumers, major new socio-technical systems are put in place. The socio-technical systems concept draws
on the well-established idea of a technological regime (Nelson and Winter, 1982) as an embedded set of practices,
skills, procedures, technologies, institutions and structures that order technological change and innovation, but
expands the idea by including a broader range of institutional factors into the analysis, including the knowledge
base, policy and governance, consumer behaviours and so on (Schot, Hoogma and Elzen, 1994; Rip and Kemp,
1998; and Geels, 2002).
In broadening the scope of analysis, the systems innovation literature is complementary with the innovation systems
analysis of the conditions under which innovative resources, networks and institutions underpin growth.

In developing economies we observe the rapid growth and embedding of sociotechnical systems. These include
investments in energy systems; telecommunications; roads, mass transit and airport systems; housing, industrial and
other buildings organized in urban systems; and water and sanitation systems, as well as food production and
consumption systems. The specific nature of these socio-technical systems, the technologies they are based on, and
the patterns of economic growth and consumption they foster, will have a profound influence on the resources and
energy profile of the developing economy. In this paper we are interested in innovation theory that seeks to analyse
the long-run emergence and change of socio-technical systems.
 1.4. INTERSYSTEM INTERACTION

A significant proportion of emergent socio-technical systems will draw on international flows in knowledge,
technology and investment. Such investments contribute, either directly and through the spillovers they generate in
the rest of the economy, contribute a major component of economic growth in newly-industrialising countries
(NICs) (Bose and Durkayastha, 1994; Kathuria, 2002). This is what we would expect in models of knowledge,
technology and capabilities diffusion through imitation and capital deepening, captured in the notion on ‘catch up’
(Chenery, Robinson and Syrquin 1986; Dowrick and Gemmell, 1991). The main point we want to emphasize here is
that while much of the economic literature on processes of catchup is concerned primarily with either changes in
labour or total factor productivity, growth rates and per capita income (Abramovitz, 1986), or with the growth of
technological capabilities in leading industrial sectors (Bell and Pavitt, 1997), the convergence of economic
structures and growth rates - which plays such a central role in growth theories - does not imply that the emergence
of socio-technical systems underpinning growth must also be convergent in terms of their technological composition
and economic structure. By drawing on recent advances in the study of innovation in socio-technical systems, we
propose mechanisms by which pathways of growth may deviate from convergence on a standard model.
Among a range of others, a few major factors will determine the technological learning profile of a country and the
pattern of its development in the long run:
 demographic transitions,
 resource endowments;
 governance; and the
 accumulation of technological and innovative capabilities.
Accumulation of technological capabilities is of our prime concern
There can be deliberate attempts at learning and there are inevitable market forces of change. Passive learning
societies also inevitably adapt new technologies in the face of global competition but at a higher cost.. for example.
Higher EU and American standards, low cost high quality competition from china and other learning economies,
loss of domestic market, prestige or crisis, as stretigic decisions have long term impacts, nations that fail to learn
with and ahead of their time, are forced to learn to survive. But in doing so they loose their late-comer advantages.

Learning speed

fast

slow Passiv Active

Learning style

Isolated
Learning orientation Collaborativ
 Sen meets Schumpeter: Towards an agent oriented theory of
inequality and qualitative change
By Dominik Hartmann1, July 2009

To establish the ultimate objective of this research, relationship between technology transition
(transfer) and economic development must be understood. All the questions of international
technology transfer to developing countries are ultimately concerned with impact of domestic
and foreign technology on economic development.
The definition of ‘development’ has always been a contentious issue. Income level is of course
one of the most widely accepted single measure of development, but most people would agree
that development is something more than providing higher material standards of living (Khan,
Christiansen, forthcoming 2010)1.
One of the earliest known development models is the Harrod-Domar Model (1930) initially
created to help analyze the business cycle, it was later adapted to explain economic growth. Its
implications were that growth depends on the quantity of labor and capital; more investment
leads to capital accumulation, which generates economic growth. The model also had
implications for less economically developed countries; labor is in plentiful supply in these
countries but physical capital is not, slowing economic progress. The Harrod-Domar model in
the early postwar times was commonly used by developing countries in economic planning. With
a target growth rate, and information on the capital output ratio, the required saving rate was
calculated. The same model is also considered the precursor of the more widely known
‘exogenous growth model’ (or neoclassical growth model) of Robert Solow.
The neo classical development model for the first time places emphasis on the role of
technological change, the original Solow (1957) study showed that technological change
accounted for almost 90 percent of U.S. economic growth in the late 19th and early 20th
centuries. The sources-of-growth measurement obtained from this model highlights the relative
importance of both the capital accumulation and technological change in economic growth
(Chen, E.K.Y. 1979) 2. More recent analysis (Choi, 1987)3 attribute over 87% of productivity
growth in the United States between 1950 and 1980 was due to technological improvements,
while another (Hirono, 1985)4 estimates it to be between 30% and 56%. It may be said that
technological progress has enabled the developed nations to become highly industrialized and
wealthy. In the case of Japan, it has been estimated that nearly 29% of growth in the
manufacturing industry between 1955 and 1979 could be attributed to technological advances.
The same study also shows that the corresponding value for the machinery industry was 40%. It

1
S. Khan & J. Christiansen (eds.), forthcoming 2010, Towards New Developmentalism: Market as Means rather than Master, Hamlet without the
Prince of Denmark: How development has disappeared from today’s ‘development’ discourse, Routledge, Abingdon
2
Chen, E.K.Y. (1979), Hyper-growth in Asian Economies, Macmillan, Basingstoke
3
Choi, Hyung Sup, (1988), "The Role of the Government and R&D Infrastructure for Technology Development", Technological Forecasting and
Social Change, 33 (March), 23-32.
4
Hirono, R. 1985. Integrated survey Report in “Improving productivity Through Macro-Macro Linkages. Tokeyo: Asian Productivity
Organization
has been futher estimated (Subramanian, 1987)5 that technological progress could contribute as
much as 65% to the economic growth of Japan in 1980s.
Besides the direct impact of technological development on a nation’s economic development and
growth, the stretigic importance of technology has other reasons as well. Technology is a key
component of the national defense mechanism and internal security and it determines the quality
of public service infrastructure ranging from health to education, transportation to
communication. Culturally, the introduction of modern media has not only promoted awareness
among masses it has also created market for increasingly sophiticated and larger varied of
manufactured goods, that cannot be always imported. Although economic performance in recent
years has been particularly impressive for many developing countries, sustaining higher growth
rates will require achieving competitiveness in high technology content products that are
becoming increasingly important in world trade (Sharif, 1988)6.
“Since the work by Abramovitz and Solow in the 1950s and by Denison, Kendrick and many
others in the 1960s, it is commonly accepted that technological change is a main determinant of
economic growth. Yet, because of the difficulty of studying technological change using
neoclassical models which predominate in the analysis of economic growth today and which
treat technological change as an exogenous factor, the causal connections between technological
change and economic growth are still poorly understood” (Carlsson, 1991)7.
The recent conception of economic development has seen an increasing focus on capabilities
rather than resource endowments as the main instruments and values in development. This
tendency can be exemplified by work by noble laureate Amartya Sen. Sen's revolutionary
contribution to development economics and social indicators is the concept of 'capability'
developed in his article "Equality of What." He argues that the country’s development should be
measured against the concrete capabilities of their citizens. Provision of basic necessities of life,
human rights and freedom from poverty for the general populace is considered as a prime source
of economic development. This view is different from previously held view where a capitalistic
economy would first increase wealth by a few of the whole population and later a trickledown
effect and income distribution functions would allow the rest of the population to share the
benefits. The most well known in this respect is the UNDP’s human development index (HDI)
and its variations, which try to incorporate non-income dimensions of human welfare, such as
education, health, and gender equality. The ‘humanistic’ dimension of development emphasized
by these indicators is absolutely correct in concluding that material progress is only the means
and not the end of development.
However, capabilities, especially technological capabilities of a country reside in its production
system. Therefore capability enhancement must necessarily be considered in the production
context, where the purpose of technology is to transform available inputs (natural resources and
samifinished goods) into desirable outputs (consumer goods, semi-finished goods and capital
goods). This is the ‘production’ side of development. Before the rise of neo-liberalism since the
late 1970s, there was a general consensus that development is largely about the transformation of
the productive structure (and the capabilities that support it) and the resulting transformation of
social structure – urbanization, dissolution of the traditional family, changes in gender
relationships, rise of labor movement, the advent of the welfare state, and so on. This was mainly

5
Subramanian, S.K. 1987. Technology, Productivity and Organization. Technological Forecasting and Social Change. 31 (4): 359-371
6
Sharif, 1988a. M.N. Sharif, Problems, issues and strategies for S&T policy analysis. Science and Public Policy 15 (1988a), pp. 195–216
7
B. Carlsson, R. Stankiewicz. (1991), On the nature, function and composition of technological systems, Journal of Evolutionary Economics
1:93-118
(although not exclusively) to be achieved through industrialization. Even though they radically
disagreed on how exactly this was to be done, most commentators ranging from Walt Rostow on
the right and the Dependency Theorists on the left – shared the view that development is
something centered around a process of transformation in the productive sphere (Khan,
Christiansen, forthcoming 2010)8.
The Millennium Development Goals of the United Nations, the Doha Development Agenda
(DDA) of the WTO (World Trade Organization), and the discourse on micro-finance also
promote the comparative advantage argument, which emphasizes the need for developing
countries to stick to their existing specializations in agriculture and textile/clothing. These
discourses have a view of ‘development’ that lacks a vision of transformation in productive
structure (and the development of social and technological capabilities that are both the causes
and the consequences of such transformation).
Under development in backward countries is best explained by a systematic concept called the
"vicious cycle theory" of economics (Hirschman, 19589; Samli, 198510). Essentially, this theory
holds that economic underdevelopment in the less developed countries results from and is
perpetuated by a configuration of factors, including low levels of income, savings, investment
and productivity, and acute shortages of capital. One strategy for breaking the vicious cycle is
through the infusion of venture capital to stimulate business startups. Another typical strategy is
through the transition (transfer) of technology, often from the developed countries to the
developing economies. Such technology transition arguably would promote entrepreneurship and
foster economic development (Baranson, 196911, 197012; Balasubramanyam, 197313).Baranson
(1969) argues that the transfer of technical know-how from the industrially advanced countries to
the developing countries is essential to upgrading the quality of human resources necessary for
effectively utilizing available physical capital and other input factors. One aspect of the
traditional technology transfer conception advocated import substitution and protection for infant
industries, but ever since mid 1970s with the dominance of neo-classical theorizing, this trend
has slowly withered out. It should be recognized that development through technological
capability enhancement is a progressive process starting with the utilization of existing mature
technologies; adaptation of evolving technologies; introduction of emerging technologies; and
eventually leading to the production of state of the art technologies.
With the rise of globalization the new conceptual framework for socio-technical change and
development is based on the revival of Innovation concept. It’s now widely believed that the
process of developing ideas into products and services is a major driving force in global
economic growth and development. Innovation has been moving from a “closed”, inward-
looking or “supply”-driven process to a more open and networked process: open to new ideas,
knowledge, resources from outside the institutions from external advisors, from enthusiasts (“the
crowd”), from other fields, from overseas (even outsourcing is in a sense “open”), and from
customers and end-users. “Creative knowledge is widely diffused, and innovation structures that
support a solely internally oriented, centralized approach to research and development are
8
S. Khan & J. Christiansen (eds.), forthcoming 2010, Towards New Developmentalism: Market as Means rather than Master, Hamlet without the
Prince of Denmark: How development has disappeared from today’s ‘development’ discourse, Routledge, Abingdon
9
Hirschman, A. 1981. The Rise and Decline of Development Economics in Essays in Trespassing, Cambridge University Press, Cambridge.
10
Samli, A.C. (Editor). Technology Transfer: Geographic, Economic, Cultural and Technical Dimensions. Quorum Books, Westport,
Connecticut, 1985.
11
Baranson, J. (1969). Industrial Technologies for Developing Economies. New York: Praeger.
12
Baranson, J. (1970). Technology transfer through the international firm. American Economic Review, 60, 435-40.
13
Balasubramanyam, V. N. (1973). International Transfer of Technology to India. New York: Praeger
becoming obsolete. Our connectivity today offers an unprecedented opportunity to harness
global creativity and add value for products and services” (Henry Chesbrough, 2003)14.
Innovation systems concept turns to the role of institutions at the state and society level in
explaining the prevalence of entrepreneurial activities and resulting economic development.
This new trend in development thinking lead by the Schumpeterian innovation thinkers like
Howitt, P. and Mayer-Foulkes, D. (2005)15 have now established after two decades of research
that differences in income per capita between countries are mainly due to differences in
technology. Thus considering economic development and growth as mainly a process of
knowledge generation or acquisition and its effective application through which technological
levels of production would rise. Since Schumpeterian analysis of endogenous technological
change first concentrated on R&D in developed countries as the source of economic growth
(Aghion and Howitt, 1989)16 and convergence (Howitt, 2000)17 it can also explain prevailing
trends in economic development namely convergence clubs, underdevelopment and divergence
(Howitt and Mayer, 2005)18.
We conclude from this discourse that technology plays a vital role in economic growth and
development, but no single dominant model or theory fully encompasses the complexities of
development. The production or material side of development as propagated by the earlier
models is as important as the modern humanistic approach to development. Domestic
technological effort and importation of advanced technologies are equally important, for this
matter, more linkages within and outside the national boundary are of required based on
appropriate institutions for learning and innovation. The modern sustainable development
concept and the recent rise in environmental concerns also pose a challenge for policy makers,
who can avoid the damaging effects of industrialization through adoption of most modern,
efficient and environment friendly technologies.

generally can adjust in above

1.5. ABOUT DEVELOPING CATCH - UP

Schumpeterian growth involve in an essential way the coevolution of technology, firm and industry structures, and a
variety of non-market institutions. rapid economic development of countries, originally far behind the frontier, who
have broadly caught up. Successful development involves the coevolution of technologies employed, firm and
industry structure, and broader economic institutions. Government policies and programs are an essential part of the
picture, for better or for worse, but inevitably.
For countries aiming to catch up, the basic challenge is to learn to master new ways of doing things. This involves
breaking from the circular flow of economic activity that Schumpeter used as his base concept for defining what he
meant by innovation. In Schumpeter’s sense of the term, catch up requires innovation. The innovation involved in
catch up is not what economists studying technological advance in countries at the frontier tend to mean by the term.
The innovation in catching up involves bringing in and learning to master ways of doing things that may have been
used for some time in the advanced economies of the world, even though they are new for the country or region
14
Henry Chesbrough, 2003, Open Innovation: The New Imperative for Creating and Profiting from Technology. Harvard Business School Press
15
Howitt, Peter & Mayer-Foulkes, David, 2005. "R&D, Implementation, and Stagnation: A Schumpeterian Theory of Convergence Clubs,"
Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(1), pages 147-77
16
Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904,
University of Western Ontario, Department of Economics.
17
Peter Howitt, 2000. "Endogenous Growth and Cross-Country Income Differences," American Economic Review, American Economic
Association, vol. 90(4), pages 829-846
18
Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2005. "The Effect of Financial Development on Convergence: Theory and
Evidence," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 173-222
catching up. In most cases there are models in advanced countries that can serve as targets for emulation, and in
many cases active assistance is available in developing the new capability. In some cases important aspects of the
model can be simply imported.
But bringing into operation practices that are new in the context involves an essential break from Schumpeter’s
circular flow of customary activity.
The record is clear that there is considerable learning that needs to be done to enable the new modes of operation to
be got under effective control, and a high chance of failure. These are the hallmarks of innovation, at least in
evolutionary economic theory.
Neoclassical growth theory misses all of this. In a recent article Howard Pack and I argued that neoclassical theory
sees economic development as largely driven by accumulation – investments in physical and human capital. In
contrast, we argue that the key driving force of catch-up is assimilation, learning to do effectively what countries at
the frontier have been doing, often for some time. We recognize, of course, that countries behind the frontier that
have made successful progress in closing the gap have been marked by high rates of investments in physical and
human capital.
These were needed to bring in the new ways of doing things, but not sufficient. The premise of neoclassical theory is
that, if the investments are made, the acquisition and mastery of new ways of doing things is relatively easy, even
automatic. The experience of some of the Communist economies in the period between 1960 and 1990 shows how
wrong is this presumption. High rates of investment, without effective assimilation, Successful innovation requires
access to physical and human capital. However, to a considerable extent, innovation and effective learning tend to
draw supplies of physical and human capital by enabling their rates of return to be high. Of course, if a country does
not have the institutional structure that enables physical and human capital to be drawn to, or created for, promising
innovative efforts, innovation will be scotched. But as we read the successful histories of catch-up in Japan early in
the twentieth century, and Korea and Taiwan toward the close of the twentieth century, it was innovation that was
driving the process, proceeding in an environment where supplies of physical and human capital were available and
forthcoming if the returns were high.
Much of the standard discussion about what is needed for catch-up focuses on the need for access to and
achievement of mastery over modern technologies.
I would like to propose that that job today is in some ways easier and in some ways more difficult than it was when
Korea and Taiwan were successfully taking aboard modern technologies. It is easier because the body of relatively
codified knowledge underlying most important technologies has become much stronger than was the case, say, thirty
years ago, and much of that knowledge can be garnered through training, sometimes advanced training, in the
relevant sciences and engineering disciplines.
The need for technological apprenticeship in, or tutelage by, companies in the leading countries, therefore, has
diminished. I am not arguing that a freshly MIT trained engineer, or a Ph.D. scientist, can step right in and be
effective in the operation of a modern technology. However, that training provides a substantial base for learning by
doing and using. From this point of view, technological catch-up is easier today than it was fifty years ago.
But from another point of view, it is harder. There is, first of all, greater need for large scale public and private
investments to create a technologically sophisticated cadre of indigenous engineers and applied scientists.

1.1. DEVELOPING COUNTRIES INNOVATION SYSTEMS

Economic Development and the National System of Innovation Approach

By Björn Johnson, Charles Edquist, Bengt-Åke Lundvall
The first written contribution that used the concept ‘national system of innovation’ is, to the best
of our knowledge, an unpublished paper by Christopher Freeman from 1982 that he worked out
for the OECD expert group on Science, Technology and Competitiveness (Freeman 1982: 18).
The paper, titled ‘Technological Infrastructure and International Competitiveness’, was written
very much in the spirit of Friedrich List, pointing out the importance of an active role for
government in promoting technological infrastructure. It also discusses in critical terms under
what circumstances free trade will promote economic development.
It is also interesting to note that while the modern version of the concept of national systems of
innovation was developed mainly in rich countries (Lundvall 1992; Nelson 1993; Edquist 1997)
some of the most important elements going into the combined concept actually came from the
literature on development issues in the third world.
For instance the Aalborg version (Andersen and Lundvall 1988) got some of its inspiration
concerning the interdependence between different sectors from Hirschman (1958) and Stewart
(1977). Other encouragements come from Myrdal (1968 The idea that institutions matter for the
performance of the economy that is central in the innovation system approach (Johnson 1988)
was originally more generally accepted for ‘less developed countries’ than for full blown market
economies where the market was assumed to solve most problems in an institution- less world
(Myrdal, 1968). As we shall see below the importance of institutions for economic development
has got new attention recently for example in the contributions of IMF and the World Bank.
To apply the NSI-concept to developing countries may therefore be seen as a kind of ‘re-export’.
Gunnar Myrdal’s ideas, inspired by Veblen and developed in ‘Asian Drama’ (1968), of positive
and negative feedback, of cumulative causation, of virtuous and vicious circles and of the
importance of institutions, are all easily reconciled with the idea of innovation systems and have
to some extent inspired its development. However, in spite of all these connections between the
innovation system concept and economic development it is not directly applicable on the
countries of the South. Especially, it would be problematic to apply a narrow definition of the
innovation system.
Common characteristics
1-A first common characteristic is the assumption that national systems differ in terms of
specialization in production, trade and knowledge (Archibugi and Pianta 1992).
co-evolution
that both the production structure and the knowledge structure will change only slowly and that
such change involves learning as well as structural change.
2- elements of knowledge important for economic performance are localized and not easily
moved from one place to another A common assumption behind the innovation system
perspective is that knowledge is something more than information and that it includes tacit
elements (Polanyi 1966). Important elements of knowledge are embodied in the minds and
bodies of agents, in routines of firms and not least in relationships between people and
organizations (Dosi 1999).
A third assumption central to the idea of innovation systems is a focus on interactions and
relationships. The relationships may be seen as carriers of knowledge and interaction as
processes where new knowledge is produced and learnt. This assumption reflects the stylized
fact that neither firms and knowledge institutions nor people innovate alo ne. Perhaps the most
basic characteristic of the innovation system approach is that it is ‘interactionist’.2institutions are
seen as informal and formal norms and rules regulating how people interact (Johnson 1992,
Edquist and Johnson, 1997). In a terminology emanating from evolutionary economics and the
management literature ‘routines’ are regarded as more or less standardized procedures followed
by economic agents and organizations when they act and when they interact with each other
(Dosi 1999).
New Tendencies in development thinking
First, there is an increasing focus on capabilities rather than resource endowments as the main
instruments and values in development. This tendency can be exemplified by work by Amartya
Sen.
Second, you can observe a new focus on knowledge as the perhaps most crucial resource driving
development. This can be illustrated by several recent reports from the World Bank.
Third, there is a tendency to underline the primary importance of institutions as the ‘root causes’
of development dwarfing the importance of all other factors such as geography and policies.
Both the World Bank and the IMF has recently underlined this view.
‘innovation systems in the context of the learning economy’.
The capability approach introduces and underlines several capabilities (or ‘freedoms’ in the
language of Sen) but more or less disregards learning capabilities. The World Bank focuses on
knowledge and its diffusion from the North to the South but seems to underestimate the role of
learning and innovation processes in the North and particularly in the South for knowledge
creation and utilization. In a related manner the new interest in institutions of the IMF gives little
attention to the institutions supporting learning and innovation. Bringing the three perspectives
into the theoretical framework of innovation systems in the learning economy confirms that
institutions are crucial for economic development. But what comes out, as the most significant
institutions, will be different when focus is moved toward innovation and competence building.

1.2. DEVELOPING COUNTRIES INNOVATION SYSTEMS

Evolution
In developing countries, technological learning — defined as the process of accumulating a capacity to innovate —
usually results from the experience gained during a series of increasingly complex activities. Initially these tend to
focus on the acquisition of foreign technologies, and their imitation. Subsequently there are attempts to modify
imported technologies through incremental changes.  Finally — as illustrated by the newly industrialised countries
in East Asia — an indigenous capacity to carry out R&D-based innovation can emerge.
Government policy should respond to the needs of both countries and organisations at each stage of this
evolutionary process. For example, at an early stage of a country's economic development, policies should support
efforts to imitate and adapt foreign technologies, as well as increase the education levels of the population. As the
capacity to adapt technologies increases, policy measures should focus increasingly on strengthening R&D
capabilities — particularly those relevant to local needs -- in the business sector, in higher education institutions
(such as universities), and in public research laboratories. 
1. The key question facing the innovation theory with reference is ‘economic
development and transformation, for closing the gaps between rich and poor countries’
and it appear from the experience of the past half century, to be intractable (Metcalfe and
Ramlogan, 2005)19.
2. The key questions therefore are ‘How can a transformation of innovation performance
be achieved in a competitive international economy? What are the appropriate policy
instruments?, What role is there for universities?, and what stimuli can be given to
19
Stan Metcalfe and Ronnie Ramlogan, ‘Innovation Systems and the Competitive Process in Developing Economies’, Presented at the
Conference on “Regulation, Competition and Income distribution: Latin American Experiences”, University of Sao Paulo, Paraty, Brazil, 18th-
21st November, 2005
 entrepreneurial action? Whether engagement with foreign sources of innovation can
spark indigenous learning and capability formation?
3. True enough, developing countries are heterogeneous in nature and any aggregate
picture hides the diversity of growth experiences both geographically and temporally.
4. With a few exceptions of East Asia and later China, majority of developing nations were
unable to sustain a rate of development sufficient enough to enable them to close the
income gap with developed countries or to be able to overcome the ravages of poverty for
substantial proportions of their populations.
5. There is a difference between igniting economic growth and sustaining it as two different
enterprises (Rodrik, 2004)20.
6. Development strategy requires a sound and evolving institutional foundation to create, to
maintain and develop an adaptable economy resilient to shocks over the longer term
7. A fundamental point that economies only develop through their people becoming more
knowledgeable. Or the instituted frames in relation to the growth and development of
economic capability and its associated knowledge base are central to the development
problem
8. Latin American scholars have made significant contributions to the innovations systems
literature (Cimoli, 200021; Cassiolato and Lastres, 200322; Dutrenit and Dodgson, 200523).
9. Success at greater macro management in general and of inflation in particular has not
necessarily lead to a transformation in productivity(Dutrenit, and Katz, 2005) 24. With the
liberalisation of trade, Latin American economies have been restructured to exploit
resource based comparative advantages (pulp and paper, steel, soya),
10. Wide recognition is also given in the literature to the need to manufacture new
comparative advantages, no doubt taking the SE Asian experience to heart, and this
will require an upgrading of technological capabilities and its translation into
enhanced innovation. Arocena and Sutz (2003)25 express this point in terms of the need
for approaching the question of innovation and development through a “southern
framework of thought”, that is to say one that emphasises core periphery relations with
respect to the growth of knowledge and innovation.
11. Innovation is a preeminent class of investment activity and a macro policy that stabilizes
the general investment climate is a necessary but not sufficient condition for innovation
led development. Instituted activities, (education, research, public purchasing of
technology) matter as demonstrated in the development of the SE Asian Tiger economies

20
Rodrik, D., 2004, ‘Growth Strategies’, sourced at http://ksghome.harvard.edu/ ~drodrik/papers.html.
21
Cimoli, M., (ed), 2002, Developing Innovation Systems: Mexico in a Global Context, London, Continuum.
22
Cassiolato, J.E., Lastres, H.M.M. and Maciel, M.L., 2003, Systems of Innovation and Development, Cheltenham, Edward Elgar.
23
Dutrenit, G. and Katz, J., 2005, ‘Innovation, Growth and Development in Latin America: Stylised Facts and a Policy Agenda’, Innovation:
Management, Policy, Practice, Vol. 7, pp. 105-130.
24
Dutrenit, G. and Katz, J., 2005, ‘Innovation, Growth and Development in Latin America: Stylised Facts and a Policy Agenda’, Innovation:
Management, Policy, Practice, Vol. 7, pp. 105-130.
25
Arocena, R. and Sutz, J., 2003, ‘Knowledge, Learning and Innovation: Systems and Policies in the North and South’, in Cassiolato, J.E.,
Lastres, H.M.M. and Maciel, M.L., Systems of Innovation and Development, Cheltenham, Edward Elgar.
 12. The concept of self sustaining development, economic development is a process of a
people becoming different in the sense of commanding greater knowledge of economic
and business capability expressed in terms of marketing, of production engineering
competence, of the organization of supply chains, of production logistics etc.
13. If development is a matter of self transformation arising from within an economy,
then innovation must play a central role in the process and so to must the capacity for an
economy to develop, integrate and adapt to novelty.
14. How the national capability fits into the global production and consumption context
becomes crucial, realizing that comparative advantages are constructed and reshaped by
international innovative activities not naturally given or freely available. They must
change as individuals, the activities they carry out must change and so too must the
supporting institutional frameworks. The self transforming character of not just the
markets but knowledge based economies.
15. the connection between innovation and economic development
16. Differential rates of development are a fundamental reflection of differential capacities at
innovation.
17. The national innovations systems literature as it attempts to confront issues of
development (Johnson and Lundvall, 2003)26.
18. Mytelka and Oyeyinka (2003)27 point to a number of systemic barriers to innovation
systems development in developing countries.
 Firstly there may be rigidities at the institutional or organizational level that resist
change in the face of new conditions and challenges. E.g. The pure scientific model of
Africa’s higher education system for instance, a legacy of nineteenth century
colonialism, is seemingly unable to adapt or be adapted to serve the region’s present
development objectives (Oyelaran-Oyeyinka and Barclay, 2004)28.
 Secondly, existing knowledge networks may be underutilized with links between critical
actors sparse or inappropriate for various reasons. E.g. universities and R&D laboratories
are centralized.
 Thirdly, organizational performance may be path dependent, with the accumulation of
inefficiencies arising from membership of an obsolete self-reinforcing network. Inertia
and resistance to change result from poor judgment, the excessive hold of tradition, lack
of vision and fear of the unknown.
 Fourthly, the organizational ineffectiveness referred to above manifests itself as system
inefficiency.
In short poor co-ordination between knowledge and economic production.

26
Johnson, B. and Lundvall, B.A., 2003, ‘Promoting Innovation Systems as a Response to the Globalised Learning Economy’, in Cassiolato,
J.E., Lastres, H.M.M. and Maciel, M.L., 2002, Systems of Innovation and Development, Cheltenham, Edward Elgar.
27
Mytelka, L. and Oyelaran-Oyeyinka, B. (2003), ‘Competence Building and Policy Impact Through the Innovation Review Process: A
Commentary’, paper presented to the IDRC-UNESCO Joint Workshop on Future Directions for National Review of Science, Technology and
Innovation in Developing Countries, UNESCO, Paris, 23-24, April.
28
Oyelaran-Oyeyinka, B and Barclay, L., 2004, ‘Human Capital and Innovation Systems of Innovation in African Development’, African
Development Review, Vol. 16, No. 1, pp. 115-138.
 19. Successful economies it has been argued (CSPO, 2003)29 are characterized by a complex,
integrated system for translating new knowledge and innovation into productive
economic capacity.
20. growing body of the empirical literature has analyzed the innovation experiences of
those newly industrializing economies such as Korea, Taiwan and Singapore which
have experienced more intensive technological learning and made some progress in
closing the gap with developed countries (Kim and Nelson, 200030; Lee and von
Tunzelmann, 200431); or contrasted the Asian and Latin American experiences, explicitly
or implicitly (Viotte, 200132; Alcorta and Peres, 199833). Cimoli (2000)34, and later
China(Motohashi, 2006)35(OECD 2008)36 (Chang and Shih, 2004)37

21. Innovation and TOT, national policies pay little, if any, attention to the importance of
imitative innovation or those based on the transfer and mastery of product, process or
organisational technologies developed elsewhere.
22. As developing countries are in general characterized by narrow and incomplete domestic
linkages, a dualistic industry structure and underdeveloped knowledge bases. Developing
countries simply may not have a broad base of local knowledge on which local firms can
draw. With limited opportunities to develop indigenous innovation systems, there is little
recourse in the short term to relying on foreign technology and knowledge
23. for policy in developing countries than a broader concept that perceives innovation, as a
learning process in which firms master and implement the design, production and
marketing of good and services that are new to them, although not necessarily so for their
competitors – domestic or foreign. This latter concept of the innovation process,
embracing continuous improvement in product design and quality, changes in
organisation and management routines, creativity in marketing and modifications to
production process is of the first importance to firms in the developing world (Mytelka,
2000)38.
24. three layers of the knowledge problem,
29
CSPO (Consortium for Science Policy and Outcomes), 2003, ‘Knowledge Flows and Knowledge Collectives: Understanding the Role of
Science and technology Policies in Development, Vol. 1, available at http://cspo.org/products/reports/index.html
30
Kim, L. and Nelson, R.R., 2000, Technology, Learning and Innovation: Experiences of Newly Industrializing Economies, Cambridge
University Press, Cambridge Mass.
31
Lee, T. and Von Tunzelmann, N., 2004, ‘A Dynamic Analytic Approach to National Innovation Systems: The IC Industry in Taiwan’
Research Policy, Vol. 34, No. 4, pp. 425-440.
32
Viotte, E., 2002, ‘National Learning Systems: A New Approach on Technological Change in the Late Industrializing Economies and Evidence
from the Cases of Brazil and South Korea’, Technological Forecasting and Social Change, Vol. 69, No. 7, pp. 653-680.
33
Alcorta, L. and Peres, W., 1998, ‘Innovation Systems and Technological Specialisation in the Latin America and the Caribbean’, Research
Policy Vol. 26, No. 7-8, pp. 857-881.
34
Cimoli, M., (ed), 2002, Developing Innovation Systems: Mexico in a Global Context, London, Continuum.
35
Kazuyuki Motohashi, 2006 China’s National Innovation System Reform and Growing Science Industry Linkage Asian Journal of Technology
Innovation 14, 2 (2006)
36
OECD Reviews of Innovation Policy: China OECD Publications, September 2008
37
Pao-Long Chang and Hsin-Yu Shih, 2004, The innovation systems of Taiwan and China: a comparative analysis Technovation, Volume 24,
Issue 7, July 2004, Pages 529-539
 a. the coding of knowledge into information for transmission,
b. the mode of transmission, and
c. the subsequent decoding of information to add to knowledge.
What matters for the growth of knowledge is the possibility of
 copying error and
 interpretive error,
 on personal differences in view despite sharing the same information flux,
and
 ultimately on the notion of individuality.
25. Schumpeter pointed out the consequence that the innovation process threatens
established positions and encourages those positions to resist the innovation process.
Johnson and Lundvall (2003)39 have drawn attention to this power aspect of innovation
but the consequence is that innovation generates political as well as economic responses.
Those who lose by innovation are not typically compensated by those who displace them
and their only resort is to use politics or other means to protect their position. Thus a
fundamental innovation systems question is the degree of openness of the current
economic structure to innovative challenges.
26. innovation systems and financial systems are inevitably interwoven (Cassiolato et al,
2003). Markets have always been instituted processes and it is this which makes it so
amenable to seeing them as components of innovation systems that are also necessarily
instituted. Innovation systems are distinctly not alternatives to the market process for
innovation is a market process.
27. innovation systems are embedded in market processes, processes that determine the
payoffs to innovation, that generate the resources for innovation (including customers
willing to pay) and that determine how experimental, in a business conjecture sense a
firm, an industry or economy is.
28. Ecologies are typically national in scope, with sub national degrees of variation, which
reflect rules of law and language, business practice and the social and political regulation
of business (Carlsson, 1997; Carlsson et al, 2002; Cooke et al, 2002).
29. innovation systems are constructed. Since systems require connections as well as
components, it is the formation of the connections, which is the necessary step in the
creation of any innovation system. Innovation systems do not occur naturally, they self
organize to bring together new knowledge and the resources to exploit that knowledge,
and the template they self-organize around is, we suggest, the problem sequence that
defines the innovation opportunity. Hence, innovation systems are emergent phenomena,
created for a purpose, they will change in content and pattern of connection as the
problem sequence evolves, and they are constructed at a micro scale. Within these
networks, firms, the unique organizations that combine the multiple kinds of knowledge
to innovative effect, play the key role in the self-organization process.
Role of state is to ensure that there is a rich, national knowledge ecology on which innovation
processes can draw and that means the presence of knowledgeable minds and appropriate

38
Mytelka, L., 2000, ‘Local Systems of Innovation in a Globalized World Economy’, Industry and Innovation, Vol. 7, No. 1, pp. 15-32.
39
Johnson, B. and Lundvall, B.A., 2003, ‘Promoting Innovation Systems as a Response to the Globalised Learning Economy’, in Cassiolato,
J.E., Lastres, H.M.M. and Maciel, M.L., 2002, Systems of Innovation and Development, Cheltenham, Edward Elgar.
organisational and institutional structures in which they can pursue the growth of knowledge and
contribute to innovation.
30. a layer of policy themes that we may list as follows. First, general policies in relation to
the education system and public research and development, primarily to provide the
supply of trained minds whose imagination will be crucial to the experimental process
and the growth of knowledge. These individuals are the basic building blocs of the
innovation ecology and they require an appropriate supply of appropriately resourced
research organisations in which to work. The range of disciplinary skills available and
their closeness to the world best practice frontier will also determine the absorptive
capacity to adapt to knowledge generated within foreign ecologies; for science and
technology are global systems and the formation of innovation systems will increasingly
reflect a search for the best partners wherever they are located (Harvey and McMeekin,
2004).
31. Another aspect of the role of state is at making and destroying the patterns of connection
between different components of that ecology. These are bridging policies that do not
take for granted a free flow of information but rather recognize the costs of forming
network relationships.

1.1. INNOVATION SYSTEMS FOR DEVELOPING COUNTRIES

Development and innovation here

The history and development of the concept of ‘national system of innovation’ indicates that it can be useful for
analyzing less developed economies. Some of the basic ideas behind it go back to Friedrich List (List, 1841) and
they were developed as the basis for a German ‘catching-up’ strategy. His concept ‘national systems of production’
took into account a wide set of national institutions including those engaged in education and training as well as
infrastructures such as networks for transportation of people and commodities (Freeman 1995).

1. List pointed to the need to build national infrastructure and institutions in order to promote the
accumulation of ‘mental capital’ and use it to spur economic development rather than just to sit back and trust
‘the invisible hand’ to solve all problems. It was a perspective and a strategy for the ‘catching-up’ economy of
early 19th century Germany
2. The first written contribution that used the concept ‘national system of innovation’ (Freeman, 1982),
‘Technological Infrastructure and International Competitiveness’, was written very much in the spirit of
Friedrich List, while the modern version of the concept of national systems of innovation was developed
mainly in rich countries (Lundvall, 1992; Nelson, 1993; Edquist, 1997) some of the most important elements in
the concept actually came from the literature on development issues in the third world positive and negative
feedback, cumulative causation, virtuous and vicious circles and the importance of institutions, are all easily
reconciled with the idea of innovation systems and have to some extent inspired its development
3. What is missing, however, in the capability based approach, as well as more generally in development
theory, is a focus on learning capabilities related to the DUI-mode of innovation; the many different kinds of
learning, which are going on in society, i.e. in rural areas, villages, firms and organizations in the public sector
as well as the private. Only a part of this takes place in the formal education system or in the research system.
What needs to be understood is how and to which extent individuals, communities, firms and organizations are
geared to learning and innovation, either by themselves or in interaction with others. Is there a ‘learning
culture’? Is there an adequate institutional underpinning of learning?
About institutions
4. Sometimes institutions are even referred to as ‘root causes’ of economic development (Acemoglu, 2003).
IMF (2003) for example concludes that if the quality of institutions in sub-Saharan Africa were to ‘improve to
the levels in developing Asia’, per capita income would rise by 80 per cent There is evidence that
entrepreneurship and innovation in many developing countries are severely hampered by red tape and slow and
costly regulation. Often the business regulation is a legacy of colonialism rather then of the present needs of
 country in question (World Bank, 2003b). The point, however, is that the crucial question of how institutions
may support learning and innovation is not raised (except for the role of the formal school system, which
belongs to the ‘established’ growth factors). The impact on learning and innovation of, for example, labor
market institutions, financial institutions, economic policy regimes and a host of norms supporting (or
undermining) a learning culture need to be analyzed.
About innovation system thinking in development this chapter
5. ‘national systems of innovation and competence building’ may be useful in this context. Such a broad
definition of national systems of innovation – taking into account not only the core but also the setting in which
it is embedded - fits well with both the new focus on capabilities and the focus on institutions since it implies
that a broad spectrum of socially based inter-linked capabilities is necessary for efficient innovation processes
or for well performing innovation systems. The concept of innovation systems may, thus, be a tool for
understanding the relations between different kinds of capabilities and between the constitutive and
instrumental aspects of capabilities in developing countries. The viewpoint taken here is that improving learning
and innovation capabilities is not only a question of more resources for education and research (more and better
schools and universities, etc.) but also of shaping and reshaping a broad set of institutions
6. It has been used to describe and compare relatively strong and diversified systems with well developed
institutional and infrastructure support of innovation activities. Usually the perspective has been that innovation
processes are evolutionary and path dependent and systems of innovation evolve over time in a largely
unplanned manner. The system of innovation approach has not, to the same extent, been applied to system
building. When applied to the South the focus need to be shifted in the direction of system construction and
system promotion – something that was central in List’s ideas for catching up - and to the fact that innovation
policy is a conscious activity that need to stimulate and supplement the spontaneous development of systems of
innovation learning and innovation is not a luxury but necessary and basic processes, which have to be parallel
to and interact with poverty alleviation. in many countries the state is in the hands of vested interests with little
motivation to create the necessary institutional setting for learning and innovation. Here ‘social innovations’
brought about by social movements might be necessary to overcome the stalemate