Management of R&D - Reaction Paper No. 9

1. NIS of Tiger Economies in Asia

A. “Crisis, National Innovation, and Reform in South Korea”

(Summary) South Korea was able to turn the collapse of its economy (which was said to be due to the chaebols' over-reliance on the state for subsidies and protection that lead to political corruption and the diversification of the chaebols into areas outside their financial and technological capabilities) during the 1997 Asian crisis into an opportunity to carry out aggressive reforms in the public sector, the financial sector, the chaebols and the labor market. The administration took several extraordinary measures (such as establishing a permanent government body to reform the public sector in an institutionalized continual process of self-innovation; and invited private consulting organizations to help determine the appropriate scope and function of government ministries and to review their current work and management system) intended to have lasting effects on the productivity improvement of the government sector. In addition, the administration introduced an open career system and performance-based management system. The administration also restructured its administrative apparatus for coordinating public science and technology (S&T) efforts and made S&T an integral part economic policy and a central national agenda. In the financial sector, the administration closed badly managed banks, rescued the “relatively better managed” remaining financial institutions, and merged several large commercial banks into a few giant banks. To introduce more modern market-oriented banking techniques, accountability, and transparency in operations, foreign equity participation in some banks, both large and small, was encouraged. The government also set five principles of corporate restructuring: down-scoping to focus on core businesses, reduction of debt to equity ratios, dismantling of cross-credit guarantees among subsidiaries, management transparency, and greater management accountability. The government used three techniques to force the chaebols to comply with its directives: threats to undertake a comprehensive tax audit, the legal prosecution of family owners, and withdrawing credits to those debt-ridden firms. By focusing on their core-businesses, many chaebols managed to transform themselves into innovation-oriented organizations. Furthermore, down-scoping and down-sizing in chaebols and the recent promotion of venture businesses by the government prompted a major surge of high technology venture firms. The government also launched various programs to induce the private sector to set up formal R&D laboratories. Spurred partly by these programs and partly by increasing competition in the international market, domestic firms have assumed an increasingly larger role in the country's R&D efforts. Moreover, firms began globalizing their R&D activities, establishing international outposts to monitor technological change at the frontier, seek opportunities to develop strategic alliances with foreign firms, and develop the state-of-the-art products through advanced R&D. The government also implemented a program to transform a dozen of its leading universities into first-class research-oriented institutions (from being primarily undergraduate teaching institutions). In addition, leading universities have established technology parks and venture incubating centers as a means to establish joint research with leading firms and to foster technology-based small businesses spinning off from university R&D laboratories.

(Reaction) It is widely acknowledged that the Korean firms’ capacity to acquire and improve foreign technology (as opposed to mere utilization) has been key to Korea’s global competitiveness. But more than this, its extraordinary recovery from the 1997Asian crisis highlights another important success factor: an effective (i.e. possesses the political will to execute reforms) and efficient (i.e. lean, streamlined) government.

B. “The National Innovation Systems of Singapore and Malaysia”

(Summary) The evolution of the NIS of both countries can be summarized as the transformation from one that emphasized technology adoption, particularly the assimilation and diffusion of technology by leveraging inward MNC investments, to a more balanced approach that places more emphasis on indigenous innovation capability and the creation of local high technology firms. Initially, both countries relied upon foreign multinationals to drive technological development and innovative activity. Then, these countries developed into high-tech export platforms as foreign multinationals not only helped to stimulate economic growth but also provided benefits in the form of technology and knowledge spillovers. As both economies continue to grow more knowledge intensive, public policy is placing a greater emphasis on developing the infrastructure and human capital necessary to support domestic innovative capacity. This is characterized by expansion in both applied R&D and the shift towards high technology entrepreneurship and basic R&D with emphasis on indigenous technological innovation capabilities, the formation of local high tech start-ups and shift towards science-based industries. The governments of both countries also seek to establish their respective countries as global technology and innovation hubs. In line with this vision, Singapore and Malaysia, successfully developed science and high-tech parks in order to 1) raise the level of technological sophistication of local industries, through the promotion of industrial R&D; 2) promote foreign investments, especially in higher value-added activities; and 3) accelerate the transition from a labor intensive to a knowledge-intensive economy. In addition, both countries have taken proactive approaches to promote knowledge flows throughout their economies and throughout regional and global linkages with initiatives that facilitate the penetration of ICT across business, government and society at local, regional and international levels. Singapore’s government is also offering more postgraduate scholarships in the sciences with renewed emphasis on basic research to create the required human capital. Furthermore, its government is also making concerted efforts to attract foreign talent to supplement the local talent pool.

(Reaction) The Singaporean and Malaysian experience demonstrate an effective way to attract and more importantly, leverage the presence of multinational corporations in developing and transforming a country’s NIS. Their experience exhibits a specific instance of the virtuous cycle of innovation: MNC investments in R&D build the nation’s innovative capacity; the nation’s innovative capacity encourages MNCs to invest in R&D. The challenge lies in starting the cycle. Clearly, there has to be a critical mass in human capital (in terms of S&T know-how) and a coherent, long-term strategy to make the various elements work together.

2. NIS of Developing Countries in Asia

A. “National Innovation Systems in Less Successful Developing Countries: The Case of Thailand”

(Summary) The development level of NIS in Thailand does not link to its economic structural development level. The mismatch between the economic structural development and the development of NIS affected the competitiveness of the nation and partially contributed to economic crisis started in 1997. A study on Thailand’s NIS has also shown that its innovation system is not well organized, especially with respect to the macro-environment, innovation infrastructure, R&D and technology transfer and innovativeness and technology capability in the industrial sector. Though the economic performance of Thailand during the past 40 years has been rather impressive (particularly the growth of its manufacturing sector) and on the whole, it is similar to the East Asian NIEs (having transitioned from an agriculture-based economy to an industrial economy), several studies of Thai firms indicate that most firms have grown without deepening their technological capabilities in the long run, and their technological learning has been very slow and passive. Only a small minority of large subsidiaries of Transnational Corporations, large domestic firms and SMEs have capability in R&D, while the majority are still struggling with increasing their design and engineering capability. Furthermore, it has been noted that due to their short-term, commercial orientation (i.e. the desire for quick return), most Thai firms would rather use on off-the-shelf imported technology (mostly in the forms of machinery) than develop their own indigenous technological capabilities (for the long-term competitiveness). Another issue that has been observed in the Thai NIS is the lack of an explicit and coherent national innovation policy (i.e. policies to promote industrial technology development are not given high priority and not incorporated in industrial, trade, and investment policies.) Investment policy, especially the promotion of foreign direct investment (FDI), is used primarily for generating employment rather than to upgrade local technological capability. There is also no institutional and technical support for industrial technological capability development within firms, such as helping to solve their operational problems. Government fiscal and financial incentives are ineffective in stimulating private sector’s demand for investment in technology development. Training by government institutions also fails to upgrade technical expertise of firms’ employees to higher end (since its main concern is employment, not technological development.) Thai universities have also been noted of their weak research culture and capabilities. Within this limited research capacity, the amount of research that has industrial relevance has been even more limited. The number of Ph.D. and Master-degree graduates in science and engineering per year is also very low. The linkages among the actors of the Thai NIS are also generally weak and fragmented (i.e. weak users-producers linkages, weak co-operation between firms in the same and related industries, low technological spill-overs from TNCs, weak industry-university link.) These weaknesses in Thailand's NIS are cited as the primary reasons to the decline in its competitiveness and eventual collapse of its economy during the 1997 Asian financial crisis.

(Reaction) Thailand’s experience shows that economic liberation alone does not guarantee sustainable economic development. On the contrary, it can lead to economic collapse if the nation’s underlying NIS is not mature or strong enough to support such an economic structure and enable it to effectively compete in the global market. The key here is not merely the possession of specific technologies (which will do until they become obsolete) but the capacity to innovate (which is determined by the state of its NIS).

B. “The Philippine National Innovation System: Structure and Characteristics”

(Summary) The Philippine NIS is characterized by the lack of private-sector participation in R&D as manifested by the lack of interest in availing of R&D-related incentives. Few are undertaking R&D because of the following reasons: 1) the uncertainty, risk, and high cost that accompany R&D investments; 2) lack of capability to do in-house R&D due to the limited number of technical personnel that can understand, adapt, modify, assimilate, disseminate and improve on imported technologies; and, 3) non-R&D incentives are more generous and have a capital-using bias compared to the existing R&D incentives. This attitude towards R&D could be partly attributed to the investors' short-sightedness (i.e. motivated by short-term gains) and lack of interest or understanding of the long-term opportunities and needs of their industries and partially to the high cost of capital that forces companies to have a short-term horizon. Despite the fact that the bulk of R&D expenditures and personnel comes from the public sector, it has been pointed out that the link between government and the private sector in terms of R&D activities is rather weak as manifested in the absence of respectable databases and technology information system. Flexibility, accountability, incentives, and fiscal autonomy to create opportunities for cooperative research with the private sector, or with the universities have also been noted to be absent from government R&D institutes. It has also been observed that despite the knowledge that broader training for workers increases flexibility, improves productivity, and reduces coordination costs, firms are still reluctant to invest in extensive training because of the mobility of workers who might bring the newly acquired skills to competitors. It is suggested that the Philippines should adopt a catch-up innovation system to address technological capability-building needs of local firms and industries. The thrust of the Philippine NIS must be the establishment of institutions and the promotion of institutional innovations that build the capability to monitor, choose, adopt, disseminate and modify existing stock of knowledge. Furthermore, the private sector must be willing to respond to opportunities open to them, start unfamiliar businesses, and assimilate new techniques. A dynamic venture capital market will provide a strong support for managers and companies to pursue such opportunities. The government should also: 1) encourage public-private partnerships for job training, 2) ensure that the educational and technical training system can produce a large number of quality scientists, engineers, managers, technicians, and skilled workers to aid the diffusion, absorption, and utilization of advanced scientific and engineering knowledge; and, 3) facilitate university-industry collaboration to address competitiveness, economic growth, and sustainability goals.

(Reaction) The human capital needed to cultivate a successful NIS has two equally important dimensions / domains that must work together: 1) science and technology; and, 2) business and entrepreneurship. What we need are individuals that are knowledgeable or at least appreciate the importance of both domains and institutions that will facilitate the integration of the two.