Innovation Complementarities, Management Quality and Export Composition

Innovation Complementarities, Management Quality and Export Composition W. F. Maloney Research Department, World Bank Ankara, December 2013 https://openknowledge.worldbank.org/handle/10986/9371

Ancient Latin American Growth Mystery I: Same Good, Different Outcomes Copper in Chile, 1870-1950: Production and % of World Production 45 40 35 30 25 20 15 10 5 0 Introduction of New Foreign Technologies 1870 1880 1890 1900 1910 1920 1930 1940 1950 % Prod. Mundial Production 5000 4000 3000 2000 1000 0

Ancient LA Growth Mystery II: Same Business Climate, Different Outcomes Percentage of Firms Managed by Immigrants Country Year % Immigrant Directors/Owners Argentina 1900 80 Chile 1880 70 Colombia(Baranquilla) 1888 60 Mexico 1935 50 Source: Maloney 2013

Structure of the Presentation Part I: Export Composition: is this the missing ingredient? Part II: Innovation: the critical agenda Part III: Management quality as a missing complement

Export Composition-is this the critical ingredient?

Why might standard price signals be deceptive in choosing goods Marshallian externalities related to goods local industry-level knowledge spillovers, input-output linkages, and labor pooling. Volatility externalities: Export diversification? Intervention warranted to shift to good with externalities against price signals.

Empirical concerns of policy makers about export composition 1. Yes, Externalities dictate that market will not generate optimal basket 2. How do we measure these externalities? 3. Doesn t the whole world see the same benefit and drive the price down? (GE) Interindustry spillovers, assymetries Should we look for safe rents, too? Natural Resources More generally, must think of demand side as well 4. Do externalities necessarily come with a good, or does it matter how we produce it? Heterogeneity, Heterogeneity, Heterogeneity

In practice, measurement of MEs is difficult, so we take shortcuts Natural resources Low productivity (Smith, Matsuyama, Sachs), few Externalities Rent seeking High productivity goods Rich Country Goods (Rodrik, Hausmann) High tech (Lall) high inter-industry MEs

CURSED GOODS: NATURAL RESOURCES

Empirically, there is no resource curse In growth regressions Minerals are good: Davis (1995), Sala-i-Martin et al. (2004), Stijns (2005), Brunnschweiler(2008, 2009) Conditional on education (above 2 years of schooling): Bravo-Ortega & De Gregorio (2007) Existing resource curse findings fragile: Lederman & Maloney (2007, 2008) [Also, Jacob Viner and Douglass North years ago ]

There is lots of heterogeneity in experiences with NR Log GDP per capita 1990 10 9 8 7 United S Switzerl Hong Kon Japan Germany France United K Italy Austria Israel Spain Cyprus Greece Korea, R Cape Ver Poland Mauritiu Hungary Turkey Jordan Panama Tunisia Fiji Morocco Egypt, A El Sri Salva Lank Philippi Pakistan Banglade Senegal India Benin Gambia, Mozambiq Guinea-B Leamer Measure: Net Exports of NR/Worker Burkina Sudan Mali China Canada Sweden Norway Denmark Finland Australi Iceland Netherla New Zeal Ireland Mexico Venezuel Malaysia Syrian A Uruguay Argentin Brazil Iran, Chile Is Gabon ThailandColombia South Costa Af Ri Algeria Ecuador Jamaica Congo, Guatemal D DominicaParaguay Peru Indonesi Bolivia Nicaragu Honduras Cameroon Papua Cote d'i Ne Zimbabwe Kenya Nigeria Sierra L Ghana Guyana Rwanda Guinea Mauritan Madagasc Zambia Togo Comoros Burundi Uganda Malawi Chad 6 Maloney 2007-11.5041 11.7949 Log Natural Resources (Leamer) Resource Scarce Resource Abundant

Treescan beveryhightech! Innovationpolicyiskey 12/23/2013 Nokia: Site of an early pulp mill in Finland Learn how to learn

HIGH PRODUCTIVITY GOODS

Does It Matter What We Export? Hausmann, Hwang, Rodrik(2007) Model- broadly inter-industry spillover Country should produce the highest productivity good within its CA Empirics: PRODY= avg. income of countries producing good EXPY= income value of our export basket Similar to Lall(2000) Find higher EXPY correlated with higher growth.

Caveats GE critique again? Rents- higher where rich countries already are? Not generally the case-nokia and TVs If easy to move into these goods, then barriers to entry/rents low Empirical findings muddy Animals, electrical machinery same PRODY

Again, high degree of heterogeneity 35000 PRODYs (with +/- 1 SD*) 30000 25000 20000 15000 10000 5000 0

Empirically, some support for MODEL Base: HHR Regressions Growth Regressions Including the Export Herfindahl and the Investment Share With Income Average Value Including the Export Herfindahl and the Investment Share IV GMM IV GMM IV GMM IV GMM Log ( initial gdp) -0.0382*** -0.0203** -0.0414* -0.0177-0.0166* -0.0177-0.028 0.0215 (0.01) (0.01) (0.02) (0.01) (0.01) (0.04) (0.02) (0.03) Log (expy) 0.0925*** 0.0532** 0.107-0.00687 0.102*** 0.0504** 0.124 0.00275 (0.02) (0.02) (0.07) (0.03) (0.02) (0.02) (0.08) (0.03) Category Log (expy) -0.0577*** -0.00566-0.0431-0.119 (0.02) (0.10) (0.03) (0.08) Log (primary schooling) 0.00468* 0.00565 0.00271 0.0101 0.00394 0.00582 0.00207 0.00958 (0.00) (0.01) (0.00) (0.01) (0.00) (0.01) (0.00) (0.01) Log (Investment Share) 0.0111* 0.0360** 0.00935 0.0566*** (0.01) (0.02) (0.01) (0.02) Root Herfindal Index 0.0551-0.0381 0.0615-0.0283 (0.06) (0.04) (0.06) (0.04) Constant -0.426*** -0.250* -0.572 0.14-0.186* -0.199-0.449 0.699 (0.10) (0.13) (0.44) (0.18) (0.10) (0.47) (0.40) (0.46) Observations 285 285 285 285 285 285 285 285 Number of wbgroup 75 75 75 75 Regressions include decade dummies Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

1b. A digression on Monkeys Being a tree in a dense area is like a ME with same GE concerns If easy to jump from one tree to others, then easy to jump to, i.e, no barriers to entry and rents Is past a good predictor? iphone didn t exist, Saab already does Would Chilean forestry produce Saab?

IS IT WHAT WE PRODUCE, OR HOW? BEYOND GOODS

IsHigh TechNecessarilyHigh Tech? CAI=1 Fuente: Lederman and Maloney (2012)

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Heterogeneity in product quality is also huge (relative unit values, standardized) Krishna and Maloney 2011

Quality ladders by product and countries (relative unit values, standardized)

Export Quality Growth Krishna and Maloney 2011

Growth in Quality Driven by Both What and How Source: Krishna and Maloney 2011

GOODS OR TASKS

Goods or Tasks: Does China really export the ipod? Table 2 China: 10 Exports with the Lowest Domestic Value Added Electronic computer 4.6 Telecommunication equipment 14.9 Cultural and office equipment 19.1 Other computer peripheral equipment 19.7 Electronic element and device 22.2 Radio, television, and communication equipment 35.5 Household electric appliances 37.2 Plastic products 37.4 Generators 39.6 Instruments, meters and other measuring equipment 42.2 China: 10 Exports with the Highest Domestic Value Added Agriculture, forestry, animal husbandry and fishing machinery 81.8 Hemp textiles 82.7 Metalworking machinery 83.4 Steel pressing 83.4 Pottery, china and earthenware 83.4 Chemical fertilizers 84.0 Fireproof materials 84.7 Cement, lime and plaster 86.4 Other non-metallic mineral products 86.4 Coking 91.6..the electronic components we make in Singapore require less skill than that required by barbers or cooks, involving mostly repetitive manual operations Goh Keng Swee, Minister of Finance Singapore (1972) Source: Koopmans, Wang, and Wei (2008).

Innovation: The Critical Agenda

Weak innovative capacity meant LA missed the 2nd Industrial Revolution Innovative Capacity vs Income 1900 Source: Maloney y Valencia (2013)

Current literature focusing on R&D is not credible... Estimated returns to R&D are very high US firm level/industry data-social returns Grillichesand Lichtenberg (1984) 71% Terleckyj1980, Scherer (1982 ) >100% Griffith, Redding, Van Reenen(2004) 57% Jones and Williams (1998) 28% X country Coe and Helpman(1995) G7 123% Van Pottlesbergheand Lichtenberg (2001) G7 68% And imply social rates of return far above private Jones and Williams (1998): US should quadruple investment in RD

and get higher with distance from the frontier Two Faces of R&D (Cohen and Levinthal1989) Invention Learning\Catch-up Poor countries should have much greater returns Griffith, Redding, Van Reenen(2004) Dist. Frontier RoRR&D USA -.18 57% UK -.53 77% Italy -.73 88% What should the rate of return be for Korea (-1.33), Malaysia (-2.28), Turkey (-2.5), Indonesia (-3.74)? 200%? 300%?

But poor countries do generally less R&D than rich countries Why? R&D/GDP vs Level of Development R & D GDP = β 1 GDP CAP GDP + β 2 CAP 2

InnovationSuperstars? 5.0% R & D GDP = β 1 GDP CAP 2 GDP + β 2 CAP 4.5% Predicted & Observed R&D/GDP 4.0% Israel 3.5% Finland 3.0% 2.5% Korea 2.0% 1.5% China 1.0% India 0.5% Argentina Mexico 0.0% 4 5 6 7 8 9 10 11 Log GDP per Capita Source: Goni, Lederman, Maloney 2006

Rates of Return suggest missing complementary factors 4,0 EGY(1981-1985) IDN(1996-2000) BOL(1996-2000) ECU(1976-1980) COL(1976-1980) COL(1981-1985) ECU(1996-2000) JOR(1981-1985) TUR(1976-1980) GTM(1986-1990) ROM(1991-1995) TUN(1996-2000) KOR(1971-1975) ROM(1996-2000) PER(1976-1980) SLV(1991-1995) SLV(1996-2000) PER(1996-2000) THA(1996-2000) CHL(1981-1985) MUS(1986-1990) BRA(1976-1980) CRI(1976-1980) JOR(1986-1990) HUN(1976-1980) TUR(1996-2000) JAM(1986-1990) MYS(1991-1995) PAN(1991-1995) ZAF(1991-1995) MEX(1971-1975) BRA(1996-2000) POL(1996-2000) CRI(1996-2000) URY(1971-1975) HUN(1996-2000) MYS(1996-2000) ZAF(1986-1990) PRT(1976-1980) CHL(1996-2000) VEN(1996-2000) MEX(1996-2000) VEN(1976-1980) IRL(1976-1980) GRC(1981-1985) ARG(1996-2000) ESP(1976-1980) ITA(1971-1975) NZL(1976-1980) ISR(1971-1975) PRT(1996-2000) GRC(1996-2000) KOR(1996-2000) BEL(1971-1975) FIN(1971-1975) FRA(1971-1975) AUS(1976-1980) AUT(1976-1980) GBR(1976-1980) ESP(1996-2000) NZL(1996-2000) NLD(1976-1980) NOR(1971-1975) ISL(1971-1975) SWE(1971-1975) USA(1971-1975) JPN(1971-1975) DNK(1976-1980) ITA(1996-2000) FRA(1996-2000) AUS(1996-2000) GBR(1996-2000) FIN(1996-2000) DEU(1996-2000) NLD(1996-2000) AUT(1996-2000) SWE(1996-2000) CHE(1971-1975) ISL(1996-2000) DNK(1996-2000) USA(1996-200 CHE(1996-2000) 00) NOR(1996-2000) JPN(1996-2000) PHL(1971-1975) CHN(1996-2000) THA(1981-1985) URY(1996-2000) ARG(1971-1975) 3,0 2,0 1,0 0,0 PHL(1991-1995) GTM(1971-1975) EGY(1996-2000) Retirns to R& &D -1,0-2,0-3,0-4,0-4,0-3,5-3,0-2,5 Distance to the -2,0 economic frontier -1,5-1,0-0,5 0,0 Source: Goni and Maloney 2012

Innovation supply Universities/ Think tanks/cts Barriers to Innovation Market Failures (&IP) Seed/Venture capital Poorly articulated S&T system (including discovery, oversight) Labor regulation Deficient human capital Innovation Ecosystem Accumulation K A Barriers to Accumulation Credit Entry/Exit barriers Business/Regulatory Climate Demand Side The firm Barriers to Demand Macro Context Trade Regime International Marketing Externalities Competitive Structure Entrepreneurship

Perceived Quality of Research Institutions 7,0 Quality 6,0 5,0 4,0 3,0 UGA IND SEN CHN IDN EGY ECU TUN ROM PER CHE ISR GBR SWE BEL USA NLD AUS DEU JPN HUN DNK IRLCAN PRT NZL FIN AUT FRA ISL MYS CRI KOR NOR POL MEX BRA CHL ARG ESP URY ITA PAN TUR GRC VEN 2,0 SLV 1,0 0,0-5,5-5,0-4,5-4,0-3,5-3,0-2,5-2,0-1,5-1,0-0,5 0,0 Distance to the economic frontier (1996-2000)

University-Industry Collaboration 7,0 Collaboratio on 6,0 5,0 4,0 3,0 2,0 UGA IND SEN CHN IDN ECU EGY TUN PER SLV ROM CRI BRA TUR MYS PAN POL HUN CHL MEX URY VEN ARG KOR PRT GRC NZL ESP SWE CHE GBR FIN ISR NLD AUS CAN BEL DEU DNK USA JPN IRL ISL AUT NOR FRA ITA 1,0 0,0-5,5-5,0-4,5-4,0-3,5-3,0-2,5-2,0-1,5-1,0-0,5 0,0 Distance to the economic frontier (1996-2000)

Business Share in R&D 90,0 80,0 GERD-performed by Business enterprise % (year=2000) 70,0 60,0 50,0 40,0 30,0 20,0 10,0 IND CHN IDN ROM TUN PER TUR BRA CRI MYS HUN POL MEX URY ARG PRT KOR ESP ISR USA BEL CHE IRL FIN DEU GBR JPN FRA CAN ISL NLD AUS ITA 0,0-5,5-5,0-4,5-4,0-3,5-3,0-2,5-2,0-1,5-1,0-0,5 0,0 Distance to the economic frontier (1996-2000)

Managing Risky Ventures Return Krishna and Maloney 2011 Risk

Ability to manage risk Export Quality Growth and Risk Krishna and Maloney 2011

So, China: WasteorWisdom? 5.0% 4.5% R & D GDP = β 1 GDP CAP 2 GDP + β 2 CAP Predicted & Observed R&D/GDP 4.0% Israel 3.5% Finland 3.0% 2.5% Korea 2.0% 1.5% China 1.0% India 0.5% Argentina Mexico 0.0% 4 5 6 7 8 9 10 11 Log GDP per Capita

Who s doing R&D? Patents granted by the USPTO to inventors based in China Branstetter 2012

China differs from Taiwan and Korea in the composition of their innovation surges Branstetter (2012)

Pros and Cons MNCs providing eco-system: complementary factors Most patents owned by MNCs 50% are co-patented But will it maintain an autonomous innovative capacity?

Management Quality: A Missing Complement?

Management Quality and Productivity Log of Sale es/employees 2 3 4 5 6 India Greece Argentina Brazil China Italy France Great Britain Portugal Northern Ireland Poland Mexico Sweden Japan Germany US 2.6 2.8 3 3.2 3.4 Overall Management Scores. Bloom and Van Reenen (2010) Sarrias and Maloney (2013)

Management Quality and Productivity Log of Sales/Em mployees 2 3 4 5 6 Colombia India Greece Chile Argentina Brazil China Italy France Great Britain Portugal Northern Ireland Poland Mexico Sweden Japan Germany US 2.6 2.8 3 3.2 3.4 Overall Management Scores. Fuente: Bloom et al. 2010+LAC, Sarrias and Maloney (2013)

China: Unprepared for indigenous Innovation Source: Maloney 2013

Convergence to the management frontier-not just more competition Source: Maloney and Sarrias 2013

Direct interventions in management quality? Japan, Korea, Singapore: All employed management promotion programs for SMEs Korea: The Small and Medium Industries Promotion program Singapore: Local Industry Upgrading Program (LIUP) India Colombia Lays the foundation for progressively more adoption and invention of new technologies.

India-Successful Management Intervention Share of key textile management practices adopted.5.6.2.3.4 Treatment plants ( ) Control plants ( ) 11% productividad d -10-8 -6-4 -2 0 2 4 6 8 10 12 Months after the diagnostic phase Source: Bloom, et al 2013

Colombia Technological Extension pilot-autoparts RCT 180 firms Individual company intervention Group intervention- Lower cost, more dynamism? Current plans to scale up to whole sector

Thank You

Distribution relative to the US Decomposition: Manager having a degree, important. Otherwise? Sarrias and Maloney (2012

Do Chinese managers know what they don t know? Self Percieved vs. Actual Management Ability Sarrias and Maloney (2012