IS-102 SEMINAR-01

Professor Luc Soete will inaugurate the Innovation Systems-102 series on 8th October, 2021. The session will be chaired by Yemisi Abisuga. In the opening session of IS-102 series Alexis Habiyaremye will present his paper Enhancing productive capabilities through intra-regional trade and cross-border investments in Southern Africa. The paper will be discussed by Luc Soete, Abiodun Egbetokun and Nanditha Mathew.

Programme

• Intro to the series: 5 minutes by the organising secretary
• Inaugural address by Professor Luc Soete: 20 minutes
• Presentation by Alexis Habiyaremye: 30 minutes
• Discussion Prof. Luc Soete: 20 minutes
• Discussion by Abiodun Egbetokun : 20 minutes
• Open discussion and Q&A: 25 minutes
• Total: 2 hours

Abstract of the paper

This study was aimed to empirically analyse technological learning and catch-up mediated by geographical proximity for the case of Botswana and South Africa. The study had two main objectives:

1: estimate the effects of three channels of cross-border knowledge and resource flows (imports of capital goods, licensing of disembodied technological knowledge and equity investments) on manufacturing productivity in the technological follower

2: analyse the corresponding skills intensity dynamics with the Hunt & Tybout (1999) technological sophistication model.

Findings:

1. Manufacturing productivity growth effects estimated with firm-level panel data covering the period 1985-2013 indicate an increase in productivity in periods following the year of importation of capital goods (with lags between 1 and 2 years). Skills intensification and technology licensing lead to a productivity increase in the same period.

2. The analysis of technology sophistication reveals a shift in skills intensity mainly driven by upgrading in existing firms within each of the considered industries rather than an intra-industry shift towards more technology intensive firms or a shift towards more technologically sophisticated industries. Entry of new firms contributed a marginal increase in the level of skills intensity over the considered period.

Lessons from this research:

1-Knowledge is a weightless production factor that can spread across national borders through various channels, including trade and investment flows acting as vectors of embodied and disembodied technological knowledge as well as management knowhow and practices (Barba Navaretti & Soloaga, 2001).

2-In a developing country setting, learning within existing firms remains the strongest source of productivity growth and development (Edquist, 2001).

3-Geographical proximity matters: most learning in Botswana’s manufacturing sector comes from its interactions with its more technologically advanced southern neighbour. Incentive systems and government support are still essential for fostering external technology absorption.

4-The Lucas/Krugman/Stokey/Young (LKSY) argument suggesting that growth is accomplished by concentrating resources in industries whose production processes induce learning and knowledge spillovers does not appear to be supported in Botswana’s growth trajectory.

These results suggest that in the development process, technological followers should gear their industrial policy and NIS to take full advantage of geographical proximity with more technologically advanced neighbours. Intensification of human capital inputs is necessary to speed up the mastering of externally developed technologies.

The central theory in this research was the argument that the tacit nature of technological knowledge often renders face-to-face interactions a necessity for technology to diffuse because knowledge circulates best locally (Marshall, 1898; Pouder & John, 1996; Kesidou & Szirmai, 2008). Geographical proximity is therefore important for technological learning as it reduces the barriers to face-to face interactions between firms involved in technological learning, facilitates trust building between them and therefore enables a more rapid knowledge diffusion (Bruneel et al., 2010, Belderbos et al., 2021). The advantages of proximity are especially important for innovation diffusion in clusters that rely mainly on tacit knowledge and constitutes an important rationale for regional innovation systems (Marshall, 1898; Pouder and John, 1996; Asheim and Coenen, 2005, Iammarino, 2005; Kramer et al., 2011).

Differences in technological development between countries with geographical proximity create a potential for cross-border interactions that can channel technological knowledge and stimulate catch-up industrialisation in the less technologically advanced neighbour. Here, the notion of cross-border regional innovation systems becomes key to understanding the dynamics of corresponding knowledge flows.(Makkonen & Rohde, 2016). For cross-border knowledge flows to be successful in supporting regional innovation, supportive regional policies play an important role (Belussi et al., 2010).

It is through such cross-border interactions that tacit knowledge can be translated into explicit, usable new knowledge that increases manufacturing productivity and skills intensity in the technological follower. Our study used the example of technological and investment flows between Botswana (mainly diamond dependent) and its southern neighbour South Africa to analyse how such interactions affect productivity and skills intensity in a sample of 340 manufacturing firms based in Botswana.

Theoretical arguments in support of manufacturing productivity growth generated by cross-border knowledge flows in a regional setting are derived from the application of the regional innovation system (RIS) approach, (Iammarino, 2005, Asheim & Coenen, 2005), which is derived from the concept on National Innovation Systems (Lundvall, 1985;1992; Freeman, 1988, etc.). The national system of innovation is a complex, integrated system involving multiple interconnected actors and institutions for the deployment of human capital, infrastructures, resources, and incentives, in order to translate new knowledge and innovations into economically viable products (goods and services) or processes. According to this framework, productivity growth in the technological follower is the result of technological learning and the successful adoption of externally produced technologies. As stressed by Cohen and Levinthal (1990), Benhabib and Spiegel (2005) and Criscuolo and Narula (2008) among others, the amount and degree of sophistication of technologies that technological followers can adopt and efficiently utilise, depend among others, on their supply of technical and managerial skills and the intensity of their interactions with technologically more advanced countries. This is why development scholars have emphasised the accumulation of absorptive capacity by developing nations as being crucial to their ability to acquire, learn, and implement the technologies and associated practices already in use in developed countries (e.g. Dahlman & Nelson, 1995; Edquist, 2001; Lundvall & Lema, 2014; Fagerberg & Srholec, 2008)). For the catch-up process to be successful, learning capacity must be built early in the development process (Edquist, 2001; OECD, 2012; Lundval & Lema, 2014). In the NIS framework, learning capacity must be supported by a commensurate incentive system and be anchored in a conducive institutional setting.

Because of contextual and institutional differences between the innovation system of the developed and developing countries, it has been argued that developing countries need their own specific approach to NSI (Edquist, 2001; Juma et al., 2001). One of the arguments in favour of specific approach to NSI in developing countries is that it cannot be aligned simply with neoclassical theories of growth as highlighted by Lundvall (1997). This has led Edquist (2001) to propose the concept of systems of innovation for development (SID), which is more suited to the context of developing countries, with more emphasis on small incremental innovations and diffusions rather than on radical innovations at the technological frontier.

Research questions were conceived as components of an empirical examination of the effects of geographical proximity on knowledge flows between two developing countries with differences in levels of technological development: South Africa and Botswana.

Literature

Our literature survey sought to identify and synthesize the main arguments supporting/contradicting the role of knowledge flows and geographical proximity for technological catch-up in the context of a developing country. Due attention was given to the role of regional innovation systems in facilitating tacit knowledge transmission. The literature on National Systems of Innovation and technological learning (appropriate to the context of developing countries) was equally surveyed to provide the necessary context within which interactions between various state and non-state actors, firms and institutions, facilitate external technology adoption. The aim of that review was to shed light on the different mechanisms through which the ensuing accumulation of technological knowledge and capabilities leads to productivity growth and shifts in technological sophistication.

Next, the literature on the technology sophistication models (the so-called LKSY hypothesis) was surveyed to provide the ground for the skills intensity decomposition in Botswana’s manufacturing sector according to the Hunt and Tybout (1999) technology sophistication framework. Finally, as a background to the empirical analysis, the arguments from the literature on the relationship between trade and productivity spillovers in the importing economy were equally presented.

Methodology

Our empirical was aimed to estimating the outcome of technological learning in Botswana’s manufacturing sector (based on an augmented production function) as well as the corresponding shifts in skills intensity (using the Hunt & Tybout (1999) technological sophistication framework). Knowledge flows are measured along three transmission channels: capital goods imports (embodied technological knowledge), cross-border equity investments (know-how and financial resources) and technology licensing (disembodied knowledge flows). The technology sophistication analysis covers the intra-industry skills upgrading, the intra-industry shift to more technology intensive firms and the entry of new firms with a shift to more skills-intensive industrial sectors.

These effects were estimated with firm-level panel data covering the period 1991-2013 using the system GMM estimator (with heteroskedasticity and autocorrelation correction). Firm level panel data analysis is the best way to test the hypotheses the effects of knowledge flows since learning and productivity growth take place at the firm level and may vary over time. Panel data therefore enable to capture bot cross sectional variations (differences between firms) and longitudinal shifts. The system GMM estimator was chosen because of its ability to reduces the finite sample bias in standard errors, especially given the relatively short time span of the period covered by our data (24 years) (Arelano and Bover, 1995, Blundel and Bond, 1998, Blundel et al., 2000; Roodman, 2006).

Skills intensity shifts were decomposed into variations due to a general increase in skills across industries and the shift attributable to the LKSY dynamics and analysed by tabulation of their descriptive statistics according to observed variations in the manufacturing sector over the relevant period.

Data collection process

The firm-level data used in this analysis are based on the data files compiled by the author from the records of the Enterprises and Establishments Register (EER) and Botswana Exporters and Manufacturing Association (BEMA) as of June 2014 and the survey conducted among manufacturing firms between May and August 2014. The data collection process posed considerable challenges as it requires visits on the ground to access various databases and conduct survey that enabled us to create records of firm-specific characteristics regarding capital equipment import, employee skills levels, equity ownership structure, and manufacturing value added. Capital import data had to be cross-checked with the data from records of the Botswana Statistical Office and UNCTAD’s Comtrade database.

Making the necessary logistical arrangements and scheduling appointments for interviews with firm managers are two of the most challenging aspects of field research. Success demands a lot of patience, rescheduling, intercultural communication skills and project management skills.

Advice to aspiring researchers from the Global South: Appraising and documenting evidence of developmental challenges confronting most countries in the Global South is crucial to enabling policy makers to devise appropriate solutions. Because of data scarcity in many instances of global south, empirical data collection remains one of the most reliable avenues to establish the needed evidence but requires overcoming multiple challenges. I encourage aspiring researcher to be perseverant in their quest for reliable data. Without reliable data to provide evidence-based recommendation, some countries in the Global South may continue to grapple with limited capacity to accurately appraise the dynamics of their development obstacles and how to overcome them.

Biographical notes:

Luc Soete graduated in economics from Ghent University, Belgium. He obtained a DPhil in economics from Sussex University where he worked as senior research fellow at the Science Policy Research Unit in the late 70’s and 80’s. From 1984 till 1985 he was visiting associate professor at the Department of Economics at Stanford University, USA. In 1986 he joined the new Faculty of Economics and Business Administration (now called the School of Business and Economics) at Maastricht University as professor of International Economics Relations. In 1988 he set up the research institute MERIT (Maastricht Economic Research centre on Innovation and Technology) which merged under his direction in 2005 with UNU-INTECH to become UNU-MERIT. In 2010 he became Director-Dean of the Maastricht Graduate School of Governance of Maastricht University. He is a member of the Board of the Maastricht School of Management (MSM) and the Belgian media company Concentra.

Over the last 30 years, Luc Soete has contributed as (co-)author and (co-)editor to some 11 books, 50 refereed articles and some 100 chapters in books. In 2002, he received the MSM  Honorary Fellow Award, in 2007 the Belgian reward Commandeur in de Kroonorde and in 2010 a Doctor Honoris Causa from his Alma Mater, the University of Ghent.

Alexis Habiyaremye is an Associate Professor at the School of Economics of the  University of Johannesburg. He is the Senior Researcher at the DST/NRF SARChI Chair in Industrial Development. He worked previously as an Adjunct Professor of Political Science at the University of Waterloo  and Antalya International University. He has published extensively in the areas of innovation, export diversification, natural resource dependence, structural transformation and Sino-American geostrategic rivalry. Dr Habiyaremye studied Civil Engineering at the Royal Military Academy of Belgium  and obtained his PhD in the Economics and Policy Studies of Technical Change from UNU-MERIT, Maastricht University

Abiodun Egbetokun is an economist with a rich multidisciplinary background, is one of Nigeria's highest rated economists on IDEAS. His PhD in Economics complements a BSc in Mechanical Engineering and an MSc in Technology Management. He is currently Assistant Director, Research at the National Centre for Technology Management (NACETEM), Nigeria. His research focuses on understanding the microeconomic factors that shape the emergence, evolution and economic impact of entrepreneurship and innovation. He is a former President of the Nigerian Young Academy, a group of Nigeria’s leading young researchers and academics.  He has been a visiting researcher at some of the world's best research clusters on innovation and entrepreneurship, including ODID, UNU-MERIT and CeSTII. His research has received funding from the DFG, DAAD, DFID (now FCDO), ESRC, GDN, NEPAD, the World Bank and others. He tweets @egbetokun and blogs at www.egbetokun.com/blogs.

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Nanditha Mathew: Nanditha Mathew joined UNU-MERIT in November 2018. She is from India and obtained her PhD in Economics from the University of Pisa in 2016. Before joining UNU-MERIT, she was a Post-doctoral fellow at the Sant'Anna School of Advanced Studies in Pisa and at the National Research Council (CNR) of Italy (in Florence). In the past years, Nanditha has done consulting work for the Asian Development Bank (ADB), United Nations Economic Commission for Latin America and the Caribbean (UN-ECLAC) and MEFOP in Rome. [https://www.merit.unu.edu/about-us/profile/?staff_id=3567]

Oluwayemisi Adebola Oyekunle is Associate Researcher at Central University of Technology. Dr Oluwayemisi Adebola Oyekunle has worked as a lecturer and researcher for the past twenty-five years. The focus of her work lies on the arts, cultural and creative industries, cultural policy, indigenous knowledge, SMEs, entrepreneurship, and marketing. She is also the founder and CEO of the “Good Reward Foundation”, an organisation that trains and empowers young people and women in fashion design, textile production, and crafts making.

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