Transcript File
Hello, I’m Bruce Edwards and welcome to this podcast produced by
the International Monetary Fund. In this program: World Bank economist, William
Maloney, tells us why developing countries would do well to take advantage of
recent innovations and tap in to the massive stock of global know-how.
MR. MALONEY [soundbite]:
We should see developing country firms
being extremely aggressive at adopting these technologies and investing in R&D,
and we should see governments thinking basically about nothing else—and we see
neither.
MR. EDWARDS:
We hear a lot about how technology is reshaping economies around the world. But,
a recent book published by the World Bank suggests developing countries are
missing out on a huge opportunity. Maloney
says the potential returns on investment into research and development by
developing countries are astounding and could dwarf international aid flows. Yet,
developing country firms and governments invest very little toward realizing
this potential.
William Maloney is Chief Economist for Equitable Growth, Finance
and Institutions in the World Bank Group, and co-author of The Innovation Paradox.
He was a guest lecturer at the IMF’s Developing Economies Seminar Series.
Describe to me, the innovation paradox that you refer to in your
research, as compared to, perhaps, the productivity paradox that we’ve been
hearing about.
MR. MALONEY:
So, these are different animals. The productivity
paradox arises from the fact that we’ve had all these huge advances in
information and telecommunications technology and we see that everywhere except
in the productivity numbers. So, that’s the productivity paradox. The innovation paradox is that rates of
return to investments and innovation of various different kinds appear to be
extremely high, much higher for poor countries than for rich countries, yet we
see a much smaller effort in these areas.
So, how do we get poor countries to adopt the technologies that
now exist in the advanced countries which can raise their productivity? It’s
not about inventing new things, it’s about the ability of countries to identify
ideas that could work to bring them to their countries, to adapt them, and to
generate growth with them.
MR. EDWARDS:
And, are they managing to do that?
MR. MALONEY:
No. This is exactly the paradox that we’re talking about in the book. If you
actually think that, more or less, half of growth is productivity growth—total
factor productivity—and somewhere around half of that is within firm improvements
in productivity, then we’re talking enormous amounts of money that dwarf
foreign aid flows of any kind. And, hence, we would think that countries would
be narrowly focused on exactly the search for new technologies and increasing
the productivity of the private sector. But, by every measure that we look at,
that's not the case.
MR. EDWARDS:
So, generally the amount on average a country might put towards research and
development, does it vary a lot between advanced economies and developing ones?
MR. MALONEY:
Hugely. Your average rich country will spend somewhere around 2 and 4 percent
of GDP on research and development. Your poorest countries will spend close to
nothing. So, for instance, in many Latin American countries you'll find it’s .1
or .2 percent of GDP, whereas in Korea, for instance, it’s somewhere between 3
and 4 percent. You could say, okay, but that’s higher order spending, that’s
including invention, which it does. It also includes adoption of technologies. But,
even if we look at other measures of technological adoption, for instance,
purchasing of existing licenses to use technologies abroad, that also increases
with GDP. So, poor countries are spending very little on adopting existing
technologies through that channel.
And, there is another dimension that we focus on which is what
we call “managerial technologies.” You can think of adopting good managing
practices as a kind of importing of best practice technologies from abroad. You
can say, well what are we talking about here? Well, do you have a good set of
accounts? Do you have capacity or systems set up to take a longer run view on
where your firm should be? Do you have staff that can help you get there? If
you’re actually thinking about doing any sort of innovation, do you have a
human resources policy that will help you staff that plan? And in all of this,
do you have established feedback loops to ensure that you’re getting where you
want to go? Very well managed companies have all of those things. We find,
again, that most poor countries have very weak managerial practices. Hence,
they don’t have the capability to identify new technologies.
MR. EDWARDS:
But, what kind of rates of return are we talking about?
MR. MALONEY:
So, in the advanced countries, let’s say the US and Spain—those are the countries
for which we have the best estimates to date—they are somewhere between 30 to
45 percent. This is social rates of return, meaning it doesn’t necessarily accrue
to the person doing it, it’s to society as a whole. If you believe these
results, and I think we should, the United States should probably be investing
twice what it does in R&D [research and development].
The second part of this little puzzle though, is that an
influential paper several years ago showed that as you get further from the technological
frontier within Europe, within the OECD …
MR. EDWARDS: What
do you mean by the technological frontier?
MR. MALONEY: So,
the countries that are most technologically advanced, let’s say. As you get
further and further from there, the potential for adopting new technologies and
moving really quickly ahead gets higher and higher. So, the returns to those
investments and innovation in R&D also get higher and higher. And,
this we do see within the OECD [Organisation for Economic Co-operation and
Development]—that Spain and those countries have higher rates of return than,
say, the United States. If you extrapolate out of this sample to even Indonesia
and Korea, the rates get even higher. So, we’re in the hundreds, and if you go
on to Africa it is like 300 or 400 percent.
So, the question is: assuming that the rates get higher as you
get further from the frontier, we should see developing country firms being
extremely aggressive in adopting these technologies and investing in R&D,
and we should see governments thinking basically about nothing else and just
saying: okay how am I going to get my firms to do this? How can I help them do
that? And, we see neither.
MR. EDWARDS:
Wow. So, 400 percent return—why do you think there is such little investment
toward the research and development?
MR. MALONEY:
Right. So, a lot of it is, again, the absence of these complementary factors,
such as having a qualified workforce; having access to credit markets that
would allow you to buy physical capital; access to foreign markets because your
trade regime is distorted; a competitive regime, for instance, where state-owned
enterprises are absorbing all the oxygen from your entrepreneurial sector. Any
number of things like these will make it so that an investment in research and development
by a firm will not get the rate of return that you would think it should get
given how far away it is from the technological frontier.
MR. EDWARDS:
So, what you’re describing are problems that developing countries have been
having for a long time. But, do you think it is realistic to think that they
can build a foundation upon which they can start investing in R&D?
MR. MALONEY:
So, the first thing to do is acknowledge that the innovation agenda that we
have in the advanced countries is much more narrow than any innovation agenda
that we face in developing countries. If you’re Sweden, you can afford to say:
okay, what is the problem with my innovation system? The standard problem there
is that, if Bruce has a really good idea and he spends a lot of money
generating this idea, he can’t prevent me from stealing that idea. So, that
means a whole bunch of people can take it. It’s what we call an “appropriability
failure.” Meaning, your idea doesn’t get used up so any of us can use it and we’ll
cut into your profit margins, so the rate of return you see is far below what
the society as a whole could get.
Then, you want to subsidize R&D or have patents or tax
write-offs or something like that, that brings the private rate of return to
that R&D closer to the social rate of return. So, that’s what we do. That’s
a standard concern in the advanced countries.
What I was just describing, though, is that in the developing
countries, we need to think not only about barriers to accumulating knowledge
capital, we have to think about all
the barriers to accumulating all of the
complementary factors—the physical capital. So, if I have a lousy education
system, it doesn’t matter if I get a high-tech firm because there won’t be any
workers to staff it. So, you have to think about all of these dimensions when
you think about what we call “the national innovation system”—the system of
institutions and people that generate or identify new ideas and bring them to a
country. It’s a much more complex problem. You have to think about a lot of
different markets that aren’t working—education markets, credit markets, your
trade regime—all that stuff matters. And that is a task that gets harder and
harder making sure all those things work exactly right as you get further from
the frontier because we find that government capacity to actually resolve
issues gets weaker and weaker.
MR. EDWARDS:
But, the returns are significantly higher if they manage to get it done?
MR. MALONEY:
Right, but these other problems start getting larger and larger. At some point,
we find the curve bends over. So, for very poor countries, the rates of return
of R&D could potentially be negative. How could they be negative? Because
instead of investing in R&D you should be investing in basic education. So,
it is exactly that kind of horse race—yes, as I get further away there are
greater opportunities, but on the other hand, I’m less capable of actually
taking advantage of them, and that causes this bend over of the returns curve.
So, exactly the challenge is to find ways for governments with
limited bandwidth—let’s be honest about our capabilities to actually move the
innovation agenda forward in meaningful ways.
MR. EDWARDS:
So, do you think generally there is just a lack of awareness among policymakers
in developing countries? Do you think that if they were more aware of this lost
opportunity, they would be putting more effort towards building policies that
will work in the long run?
MR. MALONEY:
I think there’s an awareness abstractly that this is important, but it happens
in a funny way: [they say] oh yes, artificial intelligence—we have to be there
or we need to be the internet of things. Okay, some countries definitely need
to be there, and maybe there are some countries that can leapfrog from wherever
they are to get there. But, it is important to remember, for instance, that
there are a lot of things that countries can do, that firms can do, that are
much less … let’s call it “sexy.” Just making my firm work better. And, you can
get huge returns without doing anything shiny.
There was a very important study in India by Nick Bloom and
David McKenzie and other associates, where they took 20 textile firms and they
divided them into two groups. In one of them they had Accenture Consulting come
in and benchmark them. After one year, they saw improvements in productivity of
11 percent, which could pay for the entire program. There was no introducing of
A.I. or anything, it was just, okay: let’s organize how our raw materials are
stored. Do we have good records of what each person is producing so that when
there is a defect, I can find out which worker or which manager is responsible
and I can go deal with it.
Those things sound basic, but most of the firms in our
developing countries don’t have those capabilities well established. I think
there is a little bit of a twisting or distortion of the agenda towards these
hot areas when there are huge returns to be had by much more prosaic forms of
innovation.
MR. EDWARDS: That
was William Maloney, Chief Economist for Equitable Growth, Finance and
Institutions in the World Bank Group, and co-author of The Innovation Paradox in Developing-Country Capabilities and the
Unrealized Promise of Technological Catch-Up, published by the World Bank.
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