1

Keun Lee

Prof. of Economics, Seoul Nat’l UniversityDirector, Center for Economic Catch-up  

www.keunlee.com; www.catch-up.org;

Technology Policy for a Detourto Escape the Middle Income Trap:

Schumpeterian Reflections on the Asian experience

2

Motivating Question :

Why Catching up rare and not sustained?

-> Middle Income country Trap?

Income Groups 1980 1995 Annual growth

Low Income 958 1,280 1.95

High Income 14985 20593 2.14

Upper Middle Income

5001 4616 -0.53

Lower Middle Income 958 1,280 1.95

Middle income country trap: Per capita in 2000 Dollars, 1980-95

Asian 4: Korea, Taiwan, Hong Kong, and Singapore  

1980 1995  

7041.5 15560.0  

Why the Middle Trap important?

To give hope for the Low incomers who are trapped

with the adding-up problem.

Eg) China needs to go beyond the low-end goods based growth, so that it may leave

rooms for other low income countries

Solution for the Middle Trap= Detour

rather than direct emulation

or static specialization

6

1980

Straight Road: but traffic jam (adding-up problem)

Detour: No jam but rough & winding

road-> need skill (tech. capability)

Can take a Detour if you have a high driving skill, when the straight road is jammed

7

Trend of the Income Levels as Percentage of that of Japan:

ÞKorea, Taiwan: No catching up in 60s, 70s:-> only from 1980s:Þ what happened? Just more R&D, in which sector?

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Cycle time of technologies in the US Patents: Korea & Taiwan vs. Others

High Income countries Middle Income countries

Korea and Taiwan Brazil and Argentina

yrs

Korea & Taiwan

detour: short cycle technology sectors

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Cycle time = speed of change in the knowledge base of a technol-ogy

Short cycle tech = old knowledge quickly obsolete/useless + new knowledge tend to emerge more often -> less disadvantageous for the latecomers => technological sectors with less reliance on the old technologies but with greater opportunity for emergence of new technologies,

Measured by the mean citation lag = the time difference between the application year of the citing patent and that of the cited patents (Jaffe and Trajtenberg, 2002).

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1975

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1980

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1989

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1995

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

Localization of knowledge creation & diffusion

High Income countries Middle Income countries

Korea and Taiwan Brazil and Argentina

Intra-national Citation in Patents (~self-citation)

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Criterion for Technological Specialization

12

1988 1989 1990 1991 1992 1993 1994 19950

2

4

6

8

10

12

14

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Tech. Cycle time_KRTech. Cycle time_US

Korean firms

US firms

Catching-up (Korean) vs. Mature (US) firms: The former in short cycle technologies

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1988 1989 1990 1991 1992 1993 1994 19950

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

Self-citation_KRSelf-citation_US

Catching-up (Korean) vs. Mature (US) firms: The former in low self-citation (localiza-tion)

USA Firms

Regressing growth onto National Innovation systems:

Asian 4 as benchmark

Asian 4High In-come middle Inc. World

Tech cycle time (-)* (+)* (+)* (+)*

Localization of knowl-edge + (+)* + (+)*

Originality + + + +

HH: inventor concentra-tion (-)* (-)* (-)* (-)*

Asian 4 Dummy (+)* (+)* (+) *

Controls: Initial income, Population, Investment, secondary en-rollment

Similar Results with Firm-Level Data

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0.00

2.00

4.00

6.00

8.00

10.00

12.00

cycle_junki_BOTH

cycle_buru_BOTH_COMBINED

Detour => short cutCycle Time of Korea & Taiwan Patents getting longer recently

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From Trade Specialization to Technology Specialization

Stages Low or low middle income Upper middle income toward high income

Type of specialization Trade specialization Technology specialization

Source of specialization

Comparative advantages from resource endowment

Absorption/design capabilityfrom learning/R&D effort

Type of sector Labor intensive/resource industries

Short cycle/emerging technologies

End goal competitive export industries Indigenous knowledge creation & diffusion

Background theory Product life cycle (inheriting) Catch-up cycle (leapfrogging)

How: From Middle to High Income Countries

Now, How to drive the Detour:Implementation Strategies

The detour is not just smooth and easy;

-> requires certain level of absorption and technology capacity,

not only firm-level but also at the na-tional-level

3 Steps along the Detour

1) Acquiring Design Capability

(to move beyond OEM/assembly)

2) Targeting/Entering the mature /low-end segment

of short cycle Sectors

3) Leapfrogging into New/Emerging Technologies

in the Short-cycle Sectors

 a. Hyundai's development of engine as Mitsubish refuse to transfer its latest engine technology (from 1984 to 1992)

-- Co-dev’t contract with a specialized R&D firms, Ricardo Co. UK. tried more than 1,000 proto types until success after 7 years .

 b. 256 K to 64 M Dram by Samsung  -- Samsung chose to develop its own design technology for 256 or

higher K Dram as it was not easy to buy the design -- overseas R&D outposts in Silicon Valley and reverse brain drain

c. Taiwan: electronic calculator in mid 1980s : went around the world to study LSI applications, and combined

what they saw and what they learned from Japanese suppliers.

=> Policy Tools: Tariffs and under-valuation important.

Stage 1: Acquiring Design Capability:

Government: R&D by Public labs

(ETRI in Korea)

Private: Manufacturing(private Co’s: Samsung, LG in Korea)

Government: Market protection or Procurement ( local telephone authorities)

Stage 2 Entering Mature Segment of Short cycle Sectors

By public-private partnership (PPP): eg) Telephone switch development in Korea & China

India & Brazil had the same development but not sus-tained without initial protection;

=> Infant protection still matters, together with joint PP R&D

G: R&D by Private & public labs

P: Manufacturing

G: Procurement or Standard Policy

Stage 3: Leapfrogging into Emerging Technolo-gies

eg) Korea: Digital TV, mobile phones (CDMA) ; China: 3G TD-SCDMA, Photovoltaic; electric vehicles

Policy tools: Standards policy matter, eg), exclusive standards in wireless.

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Learning Objects

      

operational skills 

  production/ process technology

 

design technology

 

Product Developmenttechnology

Stages of Knowledge Learning/ Creation and Catch-up

Learning Learning by by producing/ in-house R&D Co-develop-mentMechanism doing organizing Overseas R&D strategic al-liance following foreign P&P R&D designs

Three Patterns of Technological Catch-up (Lee & Lim 2001)

Path of the Forerunner : stage A --> stage B --> stage C --> stage D

Path-Following Catch-up : stage A --> stage B --> stage C --> stage D  eg. PC, some consumer goods, and Machine Tools

Stage-skipping Catch-up (leap-frogging I) : stage A ---------------> stage C --> stage D eg. Hyunda's fuel-injection engine (cf. carburetor engine)

Samsung' 64 K D-Ram production technology; 256 K D-ram design technology Tlephone switch in in China

Path-Creating Catch-up (leap-frogging II) stage A --> stage B --> stage C' --> stage D' eg. CDMA development, digital TV

( Notes: C and C', represent competin technologies.)

1) Late Entry: Entering Mature Segment of Short cycle Sectors: eg) High speed Train in China, India’s IT service, Middle sized Jets by Brazil Entry into notebooks by P-P in Taiwan

Suggestion: Nigeria can build oil refinery, rather than keep exporting crude oils

2) Leapfrogging into New/Emerging Segments of Shorter-cycle Sectors:

eg) Photovoltaic industry in China, Electric Vehicles by China Ethanole or Biofuels in Brazil

More Examples

Average Cycle Time of China’s top 30 class US patents

= 8.1 years (2000-2005 yrs)

Cf) Korea and Taiwan = 7.7 yrs (avg of 1980-95)

Brazil & Argentina = 9.3 yrs (avg. 1980-95)

Þ China more similar to Korea & Taiwan than to Brazil and Argentina

China and the Middle Trap?

In concluding

Government activism for 2 reasons

1) to handle not market failure but capability failure

in R&D,

2)because they are below the frontier, and less uncertainty with targeting

Market failure: more or less R&D than optimal (assumption = latecomers are capable of doing

R&D)

Capability failure = afraid of R&D = zero R&D

Þ Need not only the provision of R&D money but also various ways to cultivate R&D capability it-

self,

eg) joint public-private R&D consortium

Not market failure but Capability failure in R&D

latecomers are not on the technology frontier but have clearly defined (existing) technologies or projects

to emulate,

-> better chance of success if they mobilize all public and private resources

Assumption behind the caution or warning against techno-logical targeting is that countries are on the frontier.

However, many latecomers rely on imported technologies, but they are often charged with monopoly prices.

Eg) Telephone switches in Korea & China high speed train by China

When not on the frontier, less uncertainty of targeting

In concludingShould allow ‘detour’ for latecomers!

cf) than forcing direct replication of the developed

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1) Korea used to be more protective; but now most open with FTAs with US:

2) Lowest protection of IPRs in Korea, Taiwan but one of the highest level of IPR protection 3 ) Big Bang vs. Gradualism in system transition

Detour -> capability up -> can afford to open cf) no detour -> no capability up -> cannot

open

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Tariffs in Korea and of Asymmetric Opening (Source: Shin 2011).

Composition of Major Export Items, (% in total Exports)

Successive Entries: Composition of sales in Samsung

0.8 6

35

35

3.3

6.3

24

18.3

19.9

40

28

3.7

3.5

4825 4.4

1.1

1218

30.224.4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 (25.8 billion)

1976 (640 billion)

1987 (16,767billion)

1998 (93,766billion)

Insurance(Finance)Food&LeisureTextilesPaperHome ApplianceConstructionVehiclesMachinery, SteelNonmetalicWholsale&Retail TradeTelecomunicationsSemiconductorOther services

2.41.1

3

1

1

1.6

Source : Chang (2003), Notes: numbers are share percentages in sales

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Gracias!

Meu Amigo! Obrigado!

Thank you!

謝謝大家감사합니다

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References (www.keunlee.com)

• Lee, Keun, 2012, a book manuscript, “Knowledge and Detour for Sustained Catch-up: Schumpeterian Recipe to escape the Middle income trap.”

• Lee, Keun, Chaisung Lim, and Wichin Song (2005), "Digital Technology as a Window of Opportunity and Technological Leapfrogging: Catch-up in Digital TV by the Korean Firms”, Inter.J. of Tech. Management, Vol. 29, 1/2, pp. 40-64.

• Lee, Keun, “Making a technological Catchup.” Asian J.of Tech. Innovation, 2005.

• Mu, Qing, and Keun Lee (2005), “Knowledge Diffusion, Market Segmenta-tion and Technological Catch-up: The Case of Telecommunication Industry in China”, Research Policy.

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G5 Class Class Name Patent count

1 514 Drug, Bio-Affecting and Body Treating Compositions 103492 428 Stock Material or Miscellaneous Articles 38833 73 Measuring and Testing 37894 123 Internal-Combustion Engines 34795 424 Drug, Bio-Affecting and Body Treating Compositions 33896 210 Liquid Purification or Separation 28537 435 Chemistry: Molecular Biology and Microbiology 28528 250 Radiant Energy 26399 264 Plastic & Nonmetallic Article Shaping or Treating 2349

10 324 Electricity: Measuring and Testing 2325

Top 10 Classes in Patenting by G5 vs Korea-Taiwan

Korea-Taiwan Class Class Name Patent

count1 438 Semiconductor Device Manufacturing: Process 11892 348 Television 7123 439 Electrical Connectors 4084 257 Active Solid-State Devices ( Transistors, Solid-State Diodes) 3745 362 Illumination 3746 280 Land Vehicles 3557 365 Static Information Storage and Retrieval 3468 70 Locks 3409 360 Dynamic Magnetic Information Storage or Retrieval 313

10 482 Exercise Devices 311

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G5 Class Class Name Patent count

1 514 Drug, Bio-Affecting and Body Treating Compositions 103492 428 Stock Material or Miscellaneous Articles 38833 73 Measuring and Testing 37894 123 Internal-Combustion Engines 34795 424 Drug, Bio-Affecting and Body Treating Compositions 33896 210 Liquid Purification or Separation 28537 435 Chemistry: Molecular Biology and Microbiology 28528 250 Radiant Energy 26399 264 Plastic & Nonmetallic Article Shaping or Treating 2349

10 324 Electricity: Measuring and Testing 2325

8 mid income's Class Class Name Patent

count1 514 Drug, Bio-Affecting and Body Treating Compositions 1202 424 Drug, Bio-Affecting and Body Treating Compositions 763 435 Chemistry: Molecular Biology and Microbiology 544 75 Metallurgical Compositions, Metal Mixtures 525 65 Glass Manufacturing 446 604 Surgery 447 210 Liquid Purification or Separation 408 423 Chemistry of Inorganic Compounds 409 502 Catalyst, Solid Sorbent or Product 40

10 123 Internal-Combustion Engines 38

Top 10 Classes in Patenting by G5 vs 8 middle-income countries

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Knowledge and firm performance III: with 3 variables together

　 US firmsDependent GROWTH ROA ROS SALES/EMP TOBINQH-H Index (+)* (-) (+) (-)** (-)Originality (+) (+) (+) (+)** (+)

Self-citation (+)+ (-) (-) (+)* (+)+No. of workers (+) (-)+ (-) (-)** (-)+

Investment Propensity (+)** (+)** (+)** (-)** (+)**Debt to Equity Ratio (-) (-) (-) (-) (+)Capital Labor Ratio (-)** (-)** (-)** (+)** (-)**

Obs 3468 3472 3471 3472 3355

　 Korea firmsDependent GROWTH ROA ROS SALES/EMP TOBINQH-H Index (-) (+) (+) (-)+ (-)Originality (-) (+) (+)+ (-) (+)Tech. Cycle (+) (-)* (-)* (+) (-)

No. of workers (-) (-) (+) (-) (-)Investment propensity (+)+ (-)+ (+) (-) (-)Debt to Equity Ratio (+) (-)** (-)** (-)+ (+)Capital Labor Ratio (+) (-)+ (-)** (-) (-)+

Obs 231 232 232 232 122

Every country for IT’s? Another Adding-up?

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Analogous to the adding-up problem or risk of specialization in labor-intensives by all low-income countries.

Big difference: 1) specialization based on factor endowments : fixed with few opportunities for change, 2) specialization in short-cycle technologies : no fixed list of technologies but rather specializing in a field or sector where new technologies always emerge to replace old ones, as existing technologies become obsolete soon.

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Three Alternatives for Development: Low, Middle and High Roads

Strategy

Cycle time of

technology.

Originality

ValueSegmentation

ExampleCountries

Low Road

Existing comparativ

eAdvantage

Long LowLow-end

eg) apparel, footwear

Typical low-incomes:Bangladesh; Sri lanka

Korea & Taiwan in 60s, 70s

China in early 1980s

HighRoad

Direct Replication Long High

High-endeg) fabrics; materi-als; machineries,

toolsMedicines

Some middle incomes:Brazil, Argentinain the 1980s, 90s

MiddleRoad Detour Short Low

Middle/High endeg ) high end con-sumer electronics

Successful Middle Incomes:

Korea; Taiwan since 1980s

China now

*Best Scenario: Low Road-> Middle Detour -> High Road

*Muddling through the Middle Road: eg, 2nd tier Asian countries, eg. Malaysia, Thailand

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1975197619771978197919801981198219831984198519861987198819891990199119921993199419950

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

Originality= patents based on broad bases of knowledge

High Income countries Middle Income countries Korea and Taiwan

Brazil and Argentina

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1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 19950

0.1

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Herfindhal index of concentration of inventor

High Income countries Middle Income countries Korea and Taiwan

Brazil and Argentina

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1988 1989 1990 1991 1992 1993 1994 19950

0.05

0.1

0.15

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0.25

0.3

0.35

0.4

0.45

0.5

Originality_KROriginality_US