M a r c h 2 0 1 2 n u m b e r 6

The Changing Geography of Innovation: The Rise of the BICs—Challenges and Opportunities

Carl J. Dahlman*

The last two decades have seen a change Much of this changing geography of in the geography of innovation toward de- innovation and growth is the result of the veloping countries in three areas.1 First, on emergence of the BICs—Brazil, India, and the input side, there has been a significant China.2, 3 This policy note focuses on the increase in the share of total world research changing geography of innovation in these and development (R&D) expenditures by three countries, particularly China, and pro- developing countries. There has also been vides a quick overview of innovation efforts an increase in the share of students in and performance. As China is already well higher education, as well as of the number on its way to becoming a major global player researchers. Second, developing countries in innovation, this note will summarize some have increased their share of intermediate of the lessons from the county’s success, as outputs in the form of scientific publications well as its challenges. This note then will and the number of patents. Third, on the more broadly summarize the challenges output side, the growth of GDP in develop- and opportunities for advanced countries ing countries has been greater than that of as well as for other developing countries. developed countries, largely because it is Finally, it will describe some challenges and easier to grow by using technology that al- opportunities for the global system. ready exists (technological catch-up) than by pushing the world technological frontier for- China ward. At the same time, and accelerated by China’s authoritarian government has fo- the financial and economic crisis of 2008–09, cused on science and technology since the there has been a significant shift in the share 1960s. Science and technology was one of of total world economic activity accounted the four modernizations proclaimed by Cho for by developing countries, which also has POLICY BRIEF 2. The Republic of Korea has also become a major player implications for the direction of innovation, on the global innovation stage in inputs, outputs, and as will be argued below. growth over the last two decades, but is not considered here. Korea is already ranked as a developed country and this note focuses on developing countries. 1. Although not geographic, another important shift has 3. Russia has lost relative share in world totals on all been that of the relative importance of the main agents the above indicators in the last two decades. However, of innovation. The shift has been from government to in recent years it has been recovering some lost ground the productive sector, and to the university. as it focuses on strengthening its innovation system.

*Henry R. Luce Professor of International Relations and Information Technology at Georgetown University. Send comments to [email protected], copied to [email protected]. En Lai in 1963. In addition, after Deng, most At the most macro level, a gross measure Chinese leaders have been engineers rather of a country’s innovation performance is than lawyers or social scientists as in most the annual rate of economic growth. In the Western countries, and they have focused stylized economist’s framework, growth is on science and technology. the result of increases in capital and labor China already has the largest number of as well as technology. China’s growth per- researchers in the world; is the second largest formance has been extraordinary, averag- spender on R&D in the world in purchasing ing 9 to 10 percent per year for the last 30 power parity (PPP) terms (after the United years. This is due in part to high rates of States, and having surpassed Japan in 2010); investment and the growth of labor and and is the second-largest producer of scien- education. Another large driver of growth tific publications. In 2011 it also registered has been due improvements in productivity the largest number of patents by domestic and other technical changes, which are the residents in the world. In China the produc- result of successful technological catch-up tive sector already accounts for more than 65 and innovation with the developed world. percent of R&D, which is close to the aver- age for advanced countries. In 1995 China’s Brazil spending on R&D was just 0.5 percent of Brazil started focusing on innovation during GDP. Currently it is 1.6 percent of GDP, but the military period from the mid-1960s to China aims to be spending 2 percent of GDP the late 1970s. Spending on R&D reached on R&D by 2020, which is the average for EU one percent of GDP in the 1970s, the bulk of countries, and 2.5 percent of GDP by 2025, it by the government. Most researchers work the average for the United States. for the government. The government has Some of China’s major innovation ac- been trying to increase spending on R&D complishments include its own green revo- for several decades now but has not man- lution, space technology, and the nuclear aged much of an increase. It also has failed bomb. Some of the country’s state-owned to get the private sector to spend more on enterprises are demonstrating growing R&D, which remains at barely half a percent technological capability; they include the of GDP. However, Brazil has increased its China Ocean Shipping Company (COSCO); share of scientific publications from less the State Construction and Engineering than one percent of the world’s total to Company, China National Petroleum, China almost three percent in 2008. Offshore Oil, China Communications Con- Some of Brazil’s main innovation ac- struction, China Railways Construction Co., complishments include the development Sinochem, Sinosteel, Shanghai Baosteel, the and implementation of methanol-based China International Trust and Investment alcohol as an alternative fuel; multiple agri- Corporation (CITIC); and Beijing Enterprise cultural innovations lead by EMBRAPA (the Holdings (diversified conglomerates). Pri- public research development and extension vate firms are evolving too; they include services) that have increased productivity Shanghai Automotive Industries, Huawei in agriculture; deep-water exploration by and ZTE (makers of telecommunications Petrobras (the state-owned oil company); equipment), Lenovo (which bought IBM’s wells; and the development of an inter- personal computer division), Haier (electri- nationally competitive aircraft producer cal appliances), Goldwind (windmills), and (Embraer—once a state-owned company Suntech Power (the world’s largest producer but now private). Brazil also has many in- of solar panels). novative and internationally competitive

2 Policy Brief No. 6 March 2012 private companies, including Gerdau (basic of this spending has been by the public sec- metals); Votorantin, Suzano, and Klabin (cel- tor. The government has been trying to get lulose and paper products); JBS-Bribol and the private sector to spend more on R&D. Marfig (crop and natural animal produc- Between 2003 and 2007 it managed to get tion); Camargo Correia, Duratex (construc- the private sector to increase its share from tion); Weg (electrical equipment); Magnesita 18 percent to 28 percent. This increased (nonmetallic minerals); Brazil Foods and spending was in part the result of attracting Minerva (food products); Natura (cosmet- investment from transnational corporations ics); and Metalfrio and Romi (manufacture (TNCs), but increased R&D by some domes- of machinery and equipment). tic firms was also significant. The country’s Brazil’s growth performance during the investment in R&D has now increased to early part of the military period was high. almost 0.9 percent of GDP. However, growth stagnated with the global Some of India’s innovation accomplish- oil price increases of the early 1970s (this was ments in the state sector include the Green the motivation for the development alterna- Revolution (an international cooperative tive fuel program) and the country became R&D program) and space technology highly indebted and also suffered macro in- (though more limited than China). Strong, stability in the 1980s. Its performance during innovative private sector companies have the 1980s was poor. It was not until the early also flourished, including , HCL, 2000s that Brazil resumed growing. This was , Tata Consulting Services, Patni the result of successful macro stabilization Computer Systems, Hexaware Technolo- but also of the high demand for commodity gies, i-Gate Global Solutions, NIIT, and exports from China. The rate of investment Birlasoft (information technology); Ranb- has been low, which has prevented Brazil axy, Dr. Reddy’s Laboratories, - from incorporated technological advances ceuticals, , and Piramal Healthcare as fast as China. As a result, the contribution (pharmaceuticals); Tata (a conglomerate of productivity growth and innovation has with products including iron and steel, been low, except in agriculture. autos, telecoms, IT services, and chemicals); Mahindra and Mahindra (autos); Larsen India and Toubro (engineering and construc- India had a very autarkic policy toward tion); Bharat Forge (forging and auto com- research after independence from Britain. ponents); Videocon (a conglomerate with It set up a large network of government products including electronic picture tubes, labs to develop the technologies the country mobile phones, and telecommunications); needed. This infrastructure was focused pri- and Suzlon (windmills). marily on the needs of government, particu- India’s overall growth performance larly the large number of state enterprises. was a low 2–4 percent per year until it be- It was only after India’s trade liberalization gan to open up to the trade with the world starting in 1991, when the private sector after 1991, when growth increased to 5–6 started to face international competition, percent. India’s rate of investment was also that the government research infrastructure low at around 20 percent until the early started to respond to the needs of the private 2000s. After 2003, India started to grow at sector. India has been spending about three over 8 percent. This was in part due to the quarters of a percent on of GDP on R&D for dynamic growth of its information-enabled a long time. However, more than 80 percent service industries (which though small, had

March 2012 Policy Brief No. 6 3 strong multiplier effects), and of knowledge product, process, and service innovations services more generally. In addition to faster that address the needs of the low-income growth, investment increased from around population (“inclusive innovation” as it is 20 percent through the early 2000s to over called in India). 35 percent in the second half of the 2000s. With greater liberalization came higher Differences investment and greater tapping of global A major difference between China, India, knowledge, all of which helped to improve and Brazil is that the first two are very la- productivity across the economy. bor rich but natural resource poor on a per capita basis. Brazil is very rich in natural Similarities resources and not as populous as the first The BICs have some interesting similarities. two. In the 1950s all three countries began Early on they focused on large, mission- import substitution strategies. China and oriented projects. All included nuclear, India were much more autarkic than Bra- aerospace, and space. China and India zil, which was more open to foreign direct developed their own nuclear weapons. All investment. Brazil developed a broad-based three have developed aerospace and space industrial sector and increased the share of technology. Brazil has developed one of the manufactures in its exports. However, in the four largest airplane producers in the world. last 10 years the majority of its exports have China is now developing its airplane indus- been natural resources and commodities as try—somewhat later than Brazil, but faster. a result of the large import demand from China also has a very strong space program China. Surprisingly, China, the communist and is one of only three countries (besides country, was the first to go for a traditional the United States and Russia) to have strategy of export of manufactured goods, launched a man into space. All three BICs supported by foreign direct investment. have significantly improved agricultural This strategy started in the late 1970s when productivity. All three have also developed China began to open up to the world and es- their automotive industries. India initially tablished its first export processing zones. It developed its own domestic auto industry quickly built on its export strategy and even- and then went for joint ventures. Brazil has tually joined the WTO in 2001. It has become relied on foreign multinationals. China has the world’s largest merchandize exporter, developed its own industry and also has mostly manufactured products. India has relied on multinationals. India and Chi- not been much of an exporter until recently. nese domestic firms are already exporting It opened up to trade in the early 1990s, and domestically developed automobiles, and its strength is in information-enabled service China has very ambitious export plans. All exports rather than manufactured products. three countries have concerns about income inequality. Brazil has the highest inequality. What can they learn from China? It has developed an integrated program for Given China’s tremendous success, what reducing inequality, including measures can the other two countries learn from its addressing children’s education, health, experience? China’s innovation strategy can and food, which is having some success. be described as following three strands. The Inequality is increasing rapidly in China and first and most successful strand to date has India. The governments of all three countries been to be fast learner. China has been the are now developing programs to support most effective at tapping into global knowl-

4 Policy Brief No. 6 March 2012 edge. This has included formal mechanisms economies of scale. Second, its large market as well as informal ones. The main formal has been a very strong magnet for TNCs. ones have been trade, foreign direct invest- They have not been able to resist participat- ment, technology licensing, and foreign ing in China’s booming market, even if they study. The informal ones have been attract- know that their technology will be pirated. ing back expatriated Chinese citizens and A new element of China’s innovation copying and reverse engineering. China’s strategy is massive investments in alter- use of reverse engineering is not just larger native energy technologies. This includes in absolute terms, but also relative to the investments in nuclear energy, hydropower, size of its economy. wind, and solar, as well as investments in China has been able to incorporate a lot carbon capture and sequestration. China of new technology into its economy because is making the largest investments in the it has had a very high ratio of investment to world to develop these technologies. GDP. This ratio has averaged over 40 percent Moreover, the large needs of the Chinese over the last two decades and has increased market in this area is also attracting foreign to nearly 50 percent in the last five years. To companies to develop and scale up these be able to absorb and effectively use this technologies in China, because the Chinese technology China also has made massive government offers very attractive terms to investments in tertiary education. By 2010 it set up and operate businesses with these had more than 30 million students enrolled new technologies in China. China’s focus in higher education institutions, compared on green technologies is not just an element to 19 million in the United States, and only of developing alternative energy but also 14 million in India. An important element of of strategic energy security. It is very likely China’s strategy has been that it has become that with these massive investments China well integrated into global value chains con- will soon be the world’s technology leader trolled primarily by foreign firms. Thanks in these areas. to its investments in education, particularly higher education, Chinese firms have been China’s challenges able to move up these value chains from China has many economic challenges. These simple labor-intensive activities to those include an asset bubble; a reduction in requiring greater technological capability. import demand from developed countries The second part of China’s strategy has that are still suffering anemic growth in the been an explicit plan announced in 2006 (the aftermath of the 2008–09; the consequent Medium and Long Term Science and Tech- need for China to restructure its economy nology Plan) to go from catch-up or imita- towards domestic demand; risks of a protec- tion to its own frontier innovation. Starting tionist backlash from the rest of the world; in 2006 China began to significantly increase and rapidly rising inequality. In addition, its R&D. By 2010 it was the second-largest China’s rapid growth makes intensive use spender in R&D in the world, second only of environmental resources and technology, to the United States. which has lead to rising costs of air and China has also leveraged its large do- water and increased pollution. mestic market to improve its innovation A major challenge for China is how to capacity in several ways. First, its large main its high rate of growth. In the short market has given domestic firms opportuni- term this is more difficult in light of the fall in ties to develop their capabilities and to reap global demand for its exports. In the medium

March 2012 Policy Brief No. 6 5 to long term different challenges emerge. appears that although China has an aggres- China will catch up with the technological sive program to recruit top scientists and frontier; the contribution of labor growth will engineers of Chinese origin and has been decrease as population growth slows as a successful in the past, in the last five years result of the one child policy; and the depen- it has been having more trouble recruiting dency burden of the graying population will the talent it is seeking. increase. China is counting on innovation to help it maintain a high rate of growth. Implications for advanced On the innovation side there are three economies main challenges. First, China must able There are opportunities and challenges for to reap returns commensurate with its developed economies from the changing increased investment into output into the geography of innovation. The first opportu- R&D. The rapid raise in technical and sci- nity is for TNCs from developed countries entific publications suggests that it will. to do more R&D in the BICs, as they have However, there has been concern about a growing stock of qualified scientists and significant fraud and cheating in research engineers with much lower salaries than in and scientific publications and that many advanced countries. The second is for firms patents are of little value. The argument is from advanced countries to innovate prod- that this activity has proliferated because ucts and services that address the needs of promotions and salary increases in universi- the growing populations of these countries. ties and research labs have been reoriented Not only are their populations still grow- to be based on publications and patenting. ing, but so is their income, so they are very Second there is concern that continued attractive markets. The third opportunity is violations of international intellectual prop- for governments of advanced countries to erty laws could increase frictions with the do more science, technology, and innovation international suppliers of technology and cooperative agreements that tackle issues of bring about retaliatory trade actions through mutual interest, reflecting the growing capa- the Trade Related Aspects of Intellectual bility in the public innovation infrastructure Property Rights (TRIPs) mechanism of the in emerging countries. WTO. In spite of China’s very large invest- The first challenge is that there will be ments in R&D, it is not likely that its own more competition from BICs firms as they innovations will give it the 2–3 percentage continue to develop their capabilities. Gen- points of growth it is seeking through this eral Electric, for example, has announced means. China will continue to rely heavily that it has to develop innovations for mar- on technology that it gets from the rest of kets in China and India because domestic the world, making it important not to an- firms there are producing those innova- tagonize the suppliers of that technology. tions. In addition, these lower-cost products Finally, there is increasing speculation and services developed for the emerging that China’s authoritarian regime may markets are beginning to be exported to constrain innovation, particularly radical developed-country markets and disrupting innovation, despite the country’s rapidly TNCs’ home-country competitiveness. The increasing investments in R&D. So far none second challenge is for the governments of of the eight Nobel prizes in science awarded developed countries. As TNCs from their to persons of Chinese origin have been to a countries pursue opportunities in emerging scientist working in mainland China. It also countries, they may act less in the interest of

6 Policy Brief No. 6 March 2012 the home countries. This may be clearest in have the most difficulty taking advantage of the cases where TNCs locate more of their rapid change and run the risk of being left corporate functions, including research, in farther behind. China. The externalities from this research spill out to the Chinese economy, not to Global challenges and TNCs’ home countries. opportunities There are several challenges to the global Implications for other system. The first is the risk of the increased developing countries competition from emerging economies. There are also opportunities and challenges China in particular could lead to a protec- for other developing countries. For example, tionist reaction from advanced countries BICs may provide innovations that are rel- as well as other developing countries. This evant for developing countries’ low-income risk is heightened because of the very slow populations, such as the Nano car and the recovery, continued economic fragility, and $35 Aakash tablet computer. In addition, the high unemployment in the United States and competition from other developing countries the European Union. A second challenge is is leading developed-country TNCs to in- the risk of increased frictions over research novate products and services that respond and intellectual property. This is related to to the needs of lower-income countries. For the composition of R&D spending. In the example, GE’s $1,000 portable electrocardio- United States and developed countries, a gram developed for the Indian market and higher proportion of their R&D spending is the $15,000 personal computer–based ul- on basic research, which is largely a public trasound developed for the Chinese market good. In developing countries, including are now being exported to other developing China, only a very small proportion of R&D countries and even back to the United States. is spent on basic research. Thus there is a A second opportunity that goes beyond growing concern that emerging countries technology is that the growth of the BICs with very successful catch-up strategies, markets will create demand for exports of such as China, are free riding on the basic goods and services. research financed by developed countries. It The principal challenge is that the is not clear how this will be worked out. Will increasing technological capability and in- it lead to a reduction in spending on basic novation in the emerging countries will lead research in advanced countries, particularly to greater competition across a wider range as their governments are facing severe fiscal of goods and services. A second challenge is constraints? Or will emerging countries feel that although the diversification of technolo- increased pressure to do more basic research gies and the greater speed of technological and put more effort into protecting the intel- development are very positive, there is lectual property of advanced countries? A also a downside. Taking advantage of the third challenge is the continuing increase in increased diversity and rate of technologi- inequality within most countries as well as cal change also means that countries have across countries. This is an issue of internal to increase their capability to acquire and and international political stability. It is also make effective use of those new technolo- a humanitarian issue as many of the poor- gies. This requires upgrading of education est countries have very limited capability and technology support infrastructure. The to take advantage of the rapid advances of poorest developing countries will likely technology and are being left further behind.

March 2012 Policy Brief No. 6 7 M a r c h Many of them are also vulnerable to climate including addressing the global challenge 2 0 1 2 change, which is largely the result of the of climate change. successful industrialization of the advanced Given the increasing innovation capa- n u m b e r 6 countries and now the emerging countries. bility of the emerging countries, there are The opportunities are to rise to these important opportunities to develop coop- challenges and to develop better global erative programs to address major global systems to deal with them. Defusing the public goods issues. These include climate risk of growing trade frictions depends on change, global pandemics, agricultural in- actions from both trade deficit and trade novation to combat food shortages, innova- surplus countries. Trade deficit countries tions to deal with water shortages (including need to increase their savings, successfully desalination technologies), and many other address their fiscal problems, and reestab- innovations to help ensure environmental lish sound growth. Trade surplus countries sustainability. There are already good prec- like China (and Germany and Japan) need to edents for international public good actions develop their domestic markets rather than that have involved international cooperation to continue to rely so heavily on an export- and appropriate innovations. These include oriented development model. Addressing the Green Revolution, the African Program the issue of free riding requires more invest- to Eliminate River Blindness, and, most ment in basic research by large countries recently, the Global Health Challenges ini- that rely mostly on the basic research of oth- tiated by the Gates Foundation. Thus there ers, and more enforcement of international are many opportunities to work out better property rights. Addressing the problems outcomes. What is required is greater aware- of growing internal and international in- ness of the interdependence of the world equality requires more and better domestic on the actions of the main countries, and and international redistributive policies, as greater leadership to make the first signifi- well as more efforts to develop innovations cant moves toward solutions. that serve the needs of poorer populations, POLICY BRIEF

The views expressed in Policy Briefs are those of the authors and do not necessarily reflect those of the Growth Dialogue or George Washington University.