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    Governments Can Advance Innovation


    © International Trade Centre, International Trade Forum - Issue 3/2003

    Interview with Vinod K. Aggarwal, University of California at Berkeley

    To create conditions for innovation, governments should promote e-literacy and capital markets as well as set the right legal and technological infrastructure in place.

    Q Why do some countries, like India, succeed in moving into growing trade sectors based on knowledge capital (such as software) while others fail?

    A Access to cheap labour and raw materials do not necessarily predict trade success. Instead, as the case of India shows, countries can bypass standard views of static classical trade theory and develop comparative advantage by tapping into the emerging technological arena. India's rapid development seems to be the product of four key factors:

    • emphasis on education, specifically in advanced technological fields;
    • growth of learning centres such as the Indian Institutes of Technology, which are some of the most competitive academic centres in the world, together with training companies such as the National Institute of Information Technology, which focus on large scale technical training;
    • proficiency in English among the middle classes; and
    • high levels of Indian migration to the United States and elsewhere that has led to both joint ventures and outsourcing in the information technology (IT) industry.

    Q What examples show us that information technology and human capital are key to competitive advantage for exporters in world markets?

    A India's recent economic success is not an isolated case, but rather a prime example of new economic growth. Countries such as China, Korea, Malaysia and Singapore have been using information technology and human capital to construct competitive export industries. A comparison between these countries, and countries rich in oil reserves or other natural resources, reveals that nations that have succeeded in advancing their IT capabilities and developing a skilled workforce are experiencing much higher levels of sustained growth than countries that continue to rely on commodity exports.

    Q What is government's role in supporting innovators and how?

    In terms of strategically promoting growth, the government should be both supportive and adaptive in its relationship with innovators. Rather than directly investing in costly and inefficient state-owned enterprises, government should play a more nuanced role. As the cases of the United States and East Asian countries suggest, governments can foster innovation by actively constructing the physical and virtual infrastructures of emerging industries.

    Although there is often a collective amnesia about the United States government's role in the early stages of the Internet, it was the Advanced Research Projects Agency (ARPA), a United States Department of Defense project, which led to the creation of ARPANET. Eventually, the Internet emerged as a project that united government, academic and business experts in an arena that was not overtaken by a monopoly of government involvement or ownership.

    The governments of East Asia have guided economic growth through their creation of infrastructure. Besides creating tax-free export processing zones and constructing ports, roads and buildings, these countries have established the legal and technological frameworks that allow industry to flourish. Singapore is at the forefront of this promotional effort, as it recently spent at least US$ 2.3 billion to build a biomedical research and development complex for laboratory research. Singapore hopes to attract investors and skilled workers by offering technically advanced jobs and services, as well as a liberal legal infrastructure.

    Governments can also advance innovation by promoting capital markets. As the cases of Japan and Korea show, direct loans can be inefficient and often have severe economic consequences. The success of venture capital in the United States demonstrates that a more market-based accumulation of economic resources is a better option, although such capital is no guarantee of success as the collapse of Internet-based companies after 2000 has shown.

    Q What practical lessons can we draw for policy-makers applying the benefits of ICT to trade?

    A Governments must properly integrate new technologies by crafting an information and communications tech-nology (ICT) programme that fits their specific export industry. Policy-makers must use countries that are currently using ICT as a reference for their own growth, but they must also craft an ICT programme to meet the needs of their own particular export sector. Rather than attempting to shift production to ICT goods, they can use ICT to facilitate the necessary growth of their export industries. ICT fosters commerce by decreasing transaction costs associated with export services such as shipping, insurance and customs procedures. ICT also allows exporters to gather information, promote their products, secure contracts, and facilitate hiring. Although implementation of ICT can take diverse forms, the benefits of ICT are the same across most sectors and regions.

    Vinod K. Aggarwal (vinod@socrates.berkeley.edu) is Professor in the Department of Political Science, Affiliated Professor of Business and Public Policy in the Haas School of Business, and Director of the Berkeley Asia Pacific Economic Cooperation Study Center at the University of California at Berkeley. Currently, he is a Fellow at the Woodrow Wilson Center for International Scholars in Washington, DC. He is founder and editor-in-chief of the journal Business and Politics. Dr Aggarwal would like to thank Janna Bray for extensive research assistance and comments.