Abstract: Public policies to boost economic development in low-income countries or communities (LICs) are focused on either outward-oriented strategies (e.g. foreign technology transfer, tax incentives to attract foreign MNEs) or inward-oriented strategies based on expensive R&D expenditures. But such strategies are generally not viable in the context of LICs. This paper proposes an innovation strategy based on historical community knowledge. It presents how to industrialize pre-existing knowledge through technological propulsion committees that would gather historical knowledge owners with local business schools and IT companies. The paper also addresses the public policy challenges to overcome in order to implement this strategy.
Innovation, or the introduction of new products and processes, is a key element of economic competitiveness. But it is often achieved through costly and lengthy processes, such that its cost is often borne by entities of sufficient financial importance, either Multinational Enterprises (MNEs) or wealthy governments. In such a context, which policies can a low-income country or a low-income community (LIC) implement to develop an advantage in innovation and ultimately boost its economic development? In the context of LICs, boosting local innovation has the double advantage of 1) supporting the development of local MNEs in “niche” sectors and 2) developing a dynamic comparative advantage – therefore reinforcing international competitiveness and simultaneously attracting the local establishment of foreign MNEs. But here, mechanisms should be set up to minimize the adverse impact of such foreign MNEs on local capacities. In this article, we will see 1) the challenges that innovation represents for LICs, 2) the proposed public policies to undertake, and 3) the safeguards needed for the proper implementation of this strategy.
Innovation usually comes as the result of costly and lengthy research and development (R&D) investments – not always successful. Costs are often borne by MNEs, either because they constantly seek to invent new products or processes[i], because they have the financial ability to buy the inventions of small innovators, or because they have the technical capacity to massively produce inventions that are not protected[ii]. Conversely, LICs can hardly support technology strategies through the channels available to the most industrialized countries, e.g. focus on customized industrial machinery, fashion-sensitive consumer items, hi-technology and information technology clusters (UNCTAD, World Investment Report 1999, 202)[iii]. Generally, MNEs do not focus on local knowledge for the set-up of local R&D facilities is deemed uneconomical[iv] but rather focus on how to adapt their products to local markets (UNCTAD 1999, 215, 216)[v]. The issue therefore is how to create innovation in LICs, which have neither the industrial network nor the financial ability to heavily invest in R&D.
To address the issue, technology transfer is often presented as a desirable strategy. According to the UNCTAD, this transfer can be achieved through knowledge internalization – when harnessed and utilized by the entity (MNE or country) that produced it – or knowledge externalization – when acquired by the entity through minority joint ventures, franchising, capital goods sales, licenses, technical assistance, subcontracting or equipment-manufacturing arrangements[vi]. But technology transfer is a costly process. It can contribute to the enlargement of the local pool of knowledge, but it is not necessarily accessible for LICs and will not automatically translate into positive spill-over effects for the local economy. The proposition therefore is to focus on existing local community knowledge.
The strategy that we propose here for LICs and that has the advantage of inducing lower implementation costs can also be used within communities with more financial capacities so as to leverage historical community knowledge.
2. Public Policies
Proposed innovation strategy: focus R&D on pre-existing local knowledge
The UNCTAD (1999, 215) observes that “R&D does not play a role in early stages of industrial development.” The proposition is to remedy that issue. Indeed, traditional R&D is oriented towards technology-intensive developments – necessary costly. The UNCTAD analyzed that “much of this R&D is directed to absorbing, adapting and improving imported technologies.” The proposition here is to use the pool of pre-existing local knowledge to leverage the local economy, create a dynamic comparative advantage and boost local MNEs. Every community uses specific traditional products. The idea for each community would be to list them and study their potential for international development, e.g. energizing green ice tea used in the traditional communities of Vietnam, traditional seaweed used as food in coastal communities of East-Asia, cashmere veils in Uzbekistan, traditional herbal remedies used in Namibia, etc. The production of these products would then be integrated in local production chains.
The advantage is that such knowledge is ready-to-use; it requires lower investments than for technology-intensive developments. The first goal is to give an incentive to knowledge owners to create business ventures in their fields of activity. The additional creation of “technological propulsion committees” to enable the development of projects in partnership with local business and management schools and local IT companies, would help them develop their ventures. The second goal is to connect knowledge owners with local industries that could buy and absorb such knowledge to create new products. Energizing green ice tea, for example, has long been informally used by local populations but never industrialized. The idea would be to help the community industrialize and sell the product, or help a local beverage industry buy and absorb this knowledge to complete its line of products, while employing the local community from which it bought the knowledge.
Complementary public policies
Economic leverage based on pre-existing local community knowledge, to be efficiently appropriated by the local industry, can be backed up by different complementary policies. First, it can be supported by the development of linkages between foreign and local MNEs or between local MNEs and local industries[vii], between national MNEs and university research centers, among the different industrial sectors (e.g. biology and agri-business), with suppliers of inputs or capital goods, customers, and technology suppliers (UNCTAD 1999, 197). It can also be supported by increased access to finance for local MNEs and industries. It also requires the reinforcement of protection and enforcement of intellectual property (IP) rights, which implies not only having one national IP monitoring institution (e.g. Bénin Centre National de la Propriété Intellectuelle and Bureau Béninois du Droit d’Auteur) but also enforcing those rights by helping the informal sector shift to the formal sector, e.g. through the facilitation of business registration processes, tax incentives, benefits for informal businesses transferring to the formal sector, easier access to finance for registered businesses. In addition, the strategy can be backed by technical and industrial training, i.e. in secondary schools, universities and executive training centers (UNCTAD 1999, 197). As local and ancestral knowledge is often despised in primary schools, putting it back at the core of the community development strategies could boost local industrial innovation and the development of local MNEs. In addition, some tax incentives could also boost the project[viii], but they are not always desirable for low-income countries already have a low tax base. Since the opportunity of gaining access to local knowledge already represents an attractive business opportunity for MNEs, it might not be advantageous to increase their profit margins to attract them. Governments could rather focus on the establishment of local innovation hubs. Industrialized regions currently focus on bio-tech (trans-regional pole between France, Germany and Switzerland), med-tech (Norway) or hi-tech (California). LICs could focus on the industrialization of their local knowledge, and potentially on how to feed it with technology-intensive devices. Finally, gaining access to highly qualified scientists and engineers, preferably from the community itself to avoid knowledge leaks could be helpful but costly and not sufficiently inward-oriented. But with our proposition, the need for such experts is much lower than in technology-intensive sectors. Innovation policies become accessible to lower income communities.
3. Overcoming Intellectual Property Issues
Several challenges should be addressed to ensure the implementation of this strategy. The first problem relates to the local MNE producing the product. It will encounter different problems, with on the one hand the registration of the brand name or patent (e.g. bureaucratic, lengthy and costly process), and on the other hand the post-registration enforceability. Enforceability is particularly a problem if the judicial system is not reliable and judicial outcomes uncertain, and if the informal sector predominates, which makes monitoring hard to manage. Here, the international development of the local MNE helps overcome this issue at the company level, for geographical diversification reduces the risks of IP violation.
The second problem relates to the local community owning such knowledge. Such communities rarely have IP rights, because it is generally hard to identify one creator or owner and because such communities are usually not aware of the necessity to register their knowledge. Their ideas or inventions are therefore stolen without compensation[ix]. Furthermore, even if the community had IP rights, it risks being excluded from its creation by the company which will obtain IP rights and claim exclusive use.
The trade-off, therefore, would be to balance the need between keeping knowledge secret and registering patents that only have a 30-year life span before creations go into the public domain. Here, there are two solutions: first, ideally, help those communities industrialize and produce themselves; second, create community funds where communities which use a product or system could register their creation and through which industries interested in their product could make their payments. This fund would then offer financing to business creation in that community. A fair use exception could be foreseen for the members of that community to allow them to continue using their traditional product.
Innovation is a key element of economic competitiveness because it allows countries and MNEs to boost their dynamic comparative advantage. It gives them leadership on new untapped markets, as they create blue oceans of business opportunities where they can develop prior to the arrival of market competitors (Kim and Mauborgne, 2005).
Yet innovation is hard to achieve – and to sustain –, for R&D is expensive. The classic view of R&D is to focus on technology-intensive sectors, which have the potential for creating higher value-added. Some LICs have managed to compete in this field by copying such technologies, producing them at lower cost and developing improved versions of those technologies. Another strategy is to focus on pre-existing knowledge, therefore reducing the cost of the research element of R&D, and on the industrialization of such pre-existing knowledge, therefore focusing on the development element of R&D.
Local knowledge, traditions and ancestral customs are already part of the countries’ static economic advantage. Tapping in those niche sectors would help countries dynamize their static advantage. But this local knowledge of which they already have mastery needs to be translated into industrial terms – and protected – to serve the needs of the local industry.
Innovation and tradition seem to be oxymora. But they can also work together to push forward the frontier of local capabilities.
Kim, Chan and Renee Mauborgne. 2005. The Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant. Boston: Harvard Business School Press. (http://www.amazon.com/Blue-Ocean-Startegy-Uncotested-Competition/dp/1591396190/ref=sr_1_1?ie=UTF8&s=books&qid=1256033787&sr=8-1)
UNCTAD, World Investment Report 1999. Foreign Direct Investment and the Challenge of Development. New York, NY and Geneva. 1999. (http://www.unctad.org/en/docs/wir1999_en.pdf)
Yuk, Pan Kwan. “Africa: The New Frontier for Fast-Foods?,” Financial Times. http://blogs.ft.com/beyond-brics/2011/10/07/africa-the-next-frontier-for-fast-food/#axzz1aKqeBzGR(accessed 16 January 2012).
[i] For example, Steve Jobs’ strategy in Apple was focused on innovation, design and creative technology.
[ii] This is for example the case of pharmaceutical MNEs which copied for free and produced anti-malaria products that had been conceptualized by small African communities, integrating the active agent in different formulas to justify patentability.
[iii] On the contrary, such policies can rather backlash on the local economy, e.g. when the Brazilian government decided to create hi-tech clusters in Campinas and São Carlos, local companies were bought by foreign MNEs that chose not to sustain the prior existing local R&D efforts of those two companies, but rather focus on R&D at the parent company (UNCTAD 1999, 202).
[iv] Only 1% of R&D by MNEs is made in developing countries.
[v] See, for example, the development strategies of L’Oreal or of American fast-food companies in Africa.
[vi] Korea and Taiwan, for example, which succeeded the most in building up domestic technological capabilities, did so by relying mainly on externalized technology transfer, while encouraging the absorption of imported technologies, either through franchising or original equipment manufacturing, and/or by investing in their own R&D to imitate and build up foreign technologies (UNCTAD 1999, 209).
[vii] See, for example, the case of India where foreign MNEs seeking access to local markets need to partner with local companies, as it was the case in October 2011 with the establishment of Hermes in India.
[viii] Successful tax incentives are, e.g., tax credits for R&D expenditures as well as for upgrading human capital and setting up industry research institutes, and tax exemptions on technology development reserve funds.
[ix] This was the case, for example, with the species of yams created at the community-level in Northern Benin.
Author: Senami Astrid Houndete is a Juris Doctor/Master 2014 candidate at Columbia University School of Law and at the Sorbonne Law School. She thanks Professor Karl P. Sauvant, Professor at Columbia University School of Law, for his class on Foreign Direct Investment and Public Policy which offered a framework for this article.