Technological Learning of Latecomer Firms in Developing Countries

Patarapong Intarakumnerd
Professor
National Graduate Institute for Policy Studies (GRIPS)

 

Most firms in developing countries can be classified as ‘latecomer’ firms. A late-comer firm is a firm that faces two sets of competitive disadvantages in attempting to compete in export markets. The first disadvantage is technological in nature; late-comer firms are behind technologically, lacking in research, development and engineering capability. Their surrounding industrial and technological infrastructure is poorly developed. These firms operate in isolation from the world centres of science and innovation. The second disadvantage concerns international markets and demanding users. Late-comer firms are dislocated from demanding international markets that help to stimulate technological advance and innovation. To succeed, these late-comer firms have to devise mechanisms to overcome these two disadvantages (Hobday, 1995). For example, electronic firms in East Asian Newly Industrialized Economies (NIEs) especially Korea and Taiwan used Original Equipment Manufacturers (OEM) and Owned Design Manufacturers (ODMs) mechanisms to advance their technological capabilities and gain access to demanding markets in advanced countries.
Late-comer firms have different levels of technological capabilities. Technological capabilities are classified differently by different people. The most comprehensive and well-accepted delineation is that of Bell and Pavitt (1995). They develop their technological capability framework based on Westphal et al. (1985) and Lall (1992). Firstly they differentiate “technological capabilities” from “production capacity”. The latter incorporates the resources used to operate existing technological systems (i.e., to produce goods at given levels of efficiency and given input combinations). On the contrary, technological capabilities are resources needed to generate and manage technological change. These include skills, knowledge, and experience as well as the particular kinds of institutional structures and linkages necessary to produce inputs for technical change. They also distinguish between “depths” of technological capabilities. A basic level of capabilities permit only minor and incremental technical change, whereas technological capabilities at the intermediate and advanced levels, may result in more substantial, novel and ambitious change. Functionally, they classify capabilities into types: facility user’s decision-making and control, project preparation and implementation, process and production organization, product-center, developing linkage and capital good supply. They emphasise that more successful late-comer firms in Korea and Taiwan, before being able to produce such original innovations as they do today, had developed strong capabilities for generating continuous incremental change in technologies initially acquired from forerunner countries. In less-successful late-comer firms elsewhere, the accumulation of this kind of technological capability within firms has been much more limited.
Similarly, Amsden and Hikino (1993) point to the unique historical setting of the 20th century, in which increasing codification of technology and widening opportunities to buy foreign technology for the ‘post-adolescent’ or ‘mid-tech’ industries has allowed firms in late-comer countries to diversify to several industries (1993: 246; 1994: 124). The diversification of these firms takes the technologically ‘unrelated’ direction. This is because of the absence of proprietary technology in late-comer firms to move up to the higher end of the industry and/or to diversify into other ‘related’ industries like large industrial enterprises in advanced countries. Therefore, the late-comers firms have evolved as ‘learners’, not innovators, by borrowing and improving technology already commercialised by innovating firms from developed countries. Moreover they argue that at initial stage of development, not ‘innovative’ capability in generating new products and processes like in advanced countries, but the so-called ‘project execution capability’, the skills required to establish or expand operating and other corporate facilities (including undertaking pre-investment feasibility studies, project management, project engineering, procurement, construction and starting up operations), plays a supporting role in the diversification process. An example of this is the case of Korean conglomerates during the 1960s-1970s.
Although institutionalised R&D, especially in large companies, played a very important role in developing the technological capabilities of forerunner firms in advanced countries (see, for example, Mowery 2009), the technological learning of latecomer firms in catch-up countries normally started with increasing capabilities related to the routine operation of industrial technologies (such as operating production machinery) acquired from advanced countries. Subsequently, some firms succeeded in developing engineering and then design capabilities. Eventually, a small number were able to start their own product and process development activities, and later research (see Figure 1).

Production Engineering Design Development Research
Not Research Development Design Engineering Production
Figure 1: Process of Technological Learning in Latecomer Firms

In order to do that, absorptive capability for acquiring, adapting/improving imported technology is crucial. According to the pace of learning, late-comer firms can be classified into two types.
A) Passive learners who have to do before they can learn (learning by doing)
B) Active learners. They purposively learn before they do through various means such as reverse engineering, conducting R&D to build up their absorptive capabilities, and interactive learning by interacting with other actors in innovation systems like customers, suppliers, competitors, firms in related industries, universities, public researcher institutes and so forth.
• Of course, R&D is one important mechanism for active learners. According to OECD’s Frascati Manual 2015, R&D comprises creative and systematic work undertaken in order to increase the stock of knowledge –including knowledge of humankind, culture and society – and to devise new applications of available knowledge To be considered as R&D, Five core criteria must be met: novel, creative, uncertain, systematic (planned for and budgeted for), and transferable and/or reproducible (OECD, 2015).
Although R&D is popularly conceived as an activities done by firms with specific R&D departments by specifically assigned R&D personnel. In practice, ‘informal R&D’, i.e., R&D without specific financial, managerial resources and formalised procedures do happen in many SMEs. These firms undertake a significant amount of innovative activities in their design, production and sales departments rather than in their R&D departments which often do not exist at all (Santarelli and Sterlacchini, 1990).
Even R&D either formal or informal is important for enhancing firms’ learning capabilities, in reality firms without R&D can also innovate. According to Community Innovation Surveys conducted in several developing countries, innovating firms in developing countries introduces innovations through a variety of activities other than R&D such as acquisition of machinery, equipment software, acquisition of other external knowledge, training, design, engineering and other activities. In fact, in most surveys, innovations as results of other activities were even greater than those as results of R&D (UNESCO Institute for Statistics, 2015). Corporate strategies and government supporting policies should pay attention to enhancing of these non-R&D activities as well.

References
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Bell, M. and Pavitt, K. (1995), ‘The Development of Technological Capabilities,’ in Haque,
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Hobday, M. (1995), Innovation in East Asia: the Challenge to Japan, Aldershot: Edward Elgar.
Lall, S. (1992), ‘Technological Capabilities and Industrialization,’ World Development, 20(2), 165-186.
Mowery, D. (2009). ‘Plus ca Change; Industrial RGD in the Third Industrial Revolution,’ Industrial and Corporate Change 18 (1): 1—50.
OECD (2015), Frascati Manual 2015: Guidelines for Collecting and Reporting Data on Research and Experimental Development, The Measurement of Scientific, Technological and Innovation Activities, OECD Publishing, Paris.
Santarelli, E. and Sterlacchini, A. (1990), ‘Innovation, Formal vs. Informal R&D, and Firm Size: Some Evidence from Italian Manufacturing Firms,’ Small Business Economics, 2: 223-228
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