All the Way to the Top: Innovation, Growth, and the Role of the State

The grail of development was in focus for a seminar arranged by Swedish Entrepreneurship Forum and Stockholm Institute of Transition Economic (SITE) on November 27.  Senior Economist from the International Monetary Fund (IMF): Dr. Reda Cherif and Dr. Fuad Hasanov were presenters.

Standard growth policy not sufficient?

For the past one-half century, most emerging and low-income countries have not been able to reduce their income gap with advanced countries. Despite standard growth policy prescriptions, only a few countries have made it all the way to the top.

Traditionally, and according to literature, fortune has been about introducing new goods and tasks and move up the “quality ladder”. To do this export sophistication have been a determinant of long-run growth as well as macro stability and minimum state intervention. But still many countries do not go all the way. Standard growth policy advice may not be sufficient, Fuad Hasanov said.

-Market failures give room for the leading hand of the state to create a dynamic export sector.

Faud Hasanov

State interventions are either direct – to encourage domestic firms in targeted new industries – or indirect, supporting firms develop while learning new tasks. A third way is to enforce market discipline. Despite the support received, firms must export and are subject to fierce competition, Hasanov described.

Sophisticated exports, R&D and patents

For example both Malaysia (Proton) and Korea (Hyundai) invested in the automotive sector. The Korean, more successful way, included export from day one and the idea of moving first before learning and adjusting. Also in Korea the R&D spending was high as well as the level of domestic firm creation and patents per inhabitants.

-You need a critical mass of firms to be successful in a certain sector, Hasanov added.

Key policy getting to the top

The missing element for Malaysia was the relatively small amount of patents and R&D spending. Specializing in producing or exporting is complicated but should (according to the text book) lead to higher R&D and innovation, Reda Cherif said. Venturing into these sectors with purpose-specific policies for example in skills and infrastructure is a way forward, he continued.

-In the case of Nokia in Finland government procurement had an important role. The Swiss way is university-centered innovation managed through co-founded partnerships between the university and the industry. Reda Cherif

Furthermore there is a need of policies for attracting foreign talent and changing incentives for social attitudes regarding the emergence of entrepreneurship and risk taking.

To get to the top you need to focus on export activities of domestic firms and local technology creation, according to both IMF economists.

-Picking sectors is better than picking firms while preserving competition. You should also be competing in international markets, move to frontier technology early on, enforce market discipline and accountability, said Cherif.

What you have, what you do and what you create

Christian Ketels, Harvard Business School was the seminar’s discussant. He mentioned that we now look beyond macroeconomics of a country to see what drives prosperity. It all starts with inheritance – what your natural resources are and how your institutions are constructed. Next comes what you do with your legacy.

-It is obvious that rich countries do different things than poor countries. Richer countries are active in more sectors than poor countires. Finally it is what you create – this is not all about industries, it is also how well you do it.  Christian Ketels

Upgrade fundamentals along the way

Commenting the example of Korea and Malaysia where each country created an industrial policy that supported different brands of cars, the Proton and the Hyundai. None of them were excellent cars to begin with but Korea learned and developed industrial policy and framework conditions along the way, Ketels said.

This shows us that we cannot just create industrial policies or better framework, you have to develop and upgrade the fundamentals adapting to the development in different sectors. If we look at Singapore, they focused on the Life Science sector but also had a long term plan to improve the fundamentals.

-This is an example of the innovation paradox – a country cannot throw in lots of money into R&D without a plan. Christian Ketels, Reda Cherif, Faud Hasanov

A new role of the state?

Policy gives you a framework but you need to be much more precise. That often includes a strong commitment from civil servants, Hasanov said.

What happens now is rethinking the framework, it used to be all about removing obstacles for business. Today’s discussion is about what kind of role the government can play. It’s a new way economist think, Cherif added.

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