In what way do national systems of innovation matter for learning

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					           In what way do national systems of
      innovation matter for learning, upgrading and
        innovation processes in services GVCs? A
            review of the empirical evidence.

                           Paulina Ramirez
                     Birmingham Business School



'Offshore services in Global Value Chains: New drivers of structural change in
Latin America and the Caribbean?', ECLAC, Santiago, Chile; 18-19 October 2012
      GVCs, in-house learning routines and NSIs:
       literatures that do not talk to each other
• GVC perspective a number of advantages over traditional IB

• GVC focuses on MNCs but also indigenous-owned firms whose
  activities and competences are shaped by participation in GVCs.

• Focuses value and location of FDI but also nature of the activity.
  Allows a more detailed study of the knowledge and skills required
  by subsidiary or partner firms.

• Studies of upgrading in GVC find that upgrading does take place in
  GVCs. However, not automatic depends on governance of GVC,
  type of knowledge but also existing competence of firms. Firms that
  upgrade most are those that already have in-house capabilities.

• Doesn’t say how upgrading takes place. Doesn’t analyse firms.
                  Studies of firms
• Learning is difficult and requires conscious investment

• However firm do learn from routine activities. Passive
  Learning

• For more complex learning firms need systematic in-house
  routines for learning and knowledge acquisition (e.g Technical
  departments, R&D)
            National systems of innovation

•   Learning is a social activity. Occurs through interactions inside the firm
    and between the firm and social environment it is embedded in (customers,
    suppliers, finance system, training systems, universities).

•    Therefore, national institutions influence and shape how and what learning
    takes place. Gives rise to different types of learning and upgrading.

•   National business and innovation systems differ between countries. Notion
    of ‘best practice’ not meaningful.

•   Varieties of Capitalism: Business systems are not product of logic (are not
    technocratic problems) but are the product of political and social choice.
    They are often contested (e.g. national skills systems, ownership of IP).
    Different countries make different choices.
GVC             Inside firm




                              ?
      NSI/VOC
              Review of Empirical literature

Looked at GVC literature:

• Very little on role of national institutions on learning and upgrading
  in GVCs though studies argue that link needs to be made.

• How GVCs affected learning in different types of firms (e.g.
  MNC/indigenous)

Looked at literature of NSI and VoC. Very little on:

• How national institutions support learning in GVCs,

• Whether firms in GVCs learn and upgrade differently from firms not
  in GVC.

• Whether firms in GVCs make different demand on NSI
            Empirical studies identify to five
                  institutions/factors

•   Institutions related to human capital;
•   The national science and technology research system;
•   Industrial structure;
•   National demand;
•   Intellectual property protection.


Most empirical studies on business services are India, Ireland, E.
European

• Main difference: India has MNCs but also significant indigenous
  industry. Ireland and E. Europe strong MNCs very weak indigenous
  firms.
Institutions related to human capital: Education, training
                          and skills


• Offshoring of business services started before ICT. A number of
  countries (e.g. Ireland, Barbados) developed business services
  industry based on advantages of location, English-speaking
  workforce, cultural proximity to main market, openness to FDI.

• Convergence between ICT and business services made technical
  skills more important. India and Ireland early development in IT
  related industries and have diversified into ICT-enabled business
  services from there.
          Education and skills development system
•   India entered business services from strong IT services position. Skilled
    workforce (at low cost) singled out in all studies on success of this industry

•   Government initiatives in IT education started early (1970s and 1980s):
    introduction of graduate and postgraduate programmes in computer
    sciences. Proficiency in computer programming made mandatory for
    undergraduates of IT colleges and for science postgraduates of all major
    universities.

•   Government-sponsored initiatives resulted in both public and private
    training initiatives to develop software skills amongst the workforce. Led
    to establishment of private training colleges and training in workplaces.

•   India's engineering colleges emphasised in all studies. They are linked to
    the agglomeration of software MNCs around the pools of skilled labour
    (e.g. Bangalore).

•   With time, significant in-house training programmes by big Indian firms
    (e.g. TCS, Wipro and Infosys. Often bigger than some university
    programmes
• However, some questions with this system.

• References to inefficient use of human capital with highly
  qualified engineers working in tasks that underutilize their
  knowledge and skills.
• Explanation given: Indian software firms (above all those
  servicing the US rather than the local Indian market) prefer to
  recruit university trained engineers even for non-technical
  tasks rather than diploma holders from private training
  institutes to convince US clients that they have a qualified
  workforce. Skills used as a signalling device

• Evidence of a polarised skills system with a very large pool of
  unskilled workers, significant numbers of graduates who are
  underutilising their skills and a weak middle.

• No doubt that there has been significant upgrading in Indian
  based GVCs- both MNC subsidiaries and indigenous firms-
  but argument about inefficient use of skills important because
  leads to tight labour market and skills shortage in other
  sectors
                    Ireland and E. Europe

• Business services dominated by MNC with Indigenously-owned
  firms very weakly connected, if at all, to GVCs.

• Presence of business services MNC subsidiaries made specific
  demands on national educational provision which not in existence
  in countries. Key point was willingness of governments to respond
  to these demands.
• E. Europe: introduction of secondary-level training for future call-
  centre employee; the organisation of university-led training
  courses in ‘services-science’.

• MNCs interested in language skills. University graduates being
  recruited because they have language skills. Other skills not being
  used (Hardy 2011)

• Questions about underutilized skills.
                            Ireland
• From 1960s industrialisation strategy of FDI-led growth based on
  attracting higher-value activities. Policies to attract FDI in IT
  since 1970s and to establish technically qualified workforce

• Key has been the responsiveness of Irish education policy to the
  skills requirements of MNCs. Establishment of Regional Colleges
  who specialised in IT and software training. During 1980s
  initiatives to train school leavers in the basics of IT, office
  procedures and business operations.

• Grants given to employers for employee training. Training
  subsidy given to MNCs as part of incentive package to invest in
  Ireland (Apple, HP, Dell, Microsoft).

• Ireland’s accession to the European Union key to the growth of
  its vocational and technical education system as expansion was
  financed to a large extent with the assistance of European Funds.

• Upgrading, but questions raised about heavy orientation to needs
  of MNCs and a neglect of the requirements of indigenous firms
            Science and technology system
• National science and technology systems important for several
  reasons

• (i) training of very high skilled workers without which limits
  to upgrading
• Information and consultancy services; access to new
  technologies
• (ii) source of new entrepreneurial start-ups

• After a certain point in order to undertake more knowledge-
  intensive activities of GVC need access to very high-skilled
  workers with doctoral degrees as well as research expertise.
  This is required for ‘problem solving expertise’, thinking out
  of box
                      India S&T system

• Government R&D efforts in software development distributed
  throughout a variety of public research institutions (including
  military research) and universities was central to the development
  of a critical mass of skilled workers with software expertise

• This seen as essential for the upgrading activities of both MNC
  subsidiaries and indigenous firms

• Many of these highly-skilled workers went on to become the
  entrepreneurs that underpinned the development of local cluster of
  'home grown' firms.

• Some studies however refer to the need for bigger postgraduate
  research and training infrastructure. This has been identified as a
  constraint to be able to upgrade to more complex activities
                        S&T in Ireland
• Due to increasing competition for FDI Ireland saw building of
  national research system ‘with international reputation for
  excellence’ as key to attracting and embedding high-value
  activities of MNCs. Seen as alternative to lowering wages.
• Since 2000 major initiative in S&T bringing in scientists from US
  and EU. Evidence that some MNCs have upgraded some activities
  due to this policy. Partly because Ireland is subsidising large part
  of R&D of these MNCs in Ireland (e.g. Lucent, DELL, Microsoft).
  Also evidence of increase in linkages between firms with higher
  skill intensity and Irish research but modest.

• S&T policies modelled on US NSF which seen as ‘best-practice’.
  Reputation for excellence seen as necessary to attract MNCs. But
  this research not relevant for indigenous SMEs who need support
  in absorbing existing technologies that ‘international excellence’.
  Therefore very weak linkages with indigenous firms. Few spin-
  out firms.
                           Industrial structure
•   Important for formation of new firms that then insert in GVCs, often at
    higher nodes.

•   MNC spin-outs important in India and Ireland. Though often failure of
    MNCs triggers spin-out activities. Exit of IBM in India and collapse of
    Digital in Ireland led to formation of indigenous firms

•   Existing national firms also important. In India many new entrants into
    business services are existing large firms diversifying from hardware into
    business services or firms that had large in-house data processing activities
    (WYPRO)

•   Spin-outs need financial support and not clear what the financial system
    supporting these firms are. Government venture capital support exists in both
    Ireland and India. It also appears that much of the financial dynamisms for
    services firms comes from Silicon-Valley based Indian techno-entrepreneurs
    that have become Angel investors for Indian based firms.
                     Role of national demand
• National demand key for upgrading in early and later stages of development of
  indigenous firms. Most firms begin to develop skills in national markets- from
  there more effort needed to integrate to GVC.

• Demand from private sector firms important. In India exit of IBM important for
  creation of indigenous firms who were called upon to service domestic market.
  In Ireland indigenous software firms developed as suppliers to national banks.

• Public procurement also key for stimulating learning and skills in more complex
  projects. This can be important for established firms. In India , example given of
  large domestic projects (e.g. reservation system for Railways, IT for Bombay
  stock-exchange) that key for upgrading capabilities of indigenous firms.
  Argument that these projects more complex than work done for MNCs.

•    Brazilian banking and telecommunications industries for Brazilian software
    firms. In Indian pharma industry domestic market important for expertise that
    now used to export R&D services.

• However domestic demand not replacement for drive for international markets.

• Responsiveness to demand important for learning. Distance from centres of
  demand will limit upgrading. Where will high-valu activities be located?
                                IPR
• In past developing country firms could develop knowledge
  and skills via reverse engineering. Argument that this allowed
  many firms to inset themselves in GVCs of EU and US firms
  as manufacturing or service providers.
• Indian pharma best example. ‘Developmental patent regime’
  of past meant existing Indian pharma firms could develop the
  chemical skills that allows them to insert themselves in EU
  and US led GVCs as R&D service providers. However, also
  meant that Pharmaceutical MNCs reluctant to invest in India
  for many years due to lax IPR.
• In India NASSCOM (ICT Industry Association) supporting
  anti-piracy initiatives.
• Within same country different industrial sectors may have
  different interests with respect to IPR
                        Conclusion
• Empirical studies indicate that national education and training
  systems are important in shaping the national skills and
  knowledge profile of the workforce needed to participate in
  GVCs. The role of national market important for knowledge and
  skills at firm level at initial stages and through demand for
  complex projects.

• NSI important for shaping the characteristics of firms that will
  engaged in GVCs by influencing firm formation and the balance
  between MNCs and indigenous firms.

• Important because these two types of firms may place different
  requirements on NSIs needing different types of support.
  Sometimes these requirements will conflict between countries
  and different GVCs within countries (e.g. IPR, nature of S&T
  systems, priorities for spending).

• Need more research. Links between GVCs and NSI not really
  understood.

				
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