The Role of Technological Change In Asian Growth

Technology has been recognised as a major driving force behind industrial progress and structural change, enabling countries to increase their competitiveness and hence their share of international trade. This has been demonstrated in recent decades by the development experience of the so-called ‘Asian tigers’ which have increasingly absorbed modern technology and integrated it into productive activities, thus expanding their output, increasing employment, improving skills, raising productivity and generally growing in economic strength (Dept of Foreign Affairs and Trade, 1997).

In order to understand the way technology impacts economic development within the newly industrialised economies (NIEs), this discussion will firstly concentrate on the some of the issues that affect the relationship between technology and economic development. Mainly, the issue of technology transfer becomes of most importance when considering the forecasted success of an NIE. Will comparative advantage be found through gradual learning and adaptation? Or will countries succeed ‘leapfrogging’?

Moreover, the discussion will also look at the involvement of indigenous research and development and its contribution to achieving competitiveness, as well the foreign investment and its effect on industrial development. Furthermore, the economic history of South Korea will be examined to exhibit how these economic tools impact a nation’s economic development. South Korea has historically proved the significant advantages involved with utilising technology to increase country competitiveness, gaining the status of being one of the more advanced NIEs.

South Korea was one of the first countries to spread the benefits of technological development. A cautious combination of state encouragement through fiscal, tariff and subsidising means and of capital enterprise led to rapid economic and technical progress, first in labour intensive industries such as textiles, but later in the heavy and chemical industries. Korea’s GNP grew 155 times from $1. 9 billion in 1960 to $294. 5 billion in 1992.

What made this economic and technical growth possible was the foresight of the leadership which emphasised “building the nation through technological development”, the strong resolve of the government and the people toward economic development, and an abundant and qualified work force (Sakong, 1993). However, although the country’s success inspired others to adopt similar means, South Korea has also shown that its particular economic model is by no means foolproof.

Following the Asian crisis, less developed countries have realised that in order to increase competitiveness they must firstly realise their own competitive advantage. The current emergence of world open markets and a decline in comparative advantage of cheap labour shows no other existing recourse but to develop new, more capital intensive forms of production, utilising technology as a competitive tool to assist their capabilities and get ahead (Woronoff, 1996).

Today the relative absence of efficient technology is one of the traits that distinguishes the developed countries from the developing ones Some pessimists may suggest that as technology is accumulated through assimilation and learning it may be impossible for the less developed countries to catch up, thus disabling the notion that the market will regulate itself to achieve the competitive status that these countries seek (Asian Development Bank, 1995).

On the other hand, modern technology analysts suggest that ‘leapfrogging’ on the part of the developing countries might enable them to catch up in any field. The hypothesised explanations of international trade assume a given and unchanging state of technology. The basis for trade is attributed to factors like labour productivity, factor endowments, and national demand structures. In a dynamic world, however, technological changes occur in different nations at different rates of speed.

Technological innovations commonly result in new methods of producing existing commodities, or in the production of new commodities. Today, the present developing countries have the advantage of the availability of international resources and sophisticated technical assistance, however, in order to develop new more capital-intensive forms of production, they require to build a skilled labour force that is capable of learning new technologies, as currently the progress of some developing countries is being hindered by a shortage of technologically educated workers. Read about The Effects of Technology on the Accounting Profession

The fact of relevance that should be highlighted to the developing countries today, is that the most important technological advances are basically grounded in scientific research and development, as well as effective academic and industrial training programs. Korea invested in human resources prior to launching a drive to develop the economy. Had it not been for the training of human resources first up, Korea’s economic development would have been much retarded.

This implies that investment for human resource development should precede industrialisation efforts, as human resources cannot be trained overnight when needed (Sakong, 1993). Therefore, although these countries may possess technology transferred from more developed economies, a primary objective that these countries should embrace, is they may never realise its full potential unless this technology is understood and learned.

Otherwise the country will never be able to sustain its economic position, forcing outside intervention, an example of which was seen during the Asian crisis, and will most likely to remain a borrower of technology and not the original source, thus dashing hopes of catching up to its more advanced competitors (Asian Development Bank, 1995). The current wave of scientific discoveries and technical advances provides mounting opportunities for economic growth and improved social well-being.

But this rapid increase in new knowledge only provides economic and social benefits when it is effectively exploited and supported by appropriate policies thus leading to innovation, as mentioned before. In essence, innovation is the ability to manage knowledge creatively in response to market articulated demands and other social needs eg unemployment, sustainable development and ageing population (Chowdhury & Islam, 1993). It is now well recognised that firms are the main source of innovation and that it is ultimately the technological capabilities of firms which determine a country’s technological, and hence, economic performance.

The Korean economy exemplified export leading policies which forced firms to acquire technological capabilities quickly in order to survive international competition in price and quality. A hypothesis offered by Soesatro and Pangestu (1990) is that an inwardly-oriented developing country may not be able to acquire technological capability as quickly as the former due to the lack of competitive pressure. Two broad components of technological capabilities exist. First, those capabilities which enable firms efficiently to accumulate assimilate and appropriately adapt existing technology (technology diffusion capability).

Second, the capabilities which allow the creation of new technologies based on R;D, and hence market leadership (technology creating capability). A study undertaken by the World Bank (2002) inferred, that “an environment that stimulates innovation, derives from spending on (R&D) by public and private entities in a competitive environment, and will maximize the incentives to innovate and commercialise findings by existing firms as well as by new entrants”. This hypothesis was offered as a phenomenon that had lead to the earlier rapid growth within the NIEs.

Krugman (1999), however, has argued that previous rapid growth achieved by certain East Asian economies has largely been a result of substantial use of labour and capital, rather than efficient use of technology. He also inferred, that following the exhaustion of the above-mentioned resources, the rate of growth will tend to lessen unless there is a substantial infusion of modern technology, or more importantly, an indigenous capability to develop technology is established, coupled with a strong capacity for scientific research.

Otherwise, the technology gap that currently exists between developed and developing countries in unlikely to close. A particular problem for the developing countries has been that most scientific research and most up to date technology originates form the developed countries, which, with their enormous reservoir of scientific knowledge and advance technology, continue to progress in both those fields far more rapidly that the poorer countries. The NIEs have also faced with rising costs where state of the art technology is involved.

In consequence, they have been obliged to spend more and more on their technological development merely to keep abreast and so preserve their competitive edge. In other words, developing countries may need to spend money on research and development not so much to develop new technologies as to modify and improve the technologies which they have already acquired from abroad and to ensure they are environmentally sound (Asian Development Bank, 1995). A further problem and one that is growing, lies in the area of very advanced technology.

Not only is it extremely expensive, but its possessors, the industrialised countries, are becoming ever more reluctant to part with it at any price for fear that they give rise to potential rivals. It is apparent, therefore, that as a country reaches technological maturity, it must spend substantial resources on research and development even to stay where it is thus highlighting the close correlation between research and development and technological capabilities.

In this regard, the Republic of Korea, which has already reached such technological maturity, provides useful indicators. From 1984 to 1990, the country’s research and development expenditure doubled to exceed 2 percent of its GNP. Furthermore, the contribution of the private sector to such expenditure rose from 32 percent in 1980 to 86 percent in 1986 (Asian Development Bank, 1995). Bluementhal (1979) suggested, that the technological level of a country is a positive function of indigenous R&D, technology imports and the relation between the two.

However, other academics (Kumar (1994), Fikkert (1993)) propose that the relationship is negative. In his study, Fikkert (1993) depicts that technology imports and R&D have a significant negative relationship; firms having foreign equity participation have an insignificant direct effect on R&D, but they tend to depend significantly more on foreign technology purchases which in turn tend to reduce R&D; and trade restrictions have induced adaptive R&D.

In this context, the role and determinants of foreign direct investment and other forms of technology transfer and their developmental impact assumes importance within this discussion. Foreign direct investment (FDI) is now the most significant type of capital flow to developing countries, exceeding official aid flows by a factor of three. Several arguments have been offered regarding the benefits and limitations of FDI.

Some suggest that foreign investors oriented towards the domestic market frequently have closer links with local companies, and, as the world’s most competitive firms in these sectors, they can provide useful know-how and other basic technology for local firms. Because these foreign firms produce goods and services for the local market which meet world standards, they can indirectly help domestic firms to become more competitive in world markets, thereby enhancing the export potential of indigenous entrepreneurs (Soesatro ; Pangestu, 1990).

The other argument has offered the notion that although FDI can bring key economic benefits such as employment generation and export-led growth, concerns are often raised about its social and environmental impact. The challenge for both investors and host countries is to secure the economic benefits of FDI without widening the gap between rich and poor or damaging the environment. However, whatever the consensus, it is important for any developing country to formulate a strategy for direct foreign investment both in regard to its size and its nature.

Here, consideration of the country’s resource base, both human and natural, will be necessary for the developing strategy must be well balanced, environmentally sound and based on existing social and economic realities (Soesatro & Pangestu, 1990). During the planning process, developing countries should carefully identify those elements of technology which they are lacking. However, such technology as they decide to acquire should match the technology in their possession so that both the new and existing technology can be used together for production and training.

Developing countries should be aware of the technological benefits that can accrue from the investment of venture capital as a means for encouraging the emergence of an innovative society. Venture capital is high in risk but, since it is intended ultimately to result in high profits, it tends to seek out the new and the experimental. It does not necessarily need to be vast in scale, but if carefully applied, often in small and medium high-tech industries, a synergising effect may be created.

This may involve skilled labour, the universities, support services and other agencies involved in research(Soesatro & Pangestu, 1990). Some countries, however, are reluctant to give too much encouragement to the inflow of foreign capital especially of the multinationals, since they fear both their political potential, and their actual economic power. They also fear that the transnationals may easily come to dominate specific sections of the economy and prevent the development of indigenous firms in those areas.

Further, some governments suspect that transnationals may restrict the spread of their own technology to local firms. It must be said, however, that fears of this nature have so far proved groundless(Asian Development Bank, 1995).. Another form of technology transfer that has been available to NIEs is the import of technology. When deciding to import technology, developing countries must be sure of their exact needs.

Technology ranges from the inexpensive to the immensely expensive. The technology offered may also not always be the most suited to a developing country’s requirements. Unfortunately, even large organisations are sometimes persuaded, against their better interests, to pour money into technologies which are too high-powered for their needs. This is particularly the case where electronic equipment, which carries high prestige value is concerned (Asian Development Bank, 1995).

It is therefore essential that developing countries understand not only the economic problems which they are called upon to solve, but also the precise capabilities of the technologies being offered from abroad as a solution for their problems. Since, the science and the technologies involved are sometimes complex and include bioscience, material science and information technologies, this task is not always easy. It will, however, be made easier if the country has already made an effort to establish an academic base from which expert assistance can be called (Asian Development Bank, 1995).

Apart form foreign direct investment and direct purchase, either by governments or private companies, of capital goods, other methods of technology transfer include licensing agreements, turnkey projects and various forms of technical assistance and cooperation. Each developing country should determine which of these methods is most agreeable in terms of technology transfer, human resources, training and cost, keeping in mind the dynamics of markets and trade liberalisation (Soesatro ; Pangestu, 1990).

What appeared to be interesting with Korea was that compared with other developing countries, Korea relied least on FDI, but most on imports of capital goods and informal transfer such as reverse engineering. This policy enabled Korea to uphold its independence from possible control by multinationals. Although it has been previously mentioned that the fear of multinationals has so far been unfounded, the Korean government did not want to risk this occurrence thus regulating the entrance of the multinationals into the country.

The implications that can be inferred are as follows. Firstly, developing countries should view technology transfer as a catalytic source of change to sustain international competitiveness and economic growth rather than as a source for foreign dependency. Furthermore, Korea’s experience has indicated that the majority of technical problems can be solved locally if the capability exists. In other words, technology transfer and local capability building can be viewed as complementary, rather than substitutes (Sakong, 1993).

Overall, despite the technological achievements in the newly industrialised economies (NIEs) of East Asia, significant challenges remain in formulating and implementing policies to ensure successful innovation in firms and thus continued economic growth. Thus among the most technologically advanced East Asian NIES – Korea, Taiwan, Singapore and, to a lesser extent, China and Malaysia – a major challenge lies in developing the scientific research base and, where this already has some substance and scale, improving the linkages between it and industry.

For the less technologically advanced nations – Indonesia, Thailand, the Philippines and Vietnam – these challenges, though pressing are less important than the need to improve the capacity to acquire and use science and technology developed elsewhere. All developing countries need to fine-tune their policies to determine what type of technology will complement their core competencies in order to achieve equality in the global market.