The Relevance of SMEs and Innovation in Developing Countries

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The Relevance of SMEs and Innovation in
Developing Countries
Fulvia Farinelli Investment and Enterprise
Competitiveness UNCTAD/DITE
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The new international context

• The initial entry point for latecomers was
  traditionally located in the production and
  processing phase, where opportunities to exploit
  low wages and increasingly highly skilled labor
  lead to a competitive pricing structure.
• More recently, however, such advantages have
  become less sustainable and the locus of created
  competitive advantages has shifted both upstream
  and downstream to more knowledge-based
  activities.

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Growth in technology-intensive products
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Developing countries are doing better than
developed ones in advanced technologies.
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But manufactured exports highly concentrated in
the developing world (1998 )
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UNCTADs work on Innovation - A policy perspective

• Knowledge and the capability to learn have become
  crucial to achieve economic development
• Absence of targeted innovation policies
• In developing countries there is an urgent need
  to strengthen the relevance of institutions and
  policies dealing with science, technology and
  innovation to the rest of the economy

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Core activities

• Science, Technology and Innovation Policy Reviews
• CSTD
• Other technology-related studies

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Analytical framework

• Innovation is a systemic concept
• Innovation is taken to mean a process by which
  firms master and implement the design and
  production of goods and services that are new to
  them, irrespective of whether or not they are new
  to their competitors
• In a knowledge-based economy, the need for
  innovation is continuous and equally applies to
  natural resources-based, traditional and high
  tech sectors

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Why is this important

• It is not only inventions, RD and radical
  innovations that are important, but also
• Continuous adaptation and imitation, incremental
  innovation and tacit knowledge, become crucial
• SMEs become key actors in the NSI

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SMEs

• Primary agents for growth

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Mutually reinforcing changes in the organization
of manufacturing

• Large plants are moving away from mass production
  and into batch production.
• Increased specialization, causing large plants to
  shrink and allowing small manufacturers to shift
  toward higher volumes of production.
• Subcontracting, outsourcing and networking,
  involving a new divisions of labor between large
  and small firms and between and suppliers and
  customers.

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As a consequence

• This perspective opens up interesting windows of
  opportunities for innovation and competitiveness
  in developing countries, even those with a
  tradition of SME-based traditional manufacturing
  production locked in the cheap end of the market.
  

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Key policy issues

• What kind of policies input can support
  innovation and the technological upgrading of
  traditional activities into growing
  knowledge-based sectors?
• Should developing countries pursue a development
  path based on the processing and transformation
  of natural resources and the upgrading of
  traditional sectors, or should they leapfrog to
  high-tech, knowledge-based sectors?

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Conclusions I

• Match domestic skills and technological
  capabilities to export structures, while looking
  to upgrade technology-intensity of exports for a
  bigger slice of the trade pie.
• No single model technology policy has very
  different forms, but experience shows key
  factors.
• E.g. Korea and Taiwan show importance of strong
  domestic innovative bases, with skills
  institutions for technical change.

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Conclusions II

• Importance of FDI, TNCs and technology transfer
  in building domestic capabilities skills,
  innovation systems, enterprises, incentives.
• Active policies can greatly enhance technology
  transfer and local learning.
• There is a need to support developing countries
  in their efforts to a achieve a rapid, flexible
  adjustment to new patterns of production and
  technology.