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Effect of Economic Policies on New Technology Adoption

Info: 3581 words (14 pages) Dissertation
Published: 6th Jan 2022

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Tagged: EconomicsTechnology


Technology is becoming increasingly very important to the success of all business firms, and to the national economic growth. The process of globalization is driven by technology development and the ability of corporations to uplift the use of technology effectively and rapidly. The technological gap between developed countries and emerging nations has narrowed but still remains huge. The first step to narrowing the gap is for emerging nations to absorb technology successfully. The rapid economic growth achieved by the newly industrialized economies has generated a vast amount of research on the mechanism behind the economic take off. According to F. Montes-Negret (2008), progress in developing countries reflects the absorption of pre-existing technologies not at the frontier inventions. In general terms, catch up refers to the ability of a country to reduce the gap in productivity and income with respect to the leading international countries (Fagerberg-Godinho,2005).

Perez (1988) views catching up as a question of relative speed in a race along a fixed track, according to him, technology is understood to be a unidirectional process. Furthermore, he observes that every country is a beginner in terms of the newly emerging techno-economic paradigm, which implies the possibility of being a latecomer. Research has shown that in the catching-up process, the late-comer does not simply follow the path of a technological development of the advanced countries. Instead, they would rather skip some stages or even create their own individual ways which are different from the developed countries. By doing this, it may result in the developing countries becoming latecomers in technology advancing.

For the country to have growth in economy and industrial development, it needs to have an absorptive capacity and ability to tap in the world’s technology pool. Cohen and Levinthal (2000) explains absorptive capacity as the ability to assess the value of external knowledge and technology and to make necessary investments and changes to absorb and apply these changes in a productive manner. The development of new-to-the world knowledge can be considered to be innovative which can be a costly learning activity that a country can employ in order to catch up with others through technology absorption.

Innovation and technology absorption are two distinct processes, that is, innovation promotes absorptive capacity because the generation of human capital and new ideas, and the associated knowledge spillover effects, help build absorptive capacity. R&D is a key input into innovation and is also an input into absorption capacity.

Absorption of technology is considered a necessary step to promote the development of human capital and the productive base, paving the way for innovations at the global knowledge frontier. Research and development (R&D), patents, trade, and foreign direct investment are major channels of technological absorption, allowing diffusion of new ideas and manufacturing best practices among countries and firms. R & D is a key input into innovation and is considered to be a very important key in the absorption of technology (Cohen and Levinthal). Rogers (2003) defines examples of technology absorption as the adoption of new product and manufacturing processes developed in other countries; upgrading of an old product or process, licensing technology, improving organizational efficiency and achieving quality certification.

This paper will discuss how properly designed economic policies can significantly influence the degree to which a country absorbs new technology, that is, it will discuss the pre requisites for technology catch ups. The need for a stable and conducive policy framework and a business-friendly investment climate is what makes the country’s ability to absorb technology and knowledge, and this depends on its organization and the skills of its workforce. Further more the paper will discuss the channels that developing countries can use to catch up with other developed countries through technology absorption such as trade flows, foreign direct investment (FDI), R&D and patents.

Literature Review

The very rich literature on catch-up through technology is full of countries that in the past decades have managed catch up with the developed countries, others that have succeeded ahead and several that have fallen behind in technology and failed to be par with the developed world (Abramovitz, 1986). More research has identified a series of factors that have affected the sources of catch-up. One of the elements is regard to the presence of learning and capabilities in the domestic firms (Bell and Pavitt, 1993, Kim, 1997; 1999, Lall, 2001, Kim and Nelson, 2000, Lee, 2005). Catch-up countries should try to adopt the Schumpeterian view of the process of innovation, according to which economic agents are likely to innovate as a reaction to unexpected changes within the economic environment (Schumpeter, 1947). From the early traditional literature that emphasized how it was possible to close the gap though transfer of technology and the imitation of easily available technology, the literature on competences has forcefully moved to show the central role of the process of capability accumulation by domestic firms and the need of various types of capabilities for catch up: absorptive capabilities, innovation capabilities and complementary assets in order to adopt, adapt and modify technologies developed elsewhere or eventually generate new ones.

Actually, the most current research has shown that any process of development and growth implies some kind of innovation, and that sequences of steps in the capability building process are necessary for development. The literature has also stressed the role of social capabilities (Abramovitz 1986) and the broad institutions of a country, including the research infrastructure (Mazzoleni and Nelson,2006) and financial institutions (Gerschenkron, 1962). In the catching up in income per capita or productivity public policy has often played a major role in different ways and forms in several countries such as Japan (Johnson,1982), Korea (Kim 1997), Taiwan (Wade, 1990) and Brazil (Mani, 2004). Also the upgrading of the level of human capital has proven a key element for catching up (Fagerberg and Godinho,2004 and Bernardes and Albuquerque, 2003).

The literature further shows how technology in growth is the missing link between the developed and the less developed countries. There is a possibility of a ‘catch-up’ scenario in the event that less developed countries are able to access and employ developed technology. In other words, less developed countries would grow at a higher rate until at such time that the differences between developed and less developed countries are negligible. This can be shown by the experience of East Asian countries (World Bank, 1993).

Catching up is usually assumed to be dependent on the level of human capital and knowledge. Capital is a necessary tool for the economic success in the world today, because the countires need the capacity to mobilize knowledge and to use it to the fullest. A study by the World bank (2009) indicates that countries in the Sub Sahara of Africa (SSA) must harness both more capital and more knowledge. These African countries needs to invest heavily in physical infrastructure and productive capacity. However, maximizing productivity and achieving competitiveness will depend upon success in augmenting human capital and raising its quality. This has been shown by Namibia as it was ranked the second and fifth respectively in terms of technological sophistication and prevalence of foreign technology licensing in the competitiveness report. However, firm level absorption of this technology remains low as the country was ranked 15th. From this case we can learn that the use of technology requires skilled labor force. As earlier pointed out, investment in human capital remains a critical issue for Namibia and other developing countries. The use of technology requires supporting infrastructure such as good telecommunication and energy in particular. (?)

Nations such as Australia, Chile, Malaysia, and Spain have responded by developing cross-sectoral policy frameworks to promote science, technology, and innovation. Within Sub-Saharan Africa, Mozambique, Rwanda, and South Africa have led the way with similar cross-cutting strategies. Other SSA countries that have produced national science and technology policies since 2000 include Ethiopia, Ghana, Lesotho, Malawi, Senegal, Tanzania, Uganda, Zambia, and Zimbabwe (Mouton 2008). 

Pre Requisites for technology catch up

Technology absorption is often regarded as a pre requisite for breaking up a high cost economy and creating an economic competitive market internationally. The initial gap for countries which are trying to catch up with technology should not be too wide for them to be able to absorb knowledge from technological leaders. Moreover, late comers must have, or create, sufficient absorption capabilities. In this context, sufficient absorption capabilities are described as having qualified researchers who are able to understand external knowledge spillovers and recognize their value in operation. Developing countries need a strong human capital base that will be able to understand the new innovative systems that have been put in place by the advanced countries, hence they need well developed scientific, engineering and technical skills. Cohen and Levinthal (1990 pg .129) suggest that accumulated knowledge increases both the ability to put new ideas into practice. If the stock of knowledge is increased, in general, additional learning will be facilitated. The growth of knowledge adds value to the country’s ability to adapt to new ideas thus becoming fast in catching up with technology.

Technological progress depends on more than being exposed to foreign technologies. How fast it spreads within a country is at least as important and depends on the domestic technological absorptive capacity, the quality of technological literacy of the population and the quality of the business climate. Although major centers and leading firms may be relatively advanced, the rural population and the majority of firms do not exploit the best technologies, often because the necessary infrastructure and human competencies are not available. This may lead to some lags in technology catch up for developing countries.

Nelson and Rosenberg (2003) explains the importance of the link between science and technology as this is one of the important tools for technology catch up. The technological progress requires the mobilisation, co-ordination and integration of many different types of knowledge, and thus involves different types of knowledge producing organizations like firms, research institutes, and universities. Research organizations should be able to communicate to each other about technology innovations that are occurring within their countries. This will enhance knowledge diffusion. With respect to the co-ordination and integration of knowledge across the research sector, communication or even interaction is needed. This can be accomplished by co-operation, strategic alliances, clusters, and networks, all of which install channels along which knowledge can be communicated. If communication exists within countries, the developing countries may be able to learn this as a good tool for success in technology absorption. Knowledge is no longer the disciplinary monopoly of a few institutions of higher learning; rather, it is becoming the product of problem-solving endeavors conducted within a shifting network of often informal professional interactions (Gibbons and others 1994; Gibbons 1998).

The technological progress in developing countries is mainly a process of adopting and adapting to pre-existing technologies, hence developing countries perform relatively little when it comes to research. For the developing countries, technological progress mainly occurs through the adoption and adaptation of already existing technologies. The rapid increase in technological achievement owes much too increased linkages between developing and developed countries. Globalization in the form of imports of advanced products, and the transfer of business process technology through foreign investment and increased linkages with emigrant populations have increased the exposure of developing countries to more sophisticated technologies.

Technology absorption needs stable and conducive policy framework hence policy makers should ensure that openness is maintained, they need to concentrate on strengthening domestic competencies, promoting the dissemination of technology and reinforcing the local business environment in order to avoid the constrain on technological progress in developing countries.

Patents as indicators of Technology absorption


Catching up does not necessarily need to be viewed in a linear and unidirectional way. “As long as technology is understood as a cumulative unidirectional process, development will be seen as a race along a fixed track, where catching up will be merely a question of relative speed. Speed is no doubt a relevant aspect, but history is full of examples of how successful overtaking has been primarily based on running in a new direction.”xiv Indeed, in new fields such as biotechnology, the developing countries are making efforts to move to the scientific frontiers but they plan to apply the acquired knowledge in developing products that are more relevant to local needs.

“[T]he larger the technological and, therefore, the productivity gap between the leader and the follower, the stronger the follower’s potential for growth in productivity; and, other things being equal, the faster one expects the follower’s growth rate to be. Followers tend to catch up faster if they are initially backward.”xv The explanation for this paradoxical suggestion has to do with the level of technology embodied in a country’s capital stock.

Developing countries with the relevant human capital base are always presented with new windows of opportunity for entering new technological systems. But doing so requires other skills such as the capacity to monitor international trends, formulate long-term strategies and determine the locational as well as infrastructure advantages of the country. Most African countries, for example, do not have the capacity or the requisite institutional arrangements for monitoring technological advantages. Planning efforts are usually of a short-term nature and therefore unable to accommodate technological requirements for long-term growth. In more recent years, most countries have been forced to adopt short-term planning strategies to enable them to implement macro-economic stabilisation programmes. However, the challenge now is to put in place longterm structural adjustment programmes which are based on industrial transformation.

Technological catch-up may also involve the use of advanced technologies to deliver new products and services that do not necessarily compete with those developed in the industrialised countries. Many of the products of biotechnology, for example, may be relevant to certain locales and of little interest to the major firms. Their technological requirements, however, may be just as high as those for the products of the leading firms. The paper has shown that there are three points of entry into the game of technological competition. The first relates to the accumulation of basic technological competence in society. This is related to human capital formation. A country without the requisite technical competence is unlikely to make sustained advances in technological development. The second issue is the ability of a country to make an early entry into a particular technological system. This step can only be achieved where the first one has been accomplished. The last issue is the potential for a country to occupy particular technological niches as part of a strategy for industrial learning. With the widening range of technological trajectories and systems, the opportunities for the developing adopting any of the three strategies or combinations thereof are relatively high.

To achieve improvement of production technology, i.e. technological progress, on a large scale, relatively more scientists and engineers must be engaged in research directly integrated in production of goods and services as opposed to the university and public research sector. Notwithstanding that universities and public research institutes play an important role in developing new products and processes, the majority of research is done by firms (Nelson and Rosenberg (1993)). For new products or processes developed by universities or research and development (R&D) institutes, both domestic and foreign, to be implemented in firms’ roduction processes, the innovation must be adapted to firms’ specific organizational structure and production processes. This implies that firms understand the innovation and are able to revise it. Firms will have to do research themselves (Cohen and Levinthal (1989)) and might even have to repeat parts of the original research process, since they have only partial knowledge about the innovation. This has important implications for the organisation of R&D personnel: they should be employed in production as well. More R&D personnel in production of goods and services will increase the possibilities for absorption and diffusion in this sector.

Because a weakening economic performance that threatens a return to the economic conditions of the 1990s would be a great human tragedy. But maintaining the current momentum, and accelerating growth wherever possible, requires measures that will substantially enhance economic competitiveness and nurture expansion of new tradable activities. To realize these objectives, The key to economic success in a globalized world lies increasingly in how effectively a country can assimilate the available knowledge and build comparative advantage in selected areas with good growth prospects, and in how it can enlarge the comparative advantage by pushing the frontiers of technology through innovation. The global knowledge economy has drawn attention to the value of “national innovation systems” in the competition among nations (Nelson 1993; Porter 1990; Stern, Porter, and Furman 2000; Thurow 1999; World Bank 1999). Institutions that generate skills and knowledge, such as universities and research institutes, are essential components of a national innovation system (NIS). In essence, an NIS is a melding of institutional capacities, coordination mechanisms, communication networks, and policy incentives that fosters innovation-led gains in economic productivity. In this web of institutional relationships, innovation can arise at any point.

During the past decade, most African countries have pursued national economic growth strategies within the framework of Poverty Reduction Strategy Papers (PRSPs). Until recently, many PRSPs have been oriented toward attainment of the Millennium Development Goals, an internationally accepted set of performance targets spanning poverty alleviation, agriculture, and access to basic services. Concern with explicit growth promotion efforts as the means for sustainable poverty reduction is a relatively recent—but readily accepted—shift of strategic approach (Commission for Africa 2005).


Nelson, R. and E. Phelps (1966), Investment in humans, technology diffusion and economic growth, American Economic Review 56, 1/2, 69-75.

Harding, T. and J. Rattsø (2008), Looking abroad to understand productivity growth: the world technology frontier and industrial sector productivity in South Africa, mimeo, Department of Economics, NTNU.

Cohen, W.M. and Levinthal, D.A. (1989), ‘Innovation and Learning: The Two Faces of R&D’,The Economic Journal, 99, pp. S.569-596.

Cohen, W.M. and Levinthal, D.A. (1990), ‘Absorptive Capacity: A New Perspective on Learning and Innovation’ in Administrative Science Quarterly, No. 35, pp. 128-152

Nelson, R.R. and Rosenberg, N. (1993), ‘Technical Innovation and National Systems’, in Nelson, R.R. (ed.), National Innovation Systems: A Comparative Study, Oxford: Oxford University Press, pp. 3-21

Nelson, R.R. and Winter, S.G. (1982), An Evolutionary Theory for Economic Change, Cambridge MA: Harvard University Press.

Calestous Juma and Norman Clark; Technological Catch-Up: Opportunities and Challenges for Developing Countries, 2002, London , Print Publishers

Hiroyuki Oba and Hrushikash Panda; Industrial developmeny and Technology absorption in the Indian Steel Industry, 2005, allied Publisher, New Delhi

The World Bank, 2009, Accelerating catch-up, Tertiary Education for Growth in Sub Saharan Africa, Washington D.C

J.Ratlso, Puzzles of Convergence and Catching Up;Regional Income growth in Norway, Department of economics , Norwegian university of Science and Technology

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Technology can be described as the use of scientific and advanced knowledge to meet the requirements of humans. Technology is continuously developing, and is used in almost all aspects of life.

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