Returns on technological adoption are thought to be extremely high, yet developing countries appear to invest little, implying that this critical channel of productivity growth is underexploited. A recent World Bank study – The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up – sheds light on how to address this paradox. In this interview, William Maloney Chief Economist, Equitable Finance and Institutions Practice Group, World Bank Group, calls upon developing country public and private-sector leaders to pursue a more focused approach to innovation policy. 
What is the new study Innovation Paradox all about?
The potential gains from bringing existing technologies to developing countries are vast, much higher for poor countries than for rich countries. Yet developing-country firms and governments invest relatively little to realize this potential. That’s the origin of what we are calling ‘The Innovation Paradox’.
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Why do firms in developing countries lag behind when it comes to innovation?
The Innovation Paradox, argues that developing country firms choose not to invest heavily in adopting technology, even if they are keen to do so, because they face a range of constraints that prevent them from benefitting from the transfer.
Developing country firms are often constrained by low managerial capability, find it difficult to import the necessary technology, to contract or hire trained workers and engineers, or draw on the new organizational techniques needed to maximize the potential of innovation. Moreover, they are often inhibited by a weak business climate. For example, small and medium enterprises (SMEs) are constantly in a situation where they are putting out fires, they don’t have a five-year plan, they don’t have somebody keeping track of what new technology has come out of some place that they could bring to the firm.
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How can developing economies catch up with the developed world on innovation?
The rates of return to investments and innovation of various kinds appear to be extremely high, yet we see a much smaller effort in these areas. In the developing countries, we need to think not only about barriers to accumulating knowledge capital, we have to think about all the barriers to accumulating all of the complementary factors—the physical capital. So, if I have a lousy education system, it doesn’t matter if I get a high-tech firm because there won’t be any workers to staff it.
Innovation requires competitive and undistorted economies, adequate levels of human capital, functioning capital markets, a dynamic and capable business sector, reliable regulation and property rights. Richer countries tend to have more of these conditions. This is at the root of Paradox. Even though follower countries have much to gain from adopting existing technologies from the advanced countries, in practice, missing and distorted markets, weak management capabilities and human capital prevent them from taking advantage of these opportunities.
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How is India placed?
India is well placed to avoid some of these pitfalls. For instance, its educational and research institutions are capable of generating very high human capital. More such institutions, and better linkages between them and the private sector, would further enhance this capability.
Recent improvements in India’s Doing Business rankings suggest that the legal and regulatory environment for investment is becoming more favorable to innovative firms.
In other areas, however, the available indicators paint a mixed picture. Although Indian businesses invest more in R&D – 0.7 percent of GDP – than most countries at India’s income level, this is far below the levels of advanced countries, which typically invest 2-to-4 percent of GDP. And, while patenting has been rising sharply—a good sign—recent analysis suggests that in both India and China, much of the patent surge, and hence R&D, is driven by foreign multinationals. How much of this investment ends up benefiting the local economy is unclear.
Further, data from the MIT-Stanford World Management Survey finds that Indian firms employ poor management practices on average, impacting their productivity and ability to innovate. While India has a broad range of companies, ranging from basic SMEs to true global leaders, even India’s better-managed firms trail the better-managed companies in the United States.
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What role can the private sector play?
Our research suggests that a sophisticated, highly capable private sector is essential for R&D centered initiatives to succeed. Firms need to have the ability to respond to market conditions, identify new technological opportunities, develop a plan to exploit them, and then cultivate the necessary human resources. They need to be able to walk before they can run.
East Asian ‘miracle economies’ emphasized learning and raising the capabilities of the private sector. In Japan and Singapore, productivity movements made the people conscious of the need to improve quality to promote growth and generate good quality jobs.
India has shown that such programs work. A study of 20 textile firms showed that firms which received management consultancy services reported a dramatic increase in the adoption of good management practices, and of productivity. After just one year, these firms saw a ten percent rise in productivity, enough to cover the full costs of the consultancy.
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