How can technological upgrading help LDCs integrate into GVCs?

4 October 2015

What kind of policy reforms should be undertaken both at the domestic and international levels to support LDCs technological upgrading and innovation for better integration into global value chains?

 

Innovation and technological change have radically altered the economic landscape over the past decades, contributing to growth in developed economies and promoting the catch-up process in developing countries. Despite these developments, there remain concerns that least developed countries (LDCs) have failed to derive significant benefits from the process of technological advancement and innovation, which if adequately addressed, can create opportunities for their integration into global value chains (GVCs).

Technology and trade link in LDCs

The share of LDCs in total world trade still remains marginal, accounting for approximately only 1 percent. This figure suggests that the linkage between technology and trade across LDCs is weak in both directions, i.e. both in terms of the role of technology in trade competitiveness and the role of trade through knowledge transfer. There are many reasons for these weaknesses.

Due to low per capita income, the domestic market is small in LDCs. As a result, firms are, in general, small and medium-sized enterprises with limited opportunities to reap the benefits of economies of scale and invest in research and development (R&D). Additionally, most LDCs have a weak investment climate (poor human capital, fragile institutions, lack of infrastructure, and remoteness), which limits access to external capital and thereby constrains industrial development. For all these factors, LDCs incur higher production and transportation costs to stay in business. As technology transfers are imperfect, LDCs with low innovation rates usually specialise in low-skill intensive production, which traps them in a low-income trade cycle.

Existing managerial innovations in LDCs are incremental in nature and confined to a very low level. In addition, government capability is limited due to financial constraints and inefficiency in the form of asymmetric information and the diverse interests of public agents. Therefore, policy instruments are not always well-designed to effectively correct the market failures existing in areas such as the export-led knowledge economy, the service sector and the green economy. If policy instruments are adequate, their application is often constrained by insufficient capacity and corruption.

Challenges faced by African LDCs

Firms in African LDCs often lack skills and production capabilities. Such problems are also present in other LDCs but they are more prominent in Africa given its weak foundation in education and training. Such drawbacks are wide across the entire continent causing an absence of knowledge spill-over from around neighbouring countries. Another problem is rooted in the institutional setting, particularly the weak governments in Africa. The policy assistance for African firms to open up trade and investment is still quite hesitant.

Also, there is a tendency for African firms and policymakers to fear competition and be more inclined towards closed-door policies in order to protect local industries. In this context, international knowledge transfer is rendered more difficult for certain African LDCs.

What are the prospects for LDCs to integrate into global value chains?

The trade prospects for LDCs remain with technology-intensive goods for which global demand is rising. Some middle-income countries like India are already moving up the value chain and creating space for labour-intensive industries with low or intermediate technology products. There are therefore emerging opportunities for LDCs in these sectors.

According to the 2013 World Investment Report of the United Nations Conference on Trade and Development (UNCTAD), FDI inflows to LDCs hit a record high in 2012, an increase led by developing country transnational corporations, especially from India. FDI from other BRICS countries is also increasing in LDCs. However, this window of opportunity is only temporary as several groups of countries compete for FDI, including lower middle-income countries such as Ghana and Vietnam. Moreover, international investment policymaking is in transition: countries increasingly favour a regional over a bilateral approach to investment and take into account sustainable development elements. This is a threat to LDCs, which depend primarily on bilateral trade and investment. Therefore, if they aspire to be further integrated into the international production chain, there is an urgent need to support innovation and upgrade labour skills at the domestic level.

In addition, it must be said that innovation does not only involve technological innovation, which means R&D and lab-based innovations, but also managerial practices and business models (new organisational structures, ways of organising production, marketing etc.). These practices and models effectively enhance the productivity of firms and improve their international competitiveness.

Public investment in agriculture and agro-based businesses is, for example, a promising area for integrating LDCs into GVCs. Spending on public goods such as agricultural research, education, and rural infrastructure can improve farm level productivity and farmers' income and can help firms invest in R&D. Global demand is also growing for environmentally friendly goods like organic food. Innovation in this direction could enable LDCs to produce more eco-friendly goods and facilitate their access to global markets.  

Policy considerations:

Domestic policies

Within contemporary LDC governments and societies, the perception that innovation is something too distant or irrelevant, is simply a mistake. Thus, mind-sets need to change and the essential need for innovation should be recognised as an essential element in dynamic, sustainable and long-term productivity and economic growth.

Across developing countries, learning new techniques and imitating already existing know-how are channels for technological acquisition. Corresponding policy tools should be created in LDCs in all areas including agro-business, management, and organisation. China's experience on learning and imitating know-how is a useful lesson for LDCs.

For example, at the earlier stage of its development, China used technological learning and imitation through international linkages as an important strategy to acquire knowledge and upgrade the technological capability of domestic industries and firms. It then shifted its strategy towards R&D promotion and knowledge creation. To increase exports and integrate into GVCs, the Chinese government also introduced a series of supporting policies, such as export credits, export taxes, duty rebates, training in export and international marketing skills, provision of international marketing information, the establishment of special economic zones and export promotion zones, and devaluation of the Chinese currency.

LDCs need knowledge, skills and capacity development, and therefore much more investment in training. An example of a successful case of technological innovation through skills training and local capacity development in LDCs is the solar photovoltaic (PV) panel in Bangladesh. This successful development of technological capacity benefitted greatly from skills training and education. Bangladesh has been successful in providing training to locals, particularly women so that local firms are able to maintain and repair solar PV panels. Local firms are even capable of producing spare parts, making the country less dependent on imports. In comparison, Kenya started to use similar solar panels around the same time, but Kenya is still importing spare parts and PV panels. This is because, unlike Bangladesh, Kenya did not sufficiently invest in training and capacity building.

International perspective

Well-designed trade-related assistance may also help LDCs face the challenges of poor infrastructure, high costs of trade, and low levels of undiversified exports. For example, in Bangladesh the garment industry constitutes more than 80 percent of exports. Consequentially, trade benefits through this industry help the entire country. However, Bangladesh also needs to diversify its export base through knowledge-based and service industries. The earlier example of solar PV panel indicates that with more investment, skilled manpower for the global market can be created.     

International collaboration and aid should also be channelled towards improvements in infrastructure, ICT and knowledge building in trade-related skills. Public investment in roads, ports, and other transportation infrastructure reduces trade costs and could enhance the participation of LDCs in world trade. Similarly, investment in ICT could enable LDCs to engage more in world markets for services. With better infrastructure and ICT facilities, low transportation costs within the country and compatible skills of firms experienced in international marketing, LDCs may reposition themselves in the global economy and move further into knowledge-based and service industries.

In addition, African LDCs should open up trade and investment, especially in areas that have sufficient backward and forward linkages, for knowledge transfer to facilitate local capacity building.  This would enhance their competitiveness to enter into global value chains. At the same time, regional economic communities such as the Common Market for Eastern and Southern Africa (COMESA) and the Economic Community of Central African States (ECOWAS) may allow firms to enlarge local markets to develop their protection capacity. Larger markets are always helpful incentives for upgrading and innovating technologies to become internationally competitive.

Multilateral trade arrangements through the WTO may enhance the demand for LDC products. Simultaneously, LDCs must be granted preferential trade arrangements in the international community to spur growth in their economies. Also, given that information asymmetry as an important trade barrier, better international market information should be accessible for LDC exporters. An improved provision of marketing and price information is equally crucial for firms in LDCs.

Conclusion

Policies and programmes, both domestically and globally, must address the constraints of LDCs by supporting them to upgrade their technology and innovation levels for better integration into GVCs. LDC governments should fully recognise domestically-created innovation. These countries should also upgrade the existing technology by improving skills and capacity. Moreover, LDC governments should intervene in areas where market failure creates inefficiency. Internationally, assistance should be channelled towards easing LDC constraints to facilitate their entry into the global market. With assistance to skill and capacity development, LDCs may reposition themselves in the global market and move further into knowledge-based industries. Also, LDCs must be continuously granted preferential trade arrangements.

This article is based on a presentation given by Professor Xiaolan Fu at the panel on technology and trade organised by the Commonwealth Secretariat at the 2013 WTO Public Forum.

Authors: Xiaolan Fu is a Professor of Technology and Management, University of Oxford; Shaheen Akter is an independent Research Consultant and a Survey Manager, University of Oxford  

This article is published under
4 October 2015
Under the 2014 US Farm Bill, US cotton producers will receive subsidies that will have significant trade-distorting effects, especially in times of very low world market prices for cotton, but also...
Share: 
4 October 2015
An African ministerial meeting, organised by the World Intellectual Property Organization (WIPO) and the Japan Patent Office (JPO), to be held in Senegal next November 3-5 should embrace a balanced...
Share: